Podcast Beta
Questions and Answers
When does cash basis accounting record revenue?
Which component of the accounting equation represents the resources a business owns?
What happens to creditor claims when a company goes bankrupt?
What does equity represent in the accounting equation?
Signup and view all the answers
What is considered a liability in accounting?
Signup and view all the answers
What is retained earnings calculated by?
Signup and view all the answers
What components are included in the equity section of a Statement of Financial Position?
Signup and view all the answers
What does the Balance Sheet report?
Signup and view all the answers
What is the primary focus of the Financial Accounting Standards Board (FASB)?
Signup and view all the answers
Which of the following statements is true about dividends?
Signup and view all the answers
How is the total balance in the Statement of Financial Position calculated?
Signup and view all the answers
What is a disadvantage of the fair value principle?
Signup and view all the answers
Which principle indicates that assets should be reported at their cost?
Signup and view all the answers
Which assumption keeps the activities of the business distinct from its owners?
Signup and view all the answers
What does the Income Statement present?
Signup and view all the answers
What is the benefit of the historical cost principle?
Signup and view all the answers
What is the relationship between the Statement of Financial Position and the Income Statement?
Signup and view all the answers
What does the accrual basis accounting assumption emphasize?
Signup and view all the answers
What are revenues defined as?
Signup and view all the answers
Which assumption divides the economic life of a business into artificially created time periods?
Signup and view all the answers
In which context is the term 'going concern' primarily relevant?
Signup and view all the answers
What happens to retained earnings when Softbyte incurs the advertising expense?
Signup and view all the answers
What is the effect on assets and equity when Softbyte performs services worth €3,500?
Signup and view all the answers
What is the result of Softbyte's payment of the €250 bill from Programming News?
Signup and view all the answers
How does Softbyte's payment of expenses in cash affect its financials?
Signup and view all the answers
What occurs when Softbyte receives €600 in cash from customers for previously billed services?
Signup and view all the answers
What will not be recorded again when Softbyte pays the liability from advertising expenses?
Signup and view all the answers
What is the nature of the cost attributed to advertising by Softbyte?
Signup and view all the answers
What is the outcome of using cash to pay for salaries and wages by Softbyte?
Signup and view all the answers
What effect do dividends have on a company's financial statements?
Signup and view all the answers
Which financial statement provides a snapshot of a company’s assets, liabilities, and equity at a specific date?
Signup and view all the answers
How is retained earnings affected when a dividend is declared?
Signup and view all the answers
What type of information does the Statement of Cash Flows summarize?
Signup and view all the answers
Which statement is true regarding the Income Statement?
Signup and view all the answers
Which is NOT a component of the Statement of Financial Position?
Signup and view all the answers
Why is the statement of changes in equity important?
Signup and view all the answers
Which of the following statements about dividends is correct?
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
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
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.
