Financial Accounting flashcards

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armour
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Financial Accounting flashcards
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2011-03-31 18:18:37
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Financial Accounting study questions
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For the Financial Accounting exam
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  1. What does GAAP stand for?
    Generally Accepted Accounting Principles
  2. What does FASB stand for?
    Financial Accounting Standards Board.
  3. What does IASC stand for?
    International Accounting Standards Committee.
  4. What does IASB stand for?
    International Accounting Stands Board.
  5. What does IFRS stand for?
    International Financial Reporting Standards.
  6. What are the four principal objectives of the IFRS?
    • 1. Develope globally accepted international financial reporting standards through IASB.
    • 2. Promote the use of those standards.
    • 3. Take into account the reporting needs of emerging economies and small- and medium-sized entities.
    • 4. To bring about convergence of national accounting standards and IFRSs to high quality solutions.
  7. What is the Norfalk agreement?
    Decision made to eliminate differences between FASB and IFRS. Basically merge other countries GAAPs to one standard.
  8. What is the purpose of a "Conceptual framework"?
    To merge FASB and IASB and other GAAPs.
  9. What does the Conceptual Framework summarize?
    • 1. Ambitions with accounting.
    • 2. Demands on accounting.
    • 3. Purpose with accounting.
    • 4. Theoretical concepts about accounting.
    • 5. New standards shall be issued and/or interpreted in accordance with the framework.
    • 6. Many actors, but mainly for investors.
  10. What three things does the Conceptual Framework assume?
    • 1. Accrual basis.
    • 2. Cash and income will differ.
    • 3. Going concern.
  11. What does "accrual basis" mean?
    Transactions are recorded when they occur, not when cash is received.
  12. What is "going concern"?
    Intention to keep the business going (not threatened by bankruptcy).
  13. What four characteristics determine the usefulness of financial statement information?
    • 1. Understandability.
    • 2. Relevance.
    • 3. Reliability.
    • 4. Comparability.
  14. Elaborate "understandability" in the qualitative characteristics.
    People with some economic skills shall understand and be able to make use of the information provided.
  15. Elaborate "relevance" in the qualitative characteristics.
    As in influencing economic decisions by helping them evaluate past, present or future events. "Predictive as well as informative".
  16. Elaborate "reliability" in the qualitative characteristics.
    Free from material error and bias. Faithful. Presented in accordance with their substance and economic reality.
  17. Elaborate "comparability" in the qualitative characteristics.
    One must be able to compare the information, over time and within industries.
  18. What is the "standards overload-problem"?
    Too many standards. Small businesses dont have the economic resources to keep track of all standards. They also interfere with "cost-benefit-constraint".
  19. What is Income statement in swedish?
    Resultaträkning.
  20. What is balance sheet in swedish?
    Balansräkning.
  21. What is the "Matching Criteria"?
    Another name for the Accruals Convention, it's the same thing!
  22. Why do you need an "account" (redogörelse) for a business?
    • 1. For owners to see how their funds have been used.
    • 2. For the company to see how they have used their funds and they need to show their shareholders what they have done.
  23. Define an "asset".
    A resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.
  24. Define "comprehensive income".
    • (Totalresultat)
    • Revenues + Gains - Expenses - Losses = Earnings
  25. Interest Coverage Ratio
    ( EBIT+fin.exp ) / fin.exp.
  26. Liquidity ACID
    (Current Ass. - Inv.) / Curr.Liab
  27. Liquidity Current Ratio
    Curr.Ass / Curr.Liab
  28. Working Capital (Rörelsekapital)
    Current Assets - Current Liabilities.
  29. Leverage formula
    ROE = ROCE + ((ROCE-Interest rate)*D/E)
  30. Total Asset Turnover
    Revenue / Tot.Ass
  31. Return on Assets
    Net Income / Tot.Ass
  32. Inventory Turnover Ratio
    • Sales / Inventory
    • or
    • COGS / Average Inv.
    • (KOH!)
  33. Net Profit Margin
    Net.Profit / Net Sales
  34. Operating Margin
    Operating Profit / Net Sales
  35. Gross Profit Margin
    • Gross Profit / Net Sales
    • or
    • (Net Sales-COGS) / Net Sales
  36. ROE
    • Net Profit / Equity
    • Opt: bf or af TAX, average equity?
  37. ROCE
    (Profit bf. TAX+Fin.Exp) / (Tot.Ass-Curr.Liab)
  38. Solvency
    • E/(E+D)
    • or
    • Long term Debt / Equity
  39. What is the Income basis for?
    • Taxation
    • Formal valuations
    • Competitive structures
    • Stewardship function
  40. What is the definition of Revenue?
    • Gross inflow of economic benefits that increases equity and is not a contribution from equity participants.
    • (Gross inflow = Before deduction of any expenses)
  41. How do you measure Income?
    • At fair value in connection to
    • - Sale of goods
    • - Rendering of services
    • - Interests, royalties and dividends.
  42. How do you recognize Income?
    • Generally:
    • - Amount can be measured reliably.
    • - It's probable that the economic benefits will flow to the enterprise.
    • - Costs incurred for the transaction can be measured.

