Financial Reporting

Question 1

Explain the term accounting

Answer 1

Accounting is the skill of recording, sorting , summarizing, and interpreting monetary events in the form of business events.

Accounting is a skill, technique. It is also:
- scientific discipline
- business entity service function
- part of a business entity’s management information system

Question 2

Provide the underlying financial statements

Answer 2

1. Balance Sheet
2. Profit and Loss Account (Income Statement)
3. Cash flow statement
4. Retained Earnings Statement (Report on changes in equity)
5. Notes to the financial statements

Question 3

Users of financial statements

Answer 3

External users - financial accounting - oriented to owners, creditors, the state.

Internal users - management accounting and cost accounting (management)

Question 4

What is a balance sheet?

Answer 4

Balance sheet shows the current value of assets, liabilities and equity on a specific day. The balance sheet is the basic financial statement and its main feature is the balance sheet equation.

Question 5

Basic accounting Equation

Answer 5

Asset = Sources of Asset
Asset = Liabilities + Equity

Question 6

According to which two criteria are classified items in the balance sheet.

Answer 6

Balance sheet positions are classified by two principles:
a) Assets with increasing liquidity - liabilities with decreasing maturity (Europe)
b) assets with decreasing liquidity - liabilities with increasing maturity (USA)

Question 7

Income Statement

Answer 7

Income statement is a report that provides information to users of information about the success of a company in one accounting period (between two balance sheet dates - 1.01. - 31.12), the income statement relates to the entire period.

It contains: Revenues, expenses, business (financial) result (Profit or Loss)

The objective of the income statement is to provide users with information on the increase (or decrease) in earned capital between the two balance sheet dates.

The main link between the balance sheet and the profit and loss account is precisely the changes in equity.

Question 8

Cash Flow Statement

Answer 8

It is a report that provides users with information about cash flow (cash receipts and expenditures) over a single accounting period.

Provides information that the balance sheet and the income statement do not provide to users, based on cash and cash equivalents.

Its purpose is to assess future cash flow, to evaluate the company’s ability to pay dividends, to evaluate the company’s ability to invest and to need external financing, and to evaluate the causes of the difference between net profit and cash flow.

Question 9

What are the 2 methods of compiling a cash flow statement

Answer 9

Direct and indirect.

Direct: cash flow statement always covers a period. It consists of 3 activities:

1) business activities (show cash receipts and expenditures)
Cash receipts: from receivables collection, cash sales, dividends, interest.
Cash expenditures: purchase of raw materials and goods, salaries, insurance, interest, suppliers.

2) Investment Activities (show receipts and expenditures)
Receipts: from the sale of fixed assets, securities on the secondary market
Expenditures: Investments in fixed assets, investments in securities

3) Financing activities (financing activities of enterprises)
Receipts: from issue of shares, bonds, received loans
Expenditures: from repayment of the principal of the loan, for redemption of shares, for dividends

net cash flow = 1 + 2+ 3 (sum of all cash flows)

Indirect: only considers the content of business activities.

Cash flow from operating activities if compiled as
+ net profit
+ depreciation
+ decrease in credit claims
- increase in credit claims
+ increase in credit obligations
- reduction of credit liabilities
+ decrease in inventory
- increase in inventory
= cash flow from operating activities

It is based on the opening and closing balance sheets and the gross profit statement.
Useful for investors, shareholders, creditors.

Question 10

Statement of changes in equity

Answer 10

It is drawn up between the two balance sheet dates and provides information on the causes of the increase or decrease in equity.
Changes in equity may be:
-from transactions with shareholders (issue of shares, purchase of treasury shares, payment of dividends)
- from the activities of the company (profit, loss, etc.)

Question 11

Notes to the financial statements

Answer 11

They are part of the financial statements and consists of 2 parts:

a) Significant accounting policies - contain the most important principles, methods and procedures used by the company to prepare and publish financial statements

b) Notes - contain all the details that offset the financial statements and relate to, for example: inventory structure, investments, income, expense, etc.

Question 12

The relationship between the balance sheet and the income statement

Answer 12

The link is the profit that is entered in the balance sheet as retained earning increase. The link is changes in equity - profit or loss that is recorded in equity.

Question 13

Business Event = Book Event

Answer 13

Bookkeeping has strict requirements when choosing which business events to record and which ones to not. There are 4 conditions that a business event must satisfy in order to be subjected to accounting records:
1. the business event happened.
2. it can be valued.
3. to change the balance of assets and liabilities and to affect revenues and expenses.
4. that there is a justification document which can prove the occurrence of the change.

Question 14

Accounting document

Answer 14

Bookkeeping documents serve as evidence of the occurrence of a business event and as a basis for entering information in the books of account. Accounting documents are holders of business events data.

Types of accounting documents by:
- place of origin: internal (invoices, invoices to the buyer) and external (invoices delivered and executured by the acorn)
- Purpose: ordering (payment order), justifiying and combined (travel order, work order).
- data coverage: original and summary (payroll)

Question 15

What are business books?

Answer 15

Business books are a set of records maintained by a business entity to provide the necessary information about its business and record everything that has happened.

Question 16

What types of business books are there?

Answer 16

Basic - journal and main ledger.

Subledgers or analytical business books: cash register, inventory, entry and exit accounts, analytical accounting.

Question 17

List the characteristics of fixed assets (non-current assets)

Answer 17

Fixed assets are those assets whose life expectancy exceeds one year and will be used for a period longer than one year, that is, they will not be spent in one normal production cycle.

Question 18

List the fixed assets.

