Volume 3: Financial Reporting and Analysis

Question 1

Two fundamental qualitative characteristics that make financial information useful

Answer 1

1. Relevance

2. Faithful representation

Question 2

Four characteristics that enhance the usefulness of relevant and faithfully represented financial information

Answer 2

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

Question 3

What is the difference between the direct and the indirect format of the statement of cash flows?

Answer 3

Direct format: operating cash receipts less operating cash disbursements
Indirect format: net income minus adjustments to derive operating cash flows

Question 4

Accruals:

Receives cash prior to earning the revenue

Answer 4

Unearned (deferred) revenue: Liability

Question 5

Accruals:

Earns revenue prior to receiving cash

Answer 5

Unbilled (accrued) revenue: Asset

Question 6

Accruals:

Making a cash payment prior to recognizing an expense

Answer 6

Prepaid expense: Asset

Question 7

Accruals:

Incurs expense that have not been paid as of the end of the accounting period

Answer 7

Accrued expenses: Liability

Question 8

What is the difference between the general ledger and the journal?

Answer 8

The business transactions are sorted by date in a journal and by accounts in a ledger

Question 9

Explain the T-Account

Answer 9

Left side: debit
Right side: Credit

Assets are on the left side and liabilities and equity on the right side. An increase in assets is recorded with a debit balance, on the left side of a T-Account and decrease on the right.

Liabilities and equity increase is recorded on the right side be decrease on the left

Question 10

What are the 2 important assumptions underlying financial statements?

Answer 10

1. Accrual accounting

2. Going concern

Question 11

What are the different alternative bases of measurement (6) used to measure assets and liabilities?

Answer 11

1. Historical cost
2. Amortized cost
3. Current cost
4. Realizable (settlement) value
5. Present value
6. Fair value

Question 12

What is the difference between Current Cost and Realizable (Settlement) Value?

Answer 12

Current Cost: the amount of cash that would have to be paid to buy the same or an equivalent asset today

Realizable value: the amount of cash that could currently be obtained by selling the asset in an orderly disposal. The equivalent for liabilities is called Settlement Value.

Question 13

What are the required financial statements according to IASB (5)?

Answer 13

1. Statement of financial position (balance sheet)
2. Statement of comprehensive income (Income statement + comprehensive income)
3. Statement of changes in equity
4. Statement of cash flows
5. Notes, summarizing accounting policies and disclosing other items

Question 14

Is land depreciated?

Answer 14

No

Question 15

What is the difference between the Cost Model and the Revaluation Model?

Answer 15

Cost Model: PPE is carried at amortized cost (historical cost less any accumulated depreciation and less impairment) IFRS and US GAAP

Revaluation Model: Fair value at the date of revaluation less any subsequent accumulated depreciation. Only IFRS