89 Questions
What are the two measurement principles commonly used in IFRS?
Historical cost principle and fair value principle
Under the historical cost principle, how are assets recorded?
At their cost at the time of purchase and over the time the asset is held
What does the fair value principle state about reporting assets and liabilities?
They should be reported at fair value, which is the price received to sell an asset or settle a liability
Which of the following is not a part of the agenda for Session 1 F. Reporting?
Taxation principles
Which account would typically have a debit balance?
Materials and supplies
Which account would be classified as a non-current asset?
Property, Plant and Equipment
Which account would be classified as a current liability?
Income tax payable
Who issues U.S. GAAP?
FASB
Which international accounting standards are issued by IASB?
IFRS
In how many countries has there been a movement towards adoption of IFRS since 2002?
Over 130 countries
Which body has the authority to determine measurement rules for financial statements in the USA?
SEC
Which companies are allowed to use IFRS by the SEC?
Foreign companies trading in the U.S. and Japanese companies
Who is responsible for ensuring the accuracy of financial information through controls, external auditors, and board committees?
Management
What does an audit examine financial reports to ensure?
Representation and conformity with GAAP
What are key considerations in financial reporting?
Ethical conduct, reputation, and legal liability
What does financial disclosure include?
Parent company standalone or consolidated financial statements, auditor's report, and notes to financial statements
What does accounting strategy involve?
Identifying key accounting policies, comparative information, and financial KPIs for decision making
What are the two fundamental qualities that useful financial information should have?
Relevance and faithful representation
Which of the following is not an assumption of the IASB conceptual framework for financial reporting?
Accrual accounting
What is the primary objective of financial reporting?
To provide useful information to investors and creditors for decision-making about providing capital
Which financial statement reports assets, liabilities, and shareholders' equity at a specific date?
Balance sheet
Which financial statement reports revenues, expenses, and resulting net income or net loss for a specific period?
Income statement
What does the accounting equation Assets = Liabilities + Shareholders' Equity represent?
Economic resources and sources of financing
What are the elements included in the balance sheet?
Assets, liabilities, and shareholders' equity
What are the elements included in the income statement?
Revenues and expenses
What are the elements included in the statement of cash flows?
Cash flows from operating, investing, and financing activities
What is the purpose of the financial statements?
To provide information about financial position, performance, and cash flows of a firm for a wide range of users
What are the fundamental qualities that useful financial information should have?
Relevance and faithful representation
What is the basis for the IASB conceptual framework for financial reporting?
Reporting assumptions including monetary unit, economic entity, time period, and going concern
What does the balance sheet report?
Assets and claims
How are assets and liabilities categorized in a classified balance sheet?
Current and non-current
What does shareholders' equity represent?
Financing from owners and business operations
Why is the quality of financial disclosures crucial?
To reflect the firm's business strategy and performance
What is the balance sheet considered as?
A status report
What are current assets in a balance sheet?
Cash and cash equivalents, short-term investments, accounts receivable
What do liabilities represent in a balance sheet?
Probable future sacrifices of economic benefits
What is the focus of financial reporting sessions at IE Business School?
Understanding the purpose and elements of the balance sheet and financial disclosures
How are non-current assets classified in a balance sheet?
Property, plant, and equipment, long-term financial investments, intangible assets
What are the key components of financial reporting?
Identifying, measuring, and communicating financial information
What is more valued by the market than strong, volatile growth?
Moderate, constant growth
What does the balance between offering additional information and compulsory disclosures involve?
Trade-offs, legal risks, and potential benefits
Which of the following is an example of a current liability?
Dividends payable
What represents advance cash payments for future delivery of products or services?
Unearned revenues
What is the accounting identity representing the relationship between assets, liabilities, and shareholders' equity?
Assets = Liabilities + Shareholders' Equity
What is the difference between total assets and total liabilities, including contributions of owners and retained earnings?
Shareholders' equity
Which of the following is a non-current liability?
Bonds payable
What is the normal debit or credit balance for shareholders' equity?
Credit
How are increases and decreases recorded for each item in the balance sheet?
Based on the type of account
What is the difference between current and non-current liabilities?
Expected payment timeline
What determines the normal debit or credit balances of accounts on the balance sheet?
Balance sheet classification
Which account represents obligations expected to be paid after a year?
Long-term borrowings
What represents the claims of the owners on the company's assets?
Shareholders' equity
What represents the advance cash payments for future delivery of products or services?
Unearned revenues
Which measurement principle dictates that companies record assets at their cost?
The historical cost principle
What does the fair value principle state about reporting assets and liabilities?
Assets and liabilities should be reported at fair value
What is the focus of Session 1 F. Reporting at IE Business School?
The Accounting System, Financial Statements, GAAP, and Financial Disclosure
Who issues U.S. GAAP?
Financial Accounting Standards Board (FASB)
What is the primary focus of financial reporting quality?
Showing the firm's business strategy and its economic consequences
What does the lack of transparency in financial reporting result in?
Underpricing of shares
What is the trade-off between offering additional information and compulsory disclosures?
