ANALYZING FINANCIAL REPORTS WALL STREET PREP
LATEST COMPLETE REAL EXAM QUESTIONS AND
CORRECT VERIFIED ANSWERS LATEST UPDATES |
ASSURED SUCCESS
Conceptual Framework - ANSWER: An attempt to systematise accounting standards
across the world by setting out the purpose of financial reporting and clarifying the
characteristics that accounting information should have. It will not eliminate the
need for standards. It serves as the starting point for the development of all future
standards.
(IASB) International Accounting Standards Board - ANSWER: Independent, non-
profit, private standard setting body consisting of 16 full-time members - accounting
experts from around the world - with a variety of experience ranging from setting
accounting standards, to auditing, to educating.
(FASB) Financial Accounting Standards Board - ANSWER: The board governed by the
SEC (Securities & Exchange Commission), a federal US agency that regulates
investment.
(IFRS) International Financial Reporting Standards - ANSWER: The unified principle-
based accounting standards created by the IASB.
(GAAP) Generally Accepted Accounting Principles - ANSWER: The rules-based
reporting standards created by the FASB.
Purpose - ANSWER: Statements must provide financial information that assists
economic decision making (e.g. any decisions involving the provision of resources to
the entity). The standards board assumes that the majority of stakeholders are
concerned with the business' ability to generate cash and cash equivalents.
Rationality - ANSWER: The assumption that users are rational economic decision
makers, who are only interested in financial information.
Accruals Basis - ANSWER: The assumption of a Balance Sheet focus instead of Income
Statement focus. Transactions are recognized when their effects occur rather than
when cash flow is generated. (e.g. Performance Obligations) This decision ensures
that statements are useful and relevant.
Going Concern - ANSWER: The assumption that an entity is not likely to go into
liquidation soon, therefore we report assets at costs and not market prices. This
means that errors are overlooked--we care about long term values not day to day
fluctuations in value.
Understandability - ANSWER: Principle 1/4:
,Financial statements need to be understandable or they won't be of any use. Users
are expected to have a reasonable knowledge of accounting and should read with
care.
Relevance - ANSWER: Principle 2/4:
Judged in terms of decisions made by users. Arguably, most decisions involve looking
ahead rather than backward. The framework states that historical information is
often a valid basis for predictions.
Materiality - ANSWER: Part of the Relevance principle, this is a requirement which
says that if an item's misstatement or omission would affect the decisions of
financial statement users - either due to the amount involved (i.e. percent it makes
up of total data) or due to the importance of the event - it should be included in the
reports.
Reliability - ANSWER: Principle 3/4:
'True and Fair'; information is free from material error and bias.
Faithful Representation - ANSWER: Part of the Reliability principle, this is a
requirement which says that it is important that statements are represented
faithfully in order to maintain reliability.
Substance over Form - ANSWER: Part of the Reliability principle, this is a requirement
which says that a report should reflect the economic substance of the transaction
rather than the legal form (e.g. duck test).
Neutrality - ANSWER: Part of the Reliability principle, this is a requirement which
says that financial statements must be free from bias.
Prudence - ANSWER: Part of the Reliability principle, this is a requirement which says
that when there is doubt, the lowest figure should be chosen for assets and the
highest for liabilities and expenses. This conservative, cautious judgement-making in
accounting ensures that assets & income are not overstated and liabilities and
expenses are not understated.
Completeness - ANSWER: Part of the Reliability principle, this is a requirement which
says that figures should be complete but only to the extent that they are consistent
with materiality and cost.
Comparability - ANSWER: Principle 4/4:
Requires consistency of accounting policies from year to year and also clear
disclosure of the major policies in use.
Consistency - ANSWER: Part of the Consistency principle, this is a requirement which
says that the entity must apply the same accounting methods continuously so that
comparability between different accounting periods is maintained. When this cannot
, be maintained, the reporting entity must disclose the method change, reasons for
the change, and the impact of the change on the statements.