    • For Sale of goods:
    • - Risks, rewards, control and ownership of goods is transferred to the buyer.

    • For Rendering of Services:
    • - Stage of completion of the transaction at the balance sheet date can be measured reliably.
    • - Percentage of completion can be estimated by one of two methods:
    • 1. Surveys of percentage completed to date can be made.
    • 2. Proportion of costs to date of total costs can be estimated.
  43. Define Realization.
    The process of converting non-cash assets to cash or claims to cash.
  44. Why must all transactions and value changes pass the Income Statement?
    • To increase transparency towards the investors.
    • They might have a certain expectation of profit. To get a fair expectation you must present revaluations and unrealized changes too.
  45. What does "Transaction based" mean?
    Transactions external to the company counts.
  46. Explain the "Realization principle".
    • Income should be recognized when the earnings process is complete or virtually complete and an exchange transaction has taken place.
    • The exchange transaction is the basis for accountability and determines both the timing of revenue recognition and the amount of revenue to be recorded.
  47. What is the definition of a Current Asset?
    • Theoretically if one criteria is met but in practise several.
    • - Expected to be realised in the entity's normal operating cycle.
    • - Held in purpose of beeing traded.
    • - Expected to be realised within 12 months.
    • * All other assets are classified as NON-CURRENT ASSETS.
  48. Non-Current Assets are generally reported at their "expected present values". What issues are there involved?
    Time aspect, valuation technique. If you wont realise their value (by selling) you wont really know what exactly they're worth.
  49. Explain "Managerial intent".
    • It decides if an asset is current or non-current.
    • I.e with shares: If planned to be kept a long time they are non-current, if for a short time they're current.
  50. What is the measurement basis for:
    - Cash
    - Accounts receivable
    - Marketable securities
    - Inventory
    - Investments
    - PPE (Property, Plant & Equipment)
    • Cash: Current value
    • AR: Expected future value.
    • MS: Fair value or amortized cost.
    • Inv: Current or past value.
    • Invest: Fair value, amortized cost or result of applying the Equity method.
    • PPE: Past value adjusted for depreciation OR regular Revaluations, depending on kind of asset (i.e. computer or real estate).
  51. Define Inventory.
    • - Held for sale in the ordinary course of the business.
    • - In the process of production for such sale.
    • - Materials or supplies to be consumed in production process or in rendering of service.
  52. Which costs are included in COGS (Cost of Goods Sold)?
    • - Costs of purchase.
    • - Costs of conversion.
    • - Net Realisable Value (Estimated selling price less estimated cost of completion or cost to get it sold).
  53. What methods are there to determine Inventory Value?
    Describe them.
    • - Unit cost.
    • - FIFO.
    • - LIFO.
    • - Weighted average.
    • - (Net Realisable Value).
  54. What is the basic rule when valuing inventories?
    • Inventories shall be measured at the lower of cost or Net Realisable Value).
    • - Om man får mer betalt för varan än vad den kostat, räknas vad den kostat.
    • - Om det kostade mer än vad man får betalt, räknas vad man fått betalt.
    • - Then you dont get surprised by Unrealised Losses.
  55. Explain the Conservatism Principle.
    Rather safe than sorry.
  56. What kind of Long-Term Assets are there?
    • - Tangible (materiella) - Property.
    • - Financial - Shares.
    • - Intangible - R&D.
    • - PPE - Land, building, machinery.
  57. What does "Cost Allocation" mean?