Legal risks and information for competitors
What is the significance of realistic estimations in financial reporting?
Justification for past actions
What is valued more by the market than strong and volatile growth?
Moderate and constant growth
What does the accounting strategy and financial disclosure session emphasize?
Quality of financial disclosures and trade-offs in offering additional information
What does offering additional information in financial reporting involve?
Legal risks and information for competitors
What is the focus of the Investor Relations program/team in financial reporting quality?
Quality of segment disclosure
Which organization is recognized as the body formulating US GAAP, applied by most US companies?
FASB
Which institution issues IFRS and interpretations IFRICs and SICs?
IASB
Which movement has been observed since 2002 towards adoption of IFRS in over 130 countries?
Movement towards adoption of IFRS
Which entity allows foreign companies trading in the U.S. and Japanese companies to use IFRS?
SEC
Who is responsible for ensuring the accuracy of financial information through controls, external auditors, and board committees?
Management
What examines financial reports to ensure representation and conformity with GAAP?
Audit
What are key considerations in financial reporting?
Ethical conduct
Which organization has the authority to determine measurement rules for financial statements in the USA?
SEC
Which statement is true about the adoption of IFRS in over 130 countries?
It includes the USA and Japan
What does financial disclosure include?
Auditor's report
What is the primary responsibility of management in financial reporting?
Ensuring the accuracy of financial information
What is the role of SEC in allowing foreign companies to use IFRS?
It allows foreign companies trading in the U.S. to use IFRS
What are the fundamental qualities that useful financial information should have?
Reliability and comparability
Which financial statement reports assets, liabilities, and shareholders' equity at a specific date?
Balance sheet
What is the primary objective of financial reporting?
Provide useful information to investors and creditors for decision-making about providing capital
What represents the advance cash payments for future delivery of products or services?
Unearned revenue
What are the elements included in the statement of cash flows?
Cash flows from operating, investing, and financing activities
What does the accounting equation Assets = Liabilities + Shareholders' Equity represent?
The relationship between economic resources and sources of financing
What are the elements included in the income statement?
Revenues and expenses
What is the normal debit or credit balance for shareholders' equity?
Credit
What does the fair value principle state about reporting assets and liabilities?
Assets and liabilities should be reported at the price they would receive in an orderly transaction
Which of the following is an example of a current liability?
Accounts payable
What represents the obligations expected to be paid after a year?
Non-current liabilities
What does an audit examine financial reports to ensure?
Accuracy and compliance with accounting standards
Study Notes
Analyzing Balance Sheet and Reporting of Liabilities and Equity
- Current liabilities are obligations expected to be paid within a year, while non-current liabilities are expected to be paid after a year.
- Examples of current liabilities include accounts payable, accrued liabilities, short-term borrowings, and dividends payable.
- Unearned revenues represent advance cash payments for future delivery of products or services.
- Non-current liabilities include bonds payable, long-term borrowings, and other obligations.
- Shareholders' equity is the difference between total assets and total liabilities, including contributions of owners and retained earnings.
- The accounting identity, Assets = Liabilities + Shareholders' Equity, must always balance.
- Each item in the balance sheet is represented by an account, and the type of account determines how increases and decreases are recorded.
- The rules of debit and credit for assets, liabilities, and shareholders' equity are based on the accounting equation.
- Delta Corporation's balance sheet includes a variety of accounts such as notes and loans payable, materials and supplies, contributed capital, and patents.
- The normal debit or credit balances for these accounts are essential for classifying them on the balance sheet.
- The balance sheet classification of accounts such as notes and loans payable and materials and supplies determines their normal debit or credit balances.
- Understanding the normal debit or credit balances of specific accounts is crucial for accurately classifying them on the balance sheet.
Financial Reporting and Statements
- The primary objective of financial reporting is to provide useful information to investors and creditors for decision-making about providing capital.
- Useful information should have two fundamental qualities: relevance and faithful representation.
- The IASB conceptual framework is based on reporting assumptions including monetary unit, economic entity, time period, and going concern.
- The financial statements have a general purpose of providing information about financial position, performance, and cash flows of a firm for a wide range of users.
- The financial statements include the balance sheet, income statement, statement of shareholders' equity, statement of cash flows, and comprehensive income statement.
- The balance sheet reports assets, liabilities, and shareholders' equity at a specific date.
- The income statement reports revenues, expenses, and resulting net income or net loss for a specific period.
- The statement of cash flows reports inflows and outflows of cash for a specific period in operating, investing, and financing categories.
- The balance sheet elements include assets like cash, short-term investments, and liabilities like accounts payable and loans/bonds payable.
- The accounting equation is Assets = Liabilities + Shareholders' Equity, representing economic resources and sources of financing.
- The income statement elements include revenues like sales revenue, and expenses like wages expense and income tax expense.
- The statement of cash flows elements include cash flows from operating, investing, and financing activities, which can be positive or negative.
Test your knowledge of analyzing balance sheets and reporting of liabilities and equity with this quiz. Explore concepts such as current and non-current liabilities, shareholders' equity, accounting identities, balance sheet classifications, and normal debit/credit balances.
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