Lecture 5 published financial reports

Question 1

Communication tool

Answer 1

Financial facts of business communicated with legislation & regulation from governments and professional accounting bodies

Question 2

Published annual report

Answer 2

State and affairs of company past period. Independent external auditor checks on accuracy, completeness and reliability

Question 3

Agency theory

Answer 3

Main feature of public companies: separation of ownership (principal) and management (agent)

Question 4

The anglo Saxon approach (US, UK)

Answer 4

Management is chiefly accountable to stockholders. Thus, key in decision making

Question 5

Rhineland approach (Europe, Japan)

Answer 5

Management is accountable to all stakeholders (stockholders being on of the stakeholders)

Question 6

Direct method cash flow statement

Answer 6

Simply list of cash payment and receipts made during year

Question 7

Indirect method of a cash flow statement

Answer 7

Derive cash flow statement from balance sheets and income statements

Question 8

Categories of a cash flow statement

Answer 8

• Cash flows from operating activities
• Cash flows from investing activities
• Cash flows from financing activities

Question 9

Accounting principles

Answer 9

Guidelines and principles evolved because of common business practices and general consent

Question 10

US GAAP

Answer 10

Generally accepted accounting principles. Developed and maintained by financial accounting standards board (FASB) it is rules-based

Question 11

IFRS (EU) (International financial reporting standards)

Answer 11

Developed and maintained by international accounting standards boards (ASB). It is principle based

Question 12

Financial planning

Answer 12

Making a project statement

Question 13

Unlimited liability

Answer 13

Means that the owner is forced to use his private funds to pay back any debts incurred during business

Question 14

Limited liability

Answer 14

Owners in the company can lose no more than the money they have invested in the company

Question 15

Going concern

Answer 15

Co. assumed to reamin in operation unless evidence to contrary

Question 16

Prudence

Answer 16

Conservative view of profit, asset valuation and losses

Question 17

Realization

Answer 17

Recognition of profit & losses on realization only

Question 18

Matching

Answer 18

Expenses presented in same period for resulting revenues made

Question 19

Consistency

Answer 19

Consistency in composing financial statements

Question 20

Accruals

Answer 20

Revenues and expenses recognized and recoreder when incurred not when actual cash takes place

Question 21

Objectivity

Answer 21

Financial statements prepared free from personal opinion

Question 22

Relevance

Answer 22

Reports should be based on what is relevant

Question 23

Economic entity assumption

Answer 23

Seperation of business transactions from personal transactions. Means financial statements can be prepared for a group

Question 24

Monetary unit assumption

Answer 24

Allows acountant to express assets as dollar amounts and assumes, the dollar does not lose purchasing power over time

Question 25

Time period assumption

Answer 25

Business operations and financial results can be divided into distinct periods

Question 26

Prudence principle

Answer 26

Means that you should remove the doubtful debts and present a net receivable amount on balance sheet

Question 27

Objectivity principle

Answer 27

Objectivity or estimates and opinion involved?