International Accounting Standards Overview
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Questions and Answers

When does cash basis accounting record revenue?

  • When a sale is made on credit
  • At the end of the accounting period
  • When services are rendered
  • When cash is received (correct)

    • Which component of the accounting equation represents the resources a business owns?

  • Equity
  • Assets (correct)
  • Debts
  • Liabilities

    • What happens to creditor claims when a company goes bankrupt?

  • They are paid after ownership claims
  • They are ignored completely
  • They are converted to equity
  • They are prioritized and paid before ownership claims (correct)

    • What does equity represent in the accounting equation?

    <p>Ownership claim on a company’s total assets</p> Signup and view all the answers

    What is considered a liability in accounting?

    <p>Existing debts and obligations</p> Signup and view all the answers

    What is retained earnings calculated by?

    <p>Current net income minus dividends</p> Signup and view all the answers

    What components are included in the equity section of a Statement of Financial Position?

    <p>Share capital and retained earnings</p> Signup and view all the answers

    What does the Balance Sheet report?

    <p>Assets, liabilities, and equity at a specific date</p> Signup and view all the answers

    What is the primary focus of the Financial Accounting Standards Board (FASB)?

    <p>Creating rule-based accounting principles for the U.S.</p> Signup and view all the answers

    Which of the following statements is true about dividends?

    <p>Dividends are distributions from retained earnings</p> Signup and view all the answers

    How is the total balance in the Statement of Financial Position calculated?

    <p>Beginning balance plus increases subtract decreases</p> Signup and view all the answers

    What is a disadvantage of the fair value principle?

    <p>Less reliability in financial reporting</p> Signup and view all the answers

    Which principle indicates that assets should be reported at their cost?

    <p>Historical cost principle</p> Signup and view all the answers

    Which assumption keeps the activities of the business distinct from its owners?

    <p>Economic entity assumption</p> Signup and view all the answers

    What does the Income Statement present?

    <p>Revenue and expenses for a specific period of time</p> Signup and view all the answers

    What is the benefit of the historical cost principle?

    <p>Faithful representation of assets</p> Signup and view all the answers

    What is the relationship between the Statement of Financial Position and the Income Statement?

    <p>The net income from the Income Statement is used to adjust retained earnings in the Statement of Financial Position</p> Signup and view all the answers

    What does the accrual basis accounting assumption emphasize?

    <p>Recognizing events in the periods they occur</p> Signup and view all the answers

    What are revenues defined as?

    <p>Gross increases in equity from business activities</p> Signup and view all the answers

    Which assumption divides the economic life of a business into artificially created time periods?

    <p>Time period (periodicity) assumption</p> Signup and view all the answers

    In which context is the term 'going concern' primarily relevant?

    <p>The expectation that a company will continue its operations indefinitely</p> Signup and view all the answers

    What happens to retained earnings when Softbyte incurs the advertising expense?

    <p>Retained earnings decrease.</p> Signup and view all the answers

    What is the effect on assets and equity when Softbyte performs services worth €3,500?

    <p>Assets increase and equity increases.</p> Signup and view all the answers

    What is the result of Softbyte's payment of the €250 bill from Programming News?

    <p>Decrease in accounts payable and decrease in cash.</p> Signup and view all the answers

    How does Softbyte's payment of expenses in cash affect its financials?

    <p>Decreases total assets and equity.</p> Signup and view all the answers

    What occurs when Softbyte receives €600 in cash from customers for previously billed services?

    <p>Total assets are unchanged, but composition changes.</p> Signup and view all the answers

    What will not be recorded again when Softbyte pays the liability from advertising expenses?

    <p>Expense.</p> Signup and view all the answers

    What is the nature of the cost attributed to advertising by Softbyte?

    <p>Expense.</p> Signup and view all the answers

    What is the outcome of using cash to pay for salaries and wages by Softbyte?

    <p>Decrease in equity and cash.</p> Signup and view all the answers

    What effect do dividends have on a company's financial statements?

    <p>They decrease assets and equity.</p> Signup and view all the answers

    Which financial statement provides a snapshot of a company’s assets, liabilities, and equity at a specific date?

    <p>Statement of Financial Position</p> Signup and view all the answers

    How is retained earnings affected when a dividend is declared?

    <p>It decreases by the amount of the dividend.</p> Signup and view all the answers

    What type of information does the Statement of Cash Flows summarize?

    <p>Cash inflows and outflows for a specific period.</p> Signup and view all the answers

    Which statement is true regarding the Income Statement?

    <p>It reports net income or net loss for a specified period.</p> Signup and view all the answers

    Which is NOT a component of the Statement of Financial Position?