Recognition - ANSWER: When a transaction is recorded in the statements. This is a
continuous process in which the value of transactions are estimated. This can be
manipulated by deferring expenses.
Realisation Concept (Recognition) - ANSWER: Revenue recorded when transaction
takes place - only recognise when transaction gives a legal right to the receipt of
money, regardless of whether cash or credit is used. Reflects current economic
activity and results in healthy financial statements, and company could choose to
then defer this over time. Although relevant at the time it isn't very reliable and also
isn't very relevant in the years to come unless revenue is deferred
Control Principle (Recognition) - ANSWER: Revenues are recognised at the point of
sale or transfer of legal ownership - as control is passed either over time or at a point
in time - rather than just when cash changes hands. Control of an asset is defined as
the ability to direct the use of and obtain substantially all of the remaining benefits
from the asset. This includes the ability to prevent others from directing the use of
and obtaining the benefits from the asset.
Matching Principle (Recognition) - ANSWER: An accrual concept, and crucial to the
income statement. Revenues are recognised when the economic act occurs not
when the cashflow is registered. Both sides of the economic transaction must have
taken place, stemming from a substance-over-form approach to accounting. On an
accrual basis, expenses are recognised when they are incurred, and then these
expenses are offset against revenues generated from those expenses.
Adjusting Events (Timing - Recognition) - ANSWER: The Framework imposes a duty to
recognise events that occur after the reporting date and up to the date when the
statements are authorised for issue.
This particular type of event: things that show things that happened in the period
but no one realised - shown on financial statements.
Non Adjusting Events (Timing - Recognition) - ANSWER: The Framework imposes a
duty to recognise events that occur after the reporting date and up to the date when
the statements are authorised for issue.
This particular type of event: things that show things that hadn't yet happened by
year end (e.g. fire) - shown in the notes to these statements.
Historical Cost Accounting - ANSWER: The Income Statement approach to
measurement views the determination of revenues, expenses, and especially
earnings as the primary goal of financial reporting. This involves an emphasis on the
proper determination of the timing and magnitude of the revenue and expense
amounts. The determinations of BS variables are considered secondary and
LATEST COMPLETE REAL EXAM QUESTIONS AND
CORRECT VERIFIED ANSWERS LATEST UPDATES |
ASSURED SUCCESS
Conceptual Framework - ANSWER: An attempt to systematise accounting standards
across the world by setting out the purpose of financial reporting and clarifying the
characteristics that accounting information should have. It will not eliminate the
need for standards. It serves as the starting point for the development of all future
standards.
(IASB) International Accounting Standards Board - ANSWER: Independent, non-
profit, private standard setting body consisting of 16 full-time members - accounting
experts from around the world - with a variety of experience ranging from setting
accounting standards, to auditing, to educating.
(FASB) Financial Accounting Standards Board - ANSWER: The board governed by the
SEC (Securities & Exchange Commission), a federal US agency that regulates
investment.
(IFRS) International Financial Reporting Standards - ANSWER: The unified principle-
based accounting standards created by the IASB.
(GAAP) Generally Accepted Accounting Principles - ANSWER: The rules-based
reporting standards created by the FASB.
Purpose - ANSWER: Statements must provide financial information that assists
economic decision making (e.g. any decisions involving the provision of resources to
the entity). The standards board assumes that the majority of stakeholders are
concerned with the business' ability to generate cash and cash equivalents.
Rationality - ANSWER: The assumption that users are rational economic decision
makers, who are only interested in financial information.
Accruals Basis - ANSWER: The assumption of a Balance Sheet focus instead of Income
Statement focus. Transactions are recognized when their effects occur rather than
when cash flow is generated. (e.g. Performance Obligations) This decision ensures
that statements are useful and relevant.
Going Concern - ANSWER: The assumption that an entity is not likely to go into
liquidation soon, therefore we report assets at costs and not market prices. This
means that errors are overlooked--we care about long term values not day to day
fluctuations in value.
Understandability - ANSWER: Principle 1/4:
,Financial statements need to be understandable or they won't be of any use. Users
are expected to have a reasonable knowledge of accounting and should read with
care.