Answer 18

Intangible assets, tangible assets, financial assets, long-term receivables

Question 19

Explain and list intangible assets.

Answer 19

R&d expenditure, patents, licences, concessions, trademarks, other rights, goodwill, advances for intangible assets

Question 20

Explain and list tangible assets.

Answer 20

Land, Forest, construction objects, plants, equipment, tools, office and office inventory, means of transport, residential buildings, long-lived biological assets (crops), advances for tangible assets

Question 21

Explain depreciation

Answer 21

Depreciation is the gradual consumption of long-term intangible and tangible assets (whereby the spent value appears as an integral part of the value of the products or services provided)

Amortized Assets must meet the following conditions:
(amortization is the gradual write-off of the value of the property)
- these assets are expected to be used for more than one accounting period (more than 1 year)
- these assets must have a limited life span (useful life)
- the property is held by the company for use in the production or sale of goods and services, for rent to others or for administrative purposes

Question 22

What assets are not subject to depreciation and why?

Answer 22

Non-depreciable assets are those assets that have an indefinite useful life and whose economic benefits are not wasted, such as lands, forests and art works we own.

Question 23

Explain and list financial assets.

Answer 23

Non-current financial assets represent long-term investments or placements with other entities for the purpose of earning profit. These placements are made for a period of more than one year.
- interests in affiliates
- investments in securities
- loans given, deposits
- redemption of own shares
- other long-term investments

Question 24

List the characteristics of current assets.

Answer 24

Short-term assets are those assets that are expected to be realized within one year or during one business cycle.

Question 25

List the current assets

Answer 25

Supplies/inventories, receivables, financial assets, money

Question 26

What does cost principle mean?

Answer 26

It means that all costs involved in acquisition of asset is giving the value of that asset. So it is purchasing price plus dependable costs minus discounts.

For example acquisition cost of LTTA when purchased comprehend:
1. Purchasing price including custom and excess duties after all discounts,
2. Cost includes all costs necessary to bring the asset to working condition for its intended use.
3. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site.

Question 27

Explain and list inventories.

Answer 27

Inventories are a tangible form of current assets.

• supplies of raw materials
• supplies of merchandise
• finished goods inventories
• inventories of work in progress and semi-finished products
• supplies of spare parts

Question 28

Explain and list financial assets

Answer 28

It is a fast-cash asset placed with other businesses, with the money being returned within one year.

• shares in affiliated companies
• loans to affiliates
• investments in securities
• loans given, deposits, bail
• other short-term investments

Question 29

What is equity?

Answer 29

Equity is the rest of the assets that belong to the owners after settlement of the liabilities.
Equity = Assets - Liabilities

Equity expresses the carrying amount of a business entity.

Question 30

Shareholdings of a joint stock company?

Answer 30

1) Paid-in or invested capital (not subject to distribution until the liquidation of the company) consists of : nominal value donations and a premium on the issued shares.

2) Earned capital (generated from the activities of the company and distributed) consists of : reserves, retained earnings from previous years and retained earnings for the current year.

Question 31

List the securities

Answer 31

bonds, stocks, commercial papers, treasury bills

Question 32

State their division by maturity.

Answer 32

They are divided into long-term (bonds, stocks) and short-term (commercial and treasury bills). Debt securities and stocks are ownership securities with no maturity.

Question 33

How are securities recorded if you are investing cash?

Answer 33

As non-current or current financial assets - Investment

Question 34

How are you recording if you issue a security?

Answer 34

As long-term liabilities or increase in equity for stocks.

Question 35

Define the term cost.

Answer 35

Cost are consumed raw materials, asset, wages, and other necessary investment in production process shown in money.

1) Product costs: are all costs regarding the manufacturing function of a company. They are related to the finished product and that way affect the future economic value. Product costs are not charged as expenses in the period in which they are incurred, but in the period in which the finished products will be sold.

2) Period costs: are costs that are charged as expenses in the period in which they incurred and are matched to revenues of the particular accounting period. These costs have no future economic benefit because they are related to the non-manufacturing functions of the company. Includes selling costs and administrative costs, these costs are not related to the production of the company.

Question 36

Explain and define expenses.

Answer 36

Is one element of measuring the performance of an entity.

They are reductions in economic benefits through the accounting period in the form of outflows or the exhaustion of assets or the creation of liabilities, resulting in a decrease in capital.

Expense is not considered as a decrease in assets or an increase in liabilities directly related to the distribution of capital. Expenditure features have only those reductions in assets or increases in liabilities that result in diminished economic benefits. Expenses are divided into business, financial and extraordinary.

Question 37

Define and describe the process of accounting for revenue.

Answer 37

• considered to be an increase in economic benefits (increase in capital: through + assets, or - liabilities)
• but, not directly related to capital payments.
• Revenue accruals are recorded at the same time as an increase in assets or a decrease in liabilities.
• there’s a direct link between the balance sheet and the profit and loss account, which is the relationship between assets, liabilities, and equity in the balance sheet with income, expenses and results of operations.
• Revenues are recognized in the income accounts at the time they are created or recognized.
• We divide our revenues in business, financial, and extraordinary.

Question 38

How the financial result is determined.

Answer 38

The financial result is determined in such a way that it combines revenues and expenses from all activities of the company - business, financial, and extraordinary, and if the revenues are higher than the expenses we are operating with a positive financial result and if the expenses are greater than the revenues then we have a negative financial result.

Question 39

How does profit affect equity?

Answer 39

Profit increases capital

Question 40

How does loss affect equity?

Answer 40

Loss reduced capital