Financial Reporting Standards

Question 1

Main goal of financial statements are to provide information that is useful for investors to make decisions.

Answer 1

Financial reporting standards create consistency

Question 2

Standard setting bodies:

Answer 2

professional organization of auditors and accountants

Question 3

Regulatory Authorities:

Answer 3

government agencies having legal authority.

Question 4

The 2 primary standard setting bodies:

Answer 4

1. Financial Accounting Standards Board (FASB)

2. International Accounting Standards Board (IASB)

Question 5

FASB sets the Generally Accepted Accounting Principles (GAAP)

Answer 5

IASB sets the International Financial Reporting Standards (IFRS).

Question 6

Regulatory Authority in the US

Answer 6

Securities and Exchange Commission (SEC)

Question 7

IASB framework details qualitative characteristics and specifies reporting elements to provide information that is useful for investors

Answer 7

Qualitative Characteristics include:

• Relevance (Materiality is an aspect)
• Faithful Representation

Question 8

4 Characteristics that enhance relevance and faithful representation:

Answer 8

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability

Question 9

Required reporting elements:

Answer 9

• Assets
• Liabilities
• Equity
• Income
• Expenses

Question 10

Two underlying assumptions of financial statements:

Answer 10

1. Accrual accounting - should reflect transaction at the time they occur
2. Going concern -assumes that the company will exist in the foreseeable future.

Question 11

Required financial statements under IFRS:

Answer 11

1. Balance Sheets
2. Statement of Comprehensive Income
3. Cash Flow Statement
4. Statement of changes in Owners’ equity
5. Explanatory notes, including summary of accounting policies

Question 12

Features of preparing financial statements:

Answer 12

• Fair presentation
• Going concern basis
• Accrual basis - except cash flows
• Consistency
• Materiality == mistake free
• Aggregation
• No offsetting
• Reporting Frequency
• Comparative Information

Question 13

Differences between IASB and FASB frameworks:

Answer 13

• IASB framework list income and expenses as elements related to performance, while FASB framework includes revenues, expenses, gains, losses and comprehensive income.
• FASB defines an asset as a future economic benefit, whereas IASB defines it as a resource for which a future economic benefit is expected to flow.
• FASB does not allow the upward valuation of most assets.

Question 14

Reconciliation Statement

Answer 14

Shows what financial results would be under different accounting methods

Question 15

Characteristics of coherent framework

Answer 15

• Transparency
• Comprehensiveness
• Consistency

Question 16

Barriers to creating financial reporting framework:

Answer 16

1. Valuation – require little judgment
2. Standard setting – not a common set of standards
3. Measurement – valuing between a point in time and a period in time