FINANCIAL ACCOUNTING AND REPORTING - Practice Flashcards

A comprehensive set of practice flashcards covering key topics from the lecture notes on financial accounting and reporting, including the accounting cycle, conceptual framework, PAS standards, inventories, receivables, cash, investments, PPE, impairment, intangibles, and related party disclosures.

How many basic steps are in the accounting cycle and what are the two phases called?

Nine basic steps; the two phases are recording and summarizing.

In the recording phase, what equation guides the analyst when determining the impact of a transaction?

Assets = Liabilities + Equity.

What is journalizing?

Recording transactions in the journals; a journal is the book of original entry.

What is the difference between a general journal and special journals?

A general journal records all transactions; special journals (e.g., Sales, Cash Receipts, Purchases, Cash Disbursements) record large numbers of similar transactions for efficiency.

Name four common special journals used in recording transactions.

Sales Journal, Cash Receipts Journal, Purchases Journal, Cash Disbursements Journal.

What is a simple journal entry versus a compound journal entry?

Simple: one debit and one credit; Compound: two or more elements often representing multiple transactions.

List the broad classifications of accounts mentioned in the notes.

Real accounts (permanent), Nominal accounts (temporary), Mixed accounts; plus Clearing, Controlling, Suspense, Reciprocal, Principal, Auxiliary, and Summary accounts.

What is a real (permanent) account?

An account that is part of the statement of financial position and is not closed at the end of the period (e.g., Cash, Accounts Receivable, PPE).

What is a nominal (temporary) account?

An income statement account that is closed at the end of the period (e.g., Sales, Expenses).

What is a subsidiary ledger?

A ledger that provides additional detail supporting a general ledger account (e.g., Accounts Receivable Subsidiary Ledger).

What is posting in the accounting cycle?

Transferring data from the journal to the appropriate accounts in the general and subsidiary ledgers.

What are the two ledgers mentioned and their purposes?

General Ledger: includes all accounts on the financial statements; Subsidiary Ledgers: provide extra detail for certain general ledger accounts.

What is an unadjusted trial balance and its purpose?

A list of general ledger accounts with their debit or credit balances before adjustments; its purpose is to show that total debits equal total credits and to prepare for adjustments.

What are adjusting entries and why are they needed?

Entries made at the end of the accounting period to recognize accruals, prepayments/deferrals, estimations, and other events not signaled by new source documents; based on accrual, matching, and accounting period concepts.

What are prepayments/deferrals in adjusting entries?

Cash flows precede revenue or expense recognition; examples: Prepayments (asset method) and Deferrals (liability method such as unearned revenue).

What are accruals in adjusting entries?

Income or expense recognition occurs before cash flows; e.g., Accrued Income (receivable) and Accrued Expenses (liability).

What are estimates in adjusting entries?

Adjusting entries not involving cash flows, such as Doubtful Accounts and Depreciation.

What is the purpose of the ending inventory adjustment in the summarizing phase?

To set up the year-end physical count of inventory, applicable if using the periodic inventory system.

Which financial statements are prepared in the summarizing phase?

Statement of Financial Position (Balance Sheet), Income Statement (or Comprehensive Income), Statement of Changes in Equity, Statement of Cash Flows, and Notes/Disclosures.

What is the purpose of closing entries?

To close nominal/temporary accounts to the Income Summary and then transfer net income or loss to the capital/retained earnings account.

What is a post-closing trial balance?

A list of general ledger accounts and their balances after closing entries; similar to year-end balance sheet with certain valuation accounts treated as credit balances.

What are reversing entries and when are they used?

Optional entries at the beginning of the new period to reverse certain adjusting entries (e.g., accrued income/expenses, prepaid expenses under the asset method or income method).

What is the Conceptual Framework in financial reporting?

The IASB Framework describes the basic concepts for preparing financial statements, guiding IFRS standards development and resolving issues not directly addressed by standards.

What is the scope of the Framework?

Objectives of general purpose financial reporting; qualitative characteristics; underlying assumptions; definitions, recognition and measurement of the elements; concepts of capital and capital maintenance.

What are the fundamental qualitative characteristics?

Relevance and Faithful Representation (with components: Predictive Value, Feedback Value, Materiality; Completeness, Neutrality, Free from Error).

What are the enhancing qualitative characteristics?

Comparability, Verifiability, Timeliness, Understandability.

What is going concern in accounting assumptions?

The assumption that a business will continue operating for the foreseeable future; if not, disclosures and alternative reporting are required.

What are the elements of financial statements?

Assets, Liabilities, Equity; Income and Expenses (performance elements: income, expense).

What are the criteria for recognizing elements of financial statements?

Probable future economic benefits and reliable measurement of the item's cost or value.

What measurement bases does the Framework acknowledge?

Historical Cost, Current Cost, Net Realizable Value, Present Value; often used in combination; the framework does not prescribe a single basis.

What are the two concepts of capital maintenance?

