IFA 26 Sem 1

What is the objective of financial reporting?

To provide financial information useful to investors, lenders, and creditors when making resource allocation decisions.

What are internal users of accounting information?

Managers within the organisation who use information for planning and decision-making.

What are external users of accounting information?

Investors, creditors, regulators, customers, and other stakeholders.

What are General Purpose Financial Reports (GPFR)?

Financial reports designed to meet the needs of a wide range of external users.

What problem do financial reports help reduce?

Information asymmetry between managers and investors.

What are the two fundamental qualitative characteristics of financial information?

Relevance and faithful representation.

What does the going concern principle assume?

That the business will continue operating in the foreseeable future.

What does the cost principle state?

Assets should initially be recorded at their purchase cost.

What are the four main financial statements?

Income Statement, Balance Sheet, Statement of Cash Flows, Statement of Changes in Equity.

What is the double-entry system?

An accounting system where every transaction affects at least two accounts and total debits must equal total credits.

What is the purpose of a journal?

To record transactions chronologically with debits and credits.

What is a ledger?

A collection of all accounts that tracks balances over time.

What is a trial balance?

A list of all account balances used to verify that debits equal credits.

What does ALICE stand for?

Assets, Liabilities, Income, Contributed Equity, Expenses.

Which accounts normally have debit balances?

Assets and expenses.

Which accounts normally have credit balances?

Liabilities, income, and equity.

What is the purpose of closing entries?

To reset temporary accounts and transfer profit or loss to retained earnings.

What is accrual accounting?

Recognising revenue when earned and expenses when incurred, regardless of cash flow.

What are adjusting entries?

Entries made at the end of a period to ensure accounts are accurate.

What are prepayments?

Transactions where cash occurs before revenue or expense recognition.

What are accruals?

Transactions where revenue or expense occurs before cash.

What is unearned revenue?

Cash received before services are performed, recorded as a liability.

What is accrued revenue?

Revenue earned but not yet received.

What is accrued expense?

Expense incurred but not yet paid.

What is depreciation?

Allocation of asset cost over its useful life.

What is the purpose of adjusting entries?

To ensure correct profit and financial position.

What is inventory?

Assets held for sale, in production, or used in production/services.

What costs are included in inventory?

All costs to bring inventory to saleable condition (purchase, freight-in, handling).

Freight-in vs freight-out?

Freight-in = part of inventory cost; Freight-out = expense

What is Cost of Sales?

Cost of inventory sold during the period.

What is gross profit?

Sales - Cost of Sales.

Perpetual vs periodic system?

Perpetual = continuous updates; Periodic = updated at end of period

What is FIFO?

First items purchased are first sold.

Is LIFO allowed in Australia?

No.

What is weighted average method?

Uses average cost per unit.

What is GST?

10 percent tax collected by businesses for ATO.

GST Payable vs Receivable?

Payable = collected from customers; Receivable = paid on purchases

Who bears GST?

Final consumer.

Trade vs settlement discount?

Trade = reduces price; Settlement = early payment reward

What is NRV?

Selling price minus costs to sell.

What is LCNRV rule?

Inventory recorded at lower of cost or NRV.

What is inventory write-down?

Expense when inventory value decreases.

When is revenue recognised under AASB 15?

When performance obligations are satisfied (control transferred)

What are the 5 steps of revenue recognition?

Contract Obligations -> Price Allocate Recognise

What is a performance obligation?

A promise to deliver a distinct good/service

What is transaction price?

Expected consideration (cash/non-cash)

Why do bank differences occur?

Timing differences + errors

What is a deposit in transit?

Recorded by business, not bank yet

What is an unpresented cheque?

Issued but not cleared by bank

What is accounts receivable?

Money owed by customers

What is the allowance method?

Estimating bad debts in advance

Why is allowance method preferred?

Matches expense with revenue

Journal entry to estimate bad debts?

Dr Expense / Cr Allowance

Journal entry to write off debt?

Dr Allowance / Cr AR

How are receivables shown on balance sheet?

AR - Allowance = Net receivables

What does ageing method do?

Estimates bad debts based on overdue periods

Main risk of credit sales?

Non-payment (bad debts)

What is a source document?

Evidence of a transaction (invoice, receipt, etc.)

What are the 3 AIS stages?

Input Processing -> Output

What happens in processing stage?

Transactions are recorded (journal entries)

What is unearned revenue?

Cash received before service provided

What is prepaid expense?

Payment before benefit is used

What is an equally unperformed contract?

No transaction recorded yet

What increases accounts receivable?

Credit sales

What decreases accounts receivable?

Customer payments or bad debts

What is GST payable?

Tax collected from customers owed to government

What is GST receivable?

Tax paid that can be claimed back

What is the first step in analysing a document?

Identify buyer and seller

Why is AIS important?

Converts raw data into financial statements

What is PPE?

Tangible assets used for more than one period

What costs are capitalised?

Costs to bring asset to use

What is depreciation?

Allocation of cost over time

Is depreciation a cash flow?

No

When do we impair an asset?

When recoverable < carrying

Recoverable amount formula?

Higher of FV - costs OR value in use

Straight-line formula?

(Cost - residual) / life

What is capital expenditure?

Added to asset

What is revenue expenditure?

Expensed immediately

Gain on sale means?

Cash > carrying

What is goodwill?

Premium paid for a business

What is a liability?

Present obligation from past events requiring future outflow

Legal vs constructive obligation?

Legal = contract/law; Constructive = expectation

When is unearned revenue recognised as revenue?

When performance obligation is satisfied

What is breakage revenue?

Revenue from unused gift card balances

Provision vs contingent liability?

Provision = recognised; Contingent = disclosed only

Why is discount on bill payable a contra liability?

It reduces total liability (prepaid interest)

What risk do provisions create?

Earnings management/manipulation

What is equity?

Residual interest after liabilities

Three components of equity?

Share capital, retained earnings, reserves

Cash dividend effect?

Reduces retained earnings and cash

Share dividend effect?

No change in total equity

When is dividend recorded?

When declared (not when paid)

What is EPS?

Profit per share

Why transfer to reserves?

Set aside funds for specific purpose

Why can profit differ from cash flow?

Accrual accounting timing differences

Three CFS categories?

Operating, investing, financing

Which method is examinable?

Direct method

Purchase of PPE classification?

Investing activity

Issue of shares classification?

Financing activity

Depreciation effect on cash?

No cash effect