Relevance - ANSWER: Principle 2/4:
Judged in terms of decisions made by users. Arguably, most decisions involve looking
ahead rather than backward. The framework states that historical information is
often a valid basis for predictions.
Materiality - ANSWER: Part of the Relevance principle, this is a requirement which
says that if an item's misstatement or omission would affect the decisions of
financial statement users - either due to the amount involved (i.e. percent it makes
up of total data) or due to the importance of the event - it should be included in the
reports.
Reliability - ANSWER: Principle 3/4:
'True and Fair'; information is free from material error and bias.
Faithful Representation - ANSWER: Part of the Reliability principle, this is a
requirement which says that it is important that statements are represented
faithfully in order to maintain reliability.
Substance over Form - ANSWER: Part of the Reliability principle, this is a requirement
which says that a report should reflect the economic substance of the transaction
rather than the legal form (e.g. duck test).
Neutrality - ANSWER: Part of the Reliability principle, this is a requirement which
says that financial statements must be free from bias.
Prudence - ANSWER: Part of the Reliability principle, this is a requirement which says
that when there is doubt, the lowest figure should be chosen for assets and the
highest for liabilities and expenses. This conservative, cautious judgement-making in
accounting ensures that assets & income are not overstated and liabilities and
expenses are not understated.
Completeness - ANSWER: Part of the Reliability principle, this is a requirement which
says that figures should be complete but only to the extent that they are consistent
with materiality and cost.
Comparability - ANSWER: Principle 4/4:
Requires consistency of accounting policies from year to year and also clear
disclosure of the major policies in use.
Consistency - ANSWER: Part of the Consistency principle, this is a requirement which
says that the entity must apply the same accounting methods continuously so that
comparability between different accounting periods is maintained. When this cannot
, be maintained, the reporting entity must disclose the method change, reasons for
the change, and the impact of the change on the statements.
Recognition - ANSWER: When a transaction is recorded in the statements. This is a
continuous process in which the value of transactions are estimated. This can be
manipulated by deferring expenses.
Realisation Concept (Recognition) - ANSWER: Revenue recorded when transaction
takes place - only recognise when transaction gives a legal right to the receipt of
money, regardless of whether cash or credit is used. Reflects current economic
activity and results in healthy financial statements, and company could choose to
then defer this over time. Although relevant at the time it isn't very reliable and also
isn't very relevant in the years to come unless revenue is deferred
Control Principle (Recognition) - ANSWER: Revenues are recognised at the point of
sale or transfer of legal ownership - as control is passed either over time or at a point
in time - rather than just when cash changes hands. Control of an asset is defined as
the ability to direct the use of and obtain substantially all of the remaining benefits
from the asset. This includes the ability to prevent others from directing the use of
and obtaining the benefits from the asset.
Matching Principle (Recognition) - ANSWER: An accrual concept, and crucial to the
income statement. Revenues are recognised when the economic act occurs not
when the cashflow is registered. Both sides of the economic transaction must have
taken place, stemming from a substance-over-form approach to accounting. On an
accrual basis, expenses are recognised when they are incurred, and then these
expenses are offset against revenues generated from those expenses.
Adjusting Events (Timing - Recognition) - ANSWER: The Framework imposes a duty to
recognise events that occur after the reporting date and up to the date when the
statements are authorised for issue.
This particular type of event: things that show things that happened in the period
but no one realised - shown on financial statements.
Non Adjusting Events (Timing - Recognition) - ANSWER: The Framework imposes a
duty to recognise events that occur after the reporting date and up to the date when
the statements are authorised for issue.
This particular type of event: things that show things that hadn't yet happened by
year end (e.g. fire) - shown in the notes to these statements.
Historical Cost Accounting - ANSWER: The Income Statement approach to
measurement views the determination of revenues, expenses, and especially
earnings as the primary goal of financial reporting. This involves an emphasis on the
proper determination of the timing and magnitude of the revenue and expense
amounts. The determinations of BS variables are considered secondary and
