EMA1316 Accounting Theory and Practice 1
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Questions and Answers

What effect does closing stock have on profit?

  • Decreases profit and increases cost of sales
  • Has no effect on profit
  • Increases profit and reduces cost of sales (correct)
  • Increases cost of sales and decreases profit

    • Which accounting approach typically shows a higher profit for the same type of stock?

  • Modified Cash Basis
  • Hybrid Accounting
  • IFRS (correct)
  • US GAAP

    • How is a lease that covers the economical life of an asset categorized under IFRS?

  • Capital Lease
  • Convertible Lease
  • Operating Lease
  • Finance Lease (correct)

    • What type of lease terminology is used under US GAAP for a lease covering the entire economic life of an asset?

    <p>Capital Lease</p> Signup and view all the answers

    Why might a company using IFRS report higher profits compared to one using US GAAP?

    <p>They utilize different accounting rules for asset measurement</p> Signup and view all the answers

    What is the primary impact of using different inventory valuation methods on financial statements?

    <p>They lead to different profit calculations</p> Signup and view all the answers

    Which of the following statements is true regarding closing stock under different accounting standards?

    <p>It may lead to significantly different profit outcomes</p> Signup and view all the answers

    How do IFRS and US GAAP differ in terminology for asset leasing?

    <p>There is a distinction in terms with some leases termed differently</p> Signup and view all the answers

    What do accounting regulations help reduce?

    <p>Risk of accounting fraud</p> Signup and view all the answers

    What does harmonization of accounting standards entail?

    <p>Making two standards similar but not identical</p> Signup and view all the answers

    How does standardization differ from harmonization in accounting?

    <p>Standardization eliminates all differences, while harmonization reduces differences.</p> Signup and view all the answers

    Which two organizations were urged by the G20 to standardize accounting standards?

    <p>IASB and FASB</p> Signup and view all the answers

    What is the significance of a company following accounting rules and regulations?

    <p>It shows a true and fair view of the company's finances.</p> Signup and view all the answers

    What was a medium-term action expected from the IASB and FASB by the G20?

    <p>To standardize accounting standards into a single set.</p> Signup and view all the answers

    What is the key outcome of accounting regulation for users of financial statements?

    <p>Enhancing the comparability of financial statements</p> Signup and view all the answers

    Which statement best describes the nature of the financial statements that adhere to accounting regulations?

    <p>They represent a true and fair view of the company.</p> Signup and view all the answers

    What is the term used for the Profit / Loss statement under IFRS?

    <p>Statement of Comprehensive Income</p> Signup and view all the answers

    Which term is used to describe Share Capital in the US GAAP?

    <p>Stock</p> Signup and view all the answers

    What is one major disadvantage of not standardizing accounting principles?

    <p>Complicated financial reporting for multinational companies</p> Signup and view all the answers

    What advantage does standardization of accounting standards provide for cross-border finance?

    <p>It enhances the comparability of financial information.</p> Signup and view all the answers

    What is a potential difficulty faced by companies listed on multiple stock exchanges?

    <p>Preparation of different financial statements according to various GAAPs.</p> Signup and view all the answers

    Which example illustrates the advantage of standardization in accounting?

    <p>AstraZeneca being able to raise capital in both the UK and US without multiple statements.</p> Signup and view all the answers

    What is one terminology difference between IFRS and US GAAP?

    <p>Equity vs. Stock</p> Signup and view all the answers

    What is a consequence of differing terminology in accounting standards?

    <p>Confusion among users of financial statements.</p> Signup and view all the answers

    What was the primary directive given to the IASB and FASB by the G20 in 2009?

    <p>To standardize their accounting standards</p> Signup and view all the answers

    Which accounting standards were issued by the IASB and FASB concerning Consolidation in 2011?

    <p>IFRS 10, IFRS 11, IFRS 12</p> Signup and view all the answers

    What was the aim of the IASB and FASB in relation to the Financial Instruments Project?