    Depreciation.
  58. What depreciation methods are there?
    • - Straight line.
    • - Declining Balance-method ("Accelerated").
    • - Units of activity, activity level, output. (Tricky to keep track of)
  59. When can you Capitalize an expenses and how do you report that?
    When cost prolongs the life of the asset.
  60. What is Deferred Tax?
    • A deferred liability or deferred asset that occurs when an unrealised value change happens. Realizing would inflict that deferred tax to actual tax.
    • Normal tax is found in the Income Statement but Deferred tax is found in the Balance Sheet.
  61. What Lease-types are there?
    • Capital Lease = Financial Lease
    • Operating Lease
  62. Define the different lease-types.
    Financial Lease: With all risks and rewards incidental to ownership. Everything else is Operating Lease.
  63. What indicators are there for a Finance Lease?
    • By the end of the lease, ownership transfers to the lessee.
    • Option to buy the asset at a fixed price at the end of the lease.
    • Lease is for major part of the economic life of the asset.
    • Leased assets are customized for the lessee.
    • If lessee cancels the lease, losses are borne for the lessor which the lessee has to pay for.
    • Gains or losses from fluctuation of the fair value on the asset accrue to the lessee.
    • Lessee has ability to lease for a secondary period for an even lower rent.
  64. How do you account and report a Finance Lease?
    • - As an asset or Liability.
    • - Present Value of minimum lease payments where discount factor is the implicit interest rate in the lease.
    • - At start of lease, the asset and liability values are the same in the lessors' and lessees' balance sheets.
    • - Each lease payment reduces the obligation and finance charge for the lessor.
    • - The asset is depreciated as corresponding things are with the lessor.
    • - Lessor shall recognize finance leases as Receivables at the amount equal to the net investment in the lease.
  65. How do you account and report for Operating Leases?
    • - As Expenses in the Income Statement.
    • - Rental expenses consist of: - Minimum rent under the lease divided equally over the years. - and any contingent rent relating to that year.
    • - Non-Current Asset for the lessor.
    • - Depreciated with the lessor's policy for similar things.
    • - Costs and depreciation for Earning the lease income are recognized as expenses.
    • - Lease incomes are usually recognized in a stright line even if the it aint that way.
  66. Definition, Recognition and Measurement of a Liability?
    • DEFINITION:
    • - An obligation from past transactions or events which is expected to result in an outflow of resources as of economic benefits.
    • - Obligation is an event that creates a legal or constructive obligation having to do something.

    • RECOGNITION:
    • - Must meet the definition of liabilities above.
    • - Must be measurable.

    • MEASUREMENT:
    • - Should be measured at the present value of the future cash flows, discounted or not.
  67. Definition, Recognition, Measurement of Provisions?
    • DEFINITION:
    • - A provision is a liability of uncertain timing and amount.

    • RECOGNITION:
    • - An entity has a present obligation as a result of past event.
    • - A probable outflow of resources embodying economic benefits will be required to settle the obligation.
    • - A reliable estimate can be made of the amount of the obligation.

    • MEASUREMENT:
    • - The amount recognized shall e the best estimate of the expenditure.
    • - Uncertainties shall be measured by the weighting of all possible outcomes (expected value).
    • - Discount when the time effect matters.
    • - Take into account the future effects of technology or law changes when probable.