    <p>Net cash inflow</p> Signup and view all the answers

    Why is the statement of changes in equity important?

    <p>It shows retained earnings for a specific period.</p> Signup and view all the answers

    Which of the following statements about dividends is correct?

    <p>Dividends affect retained earnings but are not included in net income.</p> Signup and view all the answers

    Study Notes

    International Accounting Standards

    • International Accounting Standards Board (IASB) determines International Financial Reporting Standards (IFRS), which are principle-based
    • IFRS are used in 130 countries, including Korea
    • Financial Accounting Standards Board (FASB) determines Generally Accepted Accounting Principles (US-GAAP), which are rule-based
    • US-GAAP is used in the United States
    • There is a convergence movement between IFRS and US-GAAP to reduce differences and increase comparability

    Measurement Principles

    • Companies record assets at their cost (historical cost principle)
      • This principle emphasizes faithful representation and reliability
      • A drawback is that it can reduce relevance
    • Assets and liabilities should be reported at fair value (fair value principle)
      • This principle emphasizes relevance, as financial information can be more impactful in decision-making
      • It might sacrifice reliability in some cases
    • There is a trade-off between relevance and faithful representation in choosing appropriate measurement principles

    Accounting Assumptions

    • Monetary Unit Assumption: Only transactions expressed in monetary terms are included in accounting records
    • Economic Entity Assumption: The activities of an entity are kept separate from its owner and other entities
      • Common entity forms include proprietorship, partnership, and corporations
    • Going Concern Assumption: Companies are assumed to continue operating without going bankrupt when preparing financial statements
    • Time Period (Periodicity) Assumption: The economic life of a business is divided into artificial time periods, such as quarters, semesters, or years
      • This enables stakeholders to assess periodic operating performance
      • Companies can report on a fiscal or calendar year basis
    • Accrual Basis Accounting Assumption: Transactions are recorded when they occur, regardless of when cash is received or paid
      • This contrasts with cash basis accounting, where revenue and expenses are recorded only when cash is exchanged

    Accounting Equation

    • The accounting equation is the basic framework of accounting analysis for economic transactions
    • It applies to all economic entities, regardless of size
    • It always holds true
    • The basic equation is: Assets = Liabilities + Equity

    Components of the Accounting Equation

    • Assets: Resources owned by a business that provide future benefits
      • Examples include cash, inventory, property, plant, equipment, investments
    • Liabilities: Claims against assets, representing existing debts and obligations
      • When a company goes bankrupt, creditors are paid before owners
      • Examples include accounts payable, borrowings/loans, bonds payable
    • Equity: Ownership claim on a company's total assets
      • Represents the residual equity left after all liabilities are paid
      • Includes share capital and retained earnings
      • Changes in retained earnings are calculated as: Beginning Retained Earnings + Current Net Income - Dividends
    • The accounting equation is reflected in the Statement of Financial Position (Balance Sheet)

    Interrelationship between Statement of Financial Position and Income Statement

    • Statement of Financial Position (SFP/Balance Sheet) reports assets, liabilities, and equity at a specific date
    • Income Statement (I/S) presents revenues and expenses for a specific period of time
    • The ending balance of each account in the SFP is calculated as: Beginning balance + Increase - Decrease
    • Retained earnings at the end of a period are equal to: Beginning retained earnings + Current net income - Dividends

    Equity Components

    • Share capital—ordinary: The amount paid by shareholders for the ordinary shares they purchase
    • Dividends: Distribution of cash or other assets to shareholders from retained earnings, not considered an expense
    • Revenues: Increases in equity resulting from business activities, such as sales of goods or services
      • Revenue increases equity

    Financial Statements

    • Income Statement: Presents revenues, expenses, and the resulting net income or net loss for a specific period
      • A net income occurs when revenues exceed expenses
      • A net loss occurs when expenses exceed revenues
      • This statement does not include investment and dividend transactions between shareholders and the company (those are reflected in the Statement of Changes in Equity)
    • Statement of Financial Position (Balance Sheet): Reports the assets, liabilities, and equity of a company at a specific date
      • It offers a snapshot of the company's financial condition
      • Assets are listed first, followed by equity, and then liabilities
      • The total assets always equal the total liabilities plus the total equity
    • Statement of Changes in Equity: Shows changes in each equity account and total equity during the year
      • It replaces the need for a separate retained earnings statement
    • Statement of Cash Flows: Summarizes cash inflows (receipts) and outflows (payments) for a specific period

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    Description

    This quiz covers the key principles of International Accounting Standards, including the differences between IFRS and US-GAAP. It explores measurement principles such as the historical cost and fair value concepts, highlighting their relevance and reliability. Test your knowledge on these essential accounting frameworks and their global implications.

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