    <p>To consolidate the existing standards into one</p> Signup and view all the answers

    What is IFRS 15 related to in terms of accounting standards?

    <p>Revenue from Contracts with Customers</p> Signup and view all the answers

    What was a critical project undertaken by the IASB and FASB after 2009 concerning their frameworks?

    <p>To align their separate Conceptual Frameworks</p> Signup and view all the answers

    One of the main projects that led to significant changes in revenue recognition was initiated in which year?

    <p>2013</p> Signup and view all the answers

    Which of the following statements accurately reflects the status of Consolidation Standards by 2015?

    <p>They were fully aligned with no differences</p> Signup and view all the answers

    Prior to 2009, what was a significant issue between the IASB and FASB regarding their frameworks?

    <p>Differences in main Accounting Concepts</p> Signup and view all the answers

    What is the primary purpose of an Audit Report attached to Financial Statements?

    <p>To verify that the financial statements reflect reality</p> Signup and view all the answers

    Who is authorized to issue an Audit Report?

    <p>Warranted Accountants with a Practicing Certificate in Auditing</p> Signup and view all the answers

    What significant risk was highlighted regarding the issuance of clean audit reports, as seen in the case of Lehman Brothers?

    <p>The report showed financial integrity while hiding liabilities</p> Signup and view all the answers

    What body was created by the Accountancy Profession Act to oversee adherence to its provisions?

    <p>The Accountancy Board</p> Signup and view all the answers

    What is the first obligation of the Accountancy Board?

    <p>To check the correctness of submitted documents for Warrant application</p> Signup and view all the answers

    Under what circumstances can the Accountancy Board suspend a Warrant of a Warrant Holder?

    <p>If they do not act in the public interest and jeopardize trust</p> Signup and view all the answers

    What rights does the Accountancy Board hold regarding projects in the Accounting Profession?

    <p>The right to delegate or undertake beneficial projects</p> Signup and view all the answers

    What is the potential consequence if users of financial statements cannot trust the Audit Report?

    <p>Potential financial loss to investors</p> Signup and view all the answers

    What type of information must be included in the Directors' Report for larger companies?

    <p>Detailed descriptions of important events between year-end and approval of financial statements</p> Signup and view all the answers

    Why is it necessary to disclose Research and Development Expenditure in the Directors' Report?

    <p>It shows the company's commitment to innovation and improvement</p> Signup and view all the answers

    What kind of event must the Directors report if it occurs between the year-end and the date of the financial statements' approval?

    <p>Significant events like a warehouse fire impacting inventory</p> Signup and view all the answers

    What information related to future developments is necessary to include in the Directors' Report?

    <p>Plans for new product launches or factory constructions</p> Signup and view all the answers

    For a small company, what is the approach taken regarding the details in the Directors' Report?

    <p>Less detail is required compared to larger companies</p> Signup and view all the answers

    What is one example of a mandatory disclosure for the Directors' Report?

    <p>Important events after the financial year-end</p> Signup and view all the answers

    What might the Directors include regarding future development expectations?

    <p>Expected expansions or new product introductions</p> Signup and view all the answers

    Which of the following statements correctly reflects the requirements of the 6th Schedule?

    <p>The 6th Schedule specifies additional requirements for the Directors’ Report</p> Signup and view all the answers

    Study Notes

    EMA1316 Accounting Theory and Practice 1 Notes

    • Disclaimer: ASCS (the organization providing the notes) is not responsible for the quality of the past papers; they are supplementary study material, not replacements for lecture content or lecturer guidance. Past papers may contain outdated information, and ASCS cannot guarantee that the most recent past paper is always available. Sharing these papers with third parties is prohibited.

    Regulation and Financial Accounting

    • Financial Accounting: A process for recognizing, measuring, and presenting financial information to assist users in economic decision-making.