Financial capital maintenance (profit measured by net assets) and Physical capital maintenance (profit measured by productive capacity).

What is the objective of PAS 1 (Presentation of Financial Statements)?

Prescribe the basis for presentation to ensure comparability, provide framework for structure and minimum content, and address recognition, measurement, and disclosures in other standards.

What is the scope of PAS 1?

Applies to all general purpose financial statements based on Philippine Financial Reporting Standards.

What does fair presentation require under PAS 1?

Faithful representation of effects of transactions; compliance with PFRS presumed to result in fair presentation; explicit and unreserved statement of compliance if applicable.

How are current assets defined for PAS 1 presentation?

Assets expected to be realized or consumed within the normal operating cycle, within 12 months, cash or cash equivalents, or held for trading; others are non-current.

How are current liabilities defined for PAS 1 presentation?

Liabilities expected to be settled within the normal operating cycle or within 12 months, or that do not have an unconditional right to defer settlement for 12 months.

What are the required components of a complete set of financial statements under PAS 1?

Statement of Financial Position, Statement of Comprehensive Income (or Income Statement) with its components, Statement of Changes in Equity, Statement of Cash Flows, Notes including a summary of significant accounting policies.

What information should notes to the financial statements contain?

Basis of preparation and accounting policies, required disclosures not on the faces of FS, cross-references to notes, judgments made, contingencies, etc.

What is disclosure of judgments in PAS 1?

Disclosure of significant judgments management has made in applying accounting policies with the most significant effect on amounts recognized.

What is PAS 24 about?

Related Party Disclosures; ensures disclosure of related party relationships and transactions that could affect financial position or performance.

Who are related parties according to PAS 24?

Entities with control, joint control, significant influence; associates; joint ventures; key management personnel and their close family members; entities under common control; post-employment benefit plans; and others as defined.

What must be disclosed for related party transactions under PAS 24?

Nature of the related party relationship; amounts of transactions; outstanding balances; terms and conditions; guarantees; and any provisions for doubtful debts.

What is a trade receivable versus a non-trade receivable?

Trade receivables arise from the sale of goods/services (accounts receivable or notes receivable); non-trade receivables come from other transactions like advances to officers.

What is the net realizable value (NRV) for receivables?

The expected cash value of receivables after deducting estimated bad debts and related allowances.

What are the three common methods to estimate doubtful accounts?

Percentage of net credit sales method, Percentage of accounts receivable method, Aging of accounts receivable method.

What is the allowance method for doubtful accounts?

An estimate of uncollectible receivables recorded as an allowance; write-offs are charged against the allowance rather than directly to AR.

What is receivable financing and its forms?

Accelerating collection of receivables via pledging, assignment, or factoring; can be with or without recourse and can be recourse-based or non-recourse.

What is a bank reconciliation?

A statement reconciling the bank statement balance with the book balance, including deposits in transit, outstanding checks, and errors.

What are bank reconciling items?

Deposits in transit, outstanding checks, credit/debit memos, and errors needing adjustment.

What is a petty cash fund and what system is typically used?

Money set aside for small expenses; typically managed with an imprest fund system for efficiency.

What are cash equivalents according to PAS 7?

Short-term, highly liquid investments readily convertible to cash with insignificant risk of changes in value (e.g., Treasury bills, time deposits, commercial paper).

What is the difference between a pledged receivable and an assigned receivable?

Pledged: all (or all) receivables are used as collateral; assignment: a portion of receivables is used as collateral; both require disclosures.

What is the equity method of accounting for investments in associates?

Initial recognition at cost, then adjust for post-acquisition share of net assets; distributions reduce carrying amount; share of profits/losses included in investor’s results.

What is an associate under IFRS/PAS?

An entity over which the investor has significant influence (often 20% or more of voting power) but not control or joint control.

When is the equity method discontinued?

When significant influence ceases; subsequent accounting switches to other applicable methods.

What is an investment property (PAS 40)?

Property held to earn rentals or for capital appreciation or both; may be owner-occupied or measured under either cost or fair value model depending on classification.

What are the two accounting models for investment property?

Fair value model: changes in fair value go to profit or loss; Cost model: depreciated cost with possible impairment; entities choose one for all IP.

What is revaluation surplus and where is it recorded?

An increase in asset carrying amount recognized in equity as revaluation surplus, unless it reverses a previous decrease recognized in profit or loss.

What is impairment testing and the recoverable amount?

Testing whether carrying amount exceeds recoverable amount, which is the higher of fair value less costs to sell and value in use.

What is value in use?

Present value of expected future cash flows from an asset or CGU.

What is a CGU in impairment testing?

Cash-generating unit: the smallest identifiable group of assets that generates largely independent cash inflows.

What is a final step after testing CGUs for impairment?

If impairment exists, allocate the loss first to goodwill (if any) and then pro rata to other assets in the CGU.

What is the basic idea of the impairment reversal?

