Lecture Note 1

Question 1

Who are the internal and external users of accounting information?

Answer 1

Internal users include managers. External users include investors, creditors, and organizations outside the company.

Question 1

What are the three basic activities involved in accounting?

Answer 1

Identifying relevant financial information, collecting and recording data (bookkeeping), and aggregating, processing, and communicating the data.

Question 2

What are the five basic financial statements?

Answer 2

Income Statement, Statement of Cash Flows, Retained Earnings Statement, Balance Sheet, and Comprehensive Income Statement.

Question 3

What is the purpose of an Income Statement?

Answer 3

It reports revenues less expenses during an accounting period, showing the entity’s financial performance.

Question 4

How does the Balance Sheet differ from the Income Statement?

Answer 4

The Balance Sheet provides a snapshot of assets, liabilities, and equity at a point in time, while the Income Statement covers financial performance over a period.

Question 5

What are assets, according to accounting standards?

Answer 5

Assets are economic resources controlled by an entity due to past transactions, expected to provide future benefits.

Question 6

What is the purpose of the Statement of Cash Flows?

Answer 6

It shows cash inflows and outflows over an accounting period, categorized into operating, investing, and financing activities.

Question 7

Define ‘liabilities’ in accounting terms.

Answer 7

Liabilities are the company’s debts or obligations from past transactions that will be paid with assets or services.

Question 8

What does the Statement of Retained Earnings show?

Answer 8

It shows how net income and dividends affect a company’s retained earnings over an accounting period.

Question 9

What is the fundamental accounting equation?

Answer 9

Assets = Liabilities + Equity.

Question 10

Why are accounting standards important?

Answer 10

They ensure consistency and reliability in financial reporting, preventing misleading information for external users.

Question 11

Name two main standard-setting bodies for accounting.

Answer 11

Financial Accounting Standards Board (FASB) in the U.S. and International Accounting Standards Board (IASB) globally.

Question 12

What is the Revenue Recognition Principle?

Answer 12

Revenue is recognized when the performance obligation is satisfied, not necessarily when cash is received.

Question 13

Explain the concept of depreciation in financial reporting.

Answer 13

Depreciation spreads out the cost of a tangible asset over its useful life, reflecting its gradual usage.

Question 14

What does ‘equity’ represent on a balance sheet?

Answer 14

Equity represents the residual interest in the assets after deducting all liabilities.

Question 15

What is the Fair Value Principle?

Answer 15

It states that assets and liabilities should be recorded at their fair market value if actively traded, as opposed to historical cost.

Question 16

How do IFRS and US-GAAP differ in asset valuation?

Answer 16

IFRS relies more on fair value, while US-GAAP emphasizes historical cost.

Question 17

What is the Full Disclosure Principle in accounting?

Answer 17

It requires companies to disclose all relevant information that may affect users’ understanding of the financial statements.

Question 18

Why might companies choose different accounting year-ends?

Answer 18

They may choose dates when operations are slow to reduce costs and ease inventory counting, like ski resorts ending after winter or schools after June.

Question 19

What does the Conceptual Framework by IASB include?

Answer 19

It includes objectives of financial reporting, qualities of financial information, elements to measure and report, and concepts for measuring and reporting information.