    • Recognition: The categorization of a company's transactions as an asset, liability, revenue, or expense, impacting both the Statement of Comprehensive Income (SOPL) and the Statement of Financial Position (SOFP).

    • Measurement: Determining appropriate methodologies to measure recognized assets and liabilities on an ongoing basis.

    • Presentation: Summarizing transactions from the year into a complete set of financial statements:

    • Statement of Comprehensive Income

    • Statement of Financial Position

    • Statement of Changes in Equity

    • Statement of Cash Flows

    • Users of Financial Statements: Lenders, shareholders (investors), creditors.

    • Examples of Transactions:

    • Purchasing laptops for administration (recognized as an asset)

    • Maintaining computer servers (€500 expenditure)

    • Selling machinery (€1,000 sale)

    • Sale and repurchase of machinery (treated as a loan)

    Accounting Rules and Regulations

    • IFRSs (International Financial Reporting Standards)/IASs: Global accounting standards issued by the IASB, widely used worldwide.
    • Companies Act: Legislation governing financial reporting for Maltese companies.
    • Listing Rules: Specific rules for companies listed in Malta.
    • GAPSME (General Accounting Principles for Small and Medium-Sized Entities): Alternative accounting guidelines for smaller companies in Malta.
    • IFRIC (International Financial Reporting Interpretations Committee)/SIC (Standards Interpretations Committee): Issued by the IASB regarding interpretations of accounting standards in specific contexts

    Regulation and Standardisation

    • Accounting Scandals: (Enron, Parmalat, Lehman Brothers) highlight the need for improved financial reporting regulations.

    • Sarbanes–Oxley Act: US legislation introduced to prevent accounting fraud following Enron.

    • G20 Action Points:

    • Short-term: Cooperation among accounting bodies

    • Medium-term: Enforcement and convergence of standards

    • IASB & FASB: The IASB (International Accounting Standards Board) and FASB (Financial Accounting Standards Board) are the standard-setting bodies pushing towards convergence and harmonization and eliminating differences between IFRS and US GAAP.

    • IFRS 16 (Leases): A standard issued by the IASB in 2017 that removes the distinction between operating and finance leases.

    • IFRS 15 (Revenue from Contracts with Customers): Standard issued for harmonisation between IFRS and GAAP by the IASB and FASB.

    Additional Considerations

    • Dotcom Bubble (2000): Fictitious sales inflated revenue, demonstrating the need for financial reporting transparency and regulations.

    • Market Failures: Situations where accounting information is not reliable or complete or not supplied in the public interest which requires Government intervention, for example street lights.

    • Accounting Regulation: Supporters argue regulation reduces fraud; opponents suggest the market can regulate effectively on its own.

    • Public Good: Accounting information, similar to public goods (e.g., street lighting), implies some degree of universal and broad access.

    • Powerful vs. Less Powerful Users/Investors: Accounting regulation protects the interests of less powerful stakeholders.

    • Accounting Fraud: Misleading financial information that has serious negative consequences for companies and investors.

    • Different Taxation Systems: Variations in tax rules lead to different profitability and financial statement outcomes in various countries.

    • Accounting Profession Act (Malta): Establishes criteria, obligations, and regulation for accountants and auditors in Malta.

    • Accountancy Board of Malta: Responsible for upholding accounting standards and maintaining professional qualifications in Malta.

    • Financial Reporting Obligations: Companies in Malta must adhere to specific timeframes for laying and delivering financial documents to shareholders.

    • Small Companies Exemptions: Certain, smaller companies in Malta are exempted from some reporting obligations.

    • Conceptual Framework: Provides a conceptual basis for accounting standards, enhancing accounting practice and consistency, by highlighting the importance of the Principles and Concepts behind accounting practice.

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    Description

    Explore key concepts in financial accounting as detailed in the EMA1316 course. This quiz covers the processes of recognition, measurement, and presentation of financial information necessary for decision-making. Delve into how financial transactions affect financial statements and their interpretations.

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