If indicators show reversing impairment, recoverable amount may increase; reversal cannot exceed the asset’s carrying amount adjusted for depreciation and cannot exceed what was previously impaired.

What is an intangible asset and its recognition criteria?

Identifiable non-monetary asset without physical substance; recognized if probable future benefits and cost can be measured reliably.

What are the two phases of internally generated intangible assets?

Research phase (expensed) and Development phase (capitalized if criteria are met).

What is depreciation and which patterns exist?

Systematic allocation of the depreciable amount over the asset’s useful life; methods include straight-line (SL), diminishing balance (DB), units of production (production method), and sum-of-years-digits (SYD).

When does depreciation begin and end?

Begins when the asset is available for use; ends when classified as held for sale or derecognized.

What are wasting assets and how are they depleted?

Natural resources; depletion uses the production method; includes exploration, development, and restoration costs.

What is the treatment of borrowing costs for qualifying assets?

Borrowing costs capitalized for qualifying assets; commence when expenditures or borrowings occur and preparation activities begin; suspend during interruptions; cease when substantially all activities are complete.

What is a bearer plant and how is it treated under PAS 41?

A living plant used in production, expected to bear produce for more than one period, and not readily saleable; accounted for under related standards (bearer plant treatment under PPE).

What are government grants and how are they presented?

Assistance by government; grants related to assets can be recognized as deferred income or deducted from asset cost; grants related to income may be presented as income or offset against related expenses; repayment treated as a change in estimate.

What is cost of land and how is old building treated when purchasing land?

Cost includes purchase price and transaction costs; if old building is usable, allocate cost between land and building based on relative fair values; if unusable, capitalize entire cost as land.

What is the role of depreciation policies for leasehold improvements (LHI)?

LHI is amortized over the shorter of the lease term or the asset’s useful life; if renewal is certain, extend the period accordingly.

What is the formula for the cost of inventories and the allowed methods?

Costs of purchase, conversion, and other costs; FIFO or weighted average are the standard cost formulas; same cost formula should be used for similar inventories.

What is LCNRV in inventory measurement?

Lower of cost and net realizable value; write-down recognized as an expense; reversals can be recognized if NRV increases.

What is the difference between FIFO and Weighted Average cost flow assumptions when calculating COGS and ending inventory?

FIFO: oldest costs to COGS; ending inventory reflects most recent costs. Weighted Average: COGS and ending inventory based on the average cost per unit.

What is the role of stock dividends and stock rights in investment accounting?

Stock dividends reduce cost per share; stock rights can be recorded as a separate investment or as an embedded derivative depending on accounting choice; fair value of stock rights may be used for allocation when accounted separately.

What are the main characteristics of dividends and ex-dividend dates?

Dividends are recognized at declaration date; record date determines who is entitled to the dividend; ex-dividend date is typically two business days before the record date; buyers on or after ex-date do not receive the upcoming dividend.

What is an impairment reversal?

If indicators show impairment reversals, the recoverable amount may increase, but reversal is restricted by prior impairment and other limits.

What is a 'revaluation surplus' transfer to retained earnings when an asset is disposed of?

For depreciable assets, revaluation surplus transfer to retained earnings is proportional to remaining life; for non-depreciable assets, the entire surplus may be transferred.

What are the two approaches to presenting government grants related to assets?

Deferred income approach (recognize income over asset’s useful life) and deduction from the asset’s cost (reduce depreciation).

What should be disclosed about related party relationships?

Nature of relationship, transactions, outstanding balances, terms, conditions, guarantees, and any amounts of the balances or transactions.

What are rules for disclosures of compensation of key management personnel under PAS 24?

Disclose total compensation in categories: Short-term benefits, Post-employment benefits, Other long-term benefits, Termination benefits, Equity-based benefits; reimbursement is not included.

What is the typical structure of the notes to the financial statements?

Statement of compliance; summary of significant accounting policies; supporting information for items on the face; contingencies and other disclosures; judgments.

What is the difference between a record date and an ex-dividend date?

Record date determines who is entitled to the dividend; ex-dividend date determines who will receive the dividend if buying on or after that date.

What is the purpose of interim reporting and its minimum components?

Interim reporting provides condensed financial statements for a period shorter than a full year; minimum components include condensed statements of financial position, comprehensive income, changes in equity, cash flows, and selected explanatory notes.

What are the key ideas behind 'inventory estimation techniques' like Gross Method and Retail Method?

Gross Method estimates ending inventory using a constant gross profit margin; Retail Method uses retail prices and cost ratios to estimate ending inventory.

What is meant by ‘comparability’ and ‘verifiability’ in financial statement reporting?

Comparability enables users to identify similarities and differences among items; Verifiability ensures that knowledgeable observers could reach consensus about the representation.

How does PAS 1 treat comparative information for the previous period?

Comparative information must be disclosed for all amounts reported in the current period’s financial statements, with changes requiring appropriate disclosures.