Lecture 01 Intro

Question 1

What is accounting?

Answer 1

Accounting is the measurement (or quantification) of the economic activities of an entity and the communication of this information to the userss. The objective of all accounting is to provide information that is useful for decision-making.

Question 2

Who makes accounting rules for internal use?

Answer 2

For internal use companies may use whatever accounting rules they find most useful.

Question 3

Who makes accounting rules for external rules?

Answer 3

The sytem usually used for reporting to outside enitities is teh generally accepted accountign principles (GAAP)

Question 4

What is the IFRS?

Answer 4

IFRS stands for the International Financial Reporting Standards, and is the system in use in most countries in the world.

Question 5

What is the US GAAP?

Answer 5

United States Generally Accepted Accounting Principles, the GAAP used in the United states.

Question 6

Who issues the IFRS?

Answer 6

The IFRS is issued by the International Accounting Standars Board (IASB)

Question 7

Who issues the US GAAP?

Answer 7

The Financial Accounting Standards Board (FASB)

Question 8

What are the parts of the necessary imposed conceptual structure for accounting?

Answer 8

1. Accounting entity
2. Monetary unit
3. Going concern
4. Periodicity

Question 9

What is an accounting entity for the imposed conceptual structure for accounting?

Answer 9

Economic activity can be identified to a particular unit of accountability (a business or other organization), separate from its owners.

Question 10

What is a monetary unit for the imposed conceptual structure for accounting?

Answer 10

Economic activity can be measured (quantified) in monetary amounts

Question 11

What is going concern for the imposed conceptual structure for accounting?

Answer 11

The business will continue operating in the future

Question 12

What is periodicity for the imposed conceptual structure for accounting?

Answer 12

The entity’s economic activity can be measured over specified time periods (years, quarters,…).

Question 13

What are the 6 components of a typical set of financial statements?

Answer 13

1. Balance sheet
2. Income statement
3. Statement of changes in owners’ equity
4. Cash flow statement
5. Footnotes to the above financial statements
6. Audti opinion

Question 14

What is the definition of a balance sheet?

Answer 14

The balance sheet is a dual list of line items (called accounts) with associated amounts (called balances).
* Its left side lists what assets the entity controls and what value is assigned to each of these assets
* Its right side (or liabilities and equity side) shows which parties have claims to these assets and what value is assigned to each of these assets
* The term ‘equity’ refers to the claims of the entity’s owners. The term ‘liability referes to calims of non-owners

Question 15

What is the accounting equation?

Answer 15

Assets = Liabilities + Owners’ Equity

Question 16

What are the financial statements that explaing changes in the balance sheet in detail?

Answer 16

1. The statement of changes in owners’ equity shows the transactions and activities that affect equity accounts on the balance sheet.
2. The income statement shows a detailed list of those changes in owners’ equity that are part of the entity’s net income (more on this later).
3. The statement of cash flows explains (as the name suggests) the inflows and outflows of cash during the period.

Question 17

What is the Audit Opinion?

Answer 17

The audit opinion provides the external auditor’s conclusion about the quality of the firm’s financial statements.
* The firm, not its auditor, prepares the financial statements; the auditor expresses an opinion on them, after conducting audit procedures.
* Auditors cannot test every transaction, and regular audits are not designed to detect fraud. Audits provide ‘reasonable assurance,’ not a guarantee, that the financial statements meet the required standards.
* The audit opinion is unqualified if the auditor believes that the financial statements ‘present fairly, in all material respects, the firm’s financial position and the results of its operations and cash flows’ for the period in question and under the applicable financial reporting standards.
* Beware if the opinion is not unqualified (i.e., qualified, adverse, or disclaimer). (These cases are rare though.)

Question 18

What are the ways that audit opinions show insufficient internal control?

Answer 18

1. Significant deficiencies (bad)
2. Material weaknesses (very bad)

Question 19

What are critical audit matters?

Answer 19

A critical audit matter is any issue arising during the audit important enough to be communicated to the company’s audit committee.

Critical audit matters typically relate to areas that
* have a material impact on the financial statements;
* are subject to significant discretion by management; and
* are difficult to audit or require significant judgment by the auditor.

Question 20

What are the 4 basic principles of accounting?

Answer 20

1. Revenue recognition: revenue is only recognized when it is earned and realized or realizable
2. Matching principle: expenses are recognized at the same time as the revenue they helped generate/
3. Historical cost: assets and liabilities are accounted for on the basis of their acquisition prices.
4. Conservatism (prudence): when in doubt, choose the accounting treatment that least liekly overstates assets.

Question 21

What is the objective of general purpose financial reporting?

Answer 21

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.

Question 22

What are the two fundamental qualitative characteristics of decision-useful accounting information?

Answer 22

1. Relevance: the information ‘makes a difference’ in users’ decision, i.e. it is material and has predictive and/or confirmatory value.
2. Faithful representation: a representation of financial information is faithful if it is complete, neutral, and free from error

Question 23

What are the 4 enhancing qualitative characteristics of decision-useful accounting information?

Answer 23

1. Comparability: information can be compared across time and entities. To achieve comparability, consistency is important, i.e., the same accounting methods must be applied across time and entities.
2. Verifiability: different knowledgeable and independent observers could reach consensus that the information is faithfully represented.
3. Timeliness: generally, the older the information, the less useful it is.
4. Understandability: information is as clear and concise as possible, to a reasonably knowledgeable user.
   But all sub
   … but all subject to the cost constraint: accounting information should only be prepared if the cost of collecting, processing, verifying and disseminating it is outweighed by its benefits.