    • DISCLOSURE:
    • - Movement in provision during a year needs to be explained.
    • - Each provision needs:
    • A Description, Expected timing of outflows, Describe any incertainties, Amount of unexpected reimbursements (återbetalningar).
  68. What is "Big bath accounting"?
    If big loss one year, then it doesnt matter if the company adds more losses as the market wont get any more disappointed.
  69. Why does Provisions need all these requirements?
    • - Due to Big bath accounting.
    • - Creation of provisions where no obligation to a liability exists.
    • - The use of provisions to smooth profits.
  70. What is a Contingent Liability?
    • (Eventualförpliktelse, utanför balansräkningen MEN med på samma sida)
    • A contingent liability becomes a real liability if and when an unvertain future event actually occurs.
  71. Define Contingent Liability.
    • A present obligation but still not recognized as:
    • - It's not probable that an outflow of resources will be required to settle the obligation.
    • - The amount of the obligation cannot be measured with sufficient realibility.

    Contingent Liabilities occur when one or more of the conditions for Provisions are not met.
  72. How do you disclose Contingent Liabilities?
    • - Brief description.
    • - Estimate of its financial effect.
    • - Indicatino of uncertainties to the amount OR timing of outflow.
    • - Possibility of any reimbursement? (ersättning)
  73. What is Current Tax and Deferred Tax?
    • Current Tax = What should be payed.
    • Deferred Tax = (uppskjuten skatt) To get a true and fair view, resulting from temporary differences or timing differences between accounting value of assets and liabilities and their value for tax purposes.
  74. Define taxable and deductible "Temporary differences" regarding tax.
    Differences between carrying amount of an asset or liability revognized in the statements of financial position and the amount attributed to that asset or liability for that purposes.
  75. How do you recognize Temporary Differences?
    On all taxable temporary differences except goodwill.
  76. How do you measure Temporary Differences?
    • - Tax rates and laws.
    • - Balance sheet date
    • - Apply in periods which the assets or liabilities are realized or settled.
    • - Liability method.
    • - (Generally not discounted)
  77. Regarding pension, what is a Defined Contribution plan and Defined Benefit plan?
    • Defined Contribution = The amount paid every month by the employer to the employees pension.
    • Defined Benefit = The amount the employee will receive when retired.
  78. Taxes, what is the Deferred Method?
    • Income statement approach.
    • Income tax is related to the period in which income is recognized. Deferred tax occurs due to temporary differences. It is not changed afterwards.
  79. Taxes, what is the Asset/Liability-method?
    • Balance sheet oriented.
    • Shows what tax assets or liabilities one has now with todays temporary differences. If the temporary differences change, so does the deferred tax on the Balance Sheet.
  80. Interest Coverage Ratio-formula.
    (EBIT / Fin.exp)
  81. Liquidity - Acid Test formula.
    (Current assets - Inventory) / Current Liabilities
  82. Liquidity, Current Ratio-formula.
    Current Assets / Current Liabilities
  83. What is:
    a Parent Company?
    a subsidiary?
    Group Accounting?
    • Parent Company = Entity with one or more subsidiaries.
    • A subsidiary = Entity controlled by another entity.
    • Group accounting = Necessary when entities have subsidiaries with significant common economic interests.
  84. What is a "Consolidated Income Statement"?
    Total revenues and expenditures of the parent and subsidiary are included.
  85. What is the "Purchase method"?
    Must be used when one company takes over another company's net assets and control.
  86. How do you identify the acquiring entity within the Purchase Method?
    • 1. Who receives the larger portion of the Voting Rights.
    • 2. All equal, the largest Minority Interest is the acquirer.
    • 3. All equal, the one appointing the largest part of the governing body.
    • 4. All equal, the Senior Management that dominates.
    • 5. All equal, the part paying a market premium is the acquirer.
  87. What happens in the Purchase Method after the acquirer has been identified?
    • 1. Determine the cost of the acquisition.
    • 2. Any excess cost is allocated as goodwill.
  88. What is the Fresh-Start Method?
    Two companies become one new. The old ones seize to exist. All combined assets are revalued.

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