CAPE Accounting Essentials – Accounting Cycle, Conceptual Framework & IFRS/IFRS for SMEs”

Steps of the Accounting Cycle

1⃣ Analyze & Journalize – Record transactions using source documents.
2⃣ Post to Ledger – Transfer journal entries to ledger accounts.
3⃣ Unadjusted Trial Balance – Prepare list of account balances before adjustments.
4⃣ Adjusting Entries – Record period-end adjustments.
5⃣ Adjusted Trial Balance – Update balances after adjustments.
6⃣ Financial Statements – Prepare income statement, statement of changes in equity, and balance sheet.
7⃣ Closing Entries – Close temporary accounts to Retained Earnings.
8⃣ Post-Closing Trial Balance – Confirm debits = credits and carry forward permanent accounts.

Which option correctly shows the order of the Accounting Cycle?

Analyze & Journalize → Post to Ledger → Unadjusted Trial Balance → Adjusting Entries → Adjusted Trial Balance → Financial Statements → Closing Entries → Post-Closing Trial Balance

Levels of the Conceptual Framework

1⃣Objective: Purpose of financial reporting.
2⃣ Qualitative Characteristics & Elements: Ensure information is useful and define financial statement components.
3⃣ Recognition, Measurement & Disclosure Concepts: Explain how accounting information is implemented.

Fundamental Assumptions of Accounting

• Economic Entity: Business and owner are separate.

• Going Concern: Business expected to continue operating.

• Monetary Unit: Stable currency used for measurement.

• Periodicity: Reports prepared for regular periods.

• Accrual Basis: Record transactions when they occur, not when cash is exchanged.

Key Measurement and Recognition Principles

• Historical Cost: Record at original purchase price.

• Current/Fair Value: Reflects up-to-date market value.

• Revenue Recognition: Recognize when performance obligations are satisfied.

• Expense Recognition (Matching): Record when expenses contribute to revenue.

• Full Disclosure: Provide sufficient information for informed decisions.

Constraints in Financial Reporting

• Cost Constraint: Benefits of information must exceed costs.

• Materiality: Small items may be ignored if insignificant.

• Conservatism (Prudence): Avoid overstating income/assets or understating liabilities/expenses.

• Industry Practice: Certain industries follow specialized reporting methods.

Which assumption states that business activities are separate from the owner’s personal transactions?

Economic Entity

The Matching Principle requires that:

Expenses are recorded in the same period as the revenues they help generate.

Which statement about the Adjusted Trial Balance is TRUE?

It reflects updated balances after adjustments.

The Post-Closing Trial Balance contains:

Permanent accounts only

Objective of Financial Reporting

To provide information useful to investors, lenders, and creditors for making economic decisions.

Fundamental Qualities of Accounting Information

Relevance and Reliability

Enhancing Qualities of Accounting Information

Comparability, Verifiability, Timeliness, Understandability.

Which of the following correctly matches the accounting concepts with their purpose?

Predictive Value – Helps forecast future outcomes; Confirmatory Value – Confirms or adjusts prior expectations; Materiality – Omissions or misstatements that could influence decisions are considered material

Reliability

Information accurately reflects economic reality; must be complete, neutral, and free from error.

Purpose of Accounting Standards

Ensure transparency, comparability, and credibility of financial reporting across firms and countries.

Which of the following correctly describes IAS (International Accounting Standards)?

Issued by IASC from 1973–2001 to facilitate worldwide comparison and transparency in financial reporting

Which of the following correctly describes IFRS (International Financial Reporting Standards)?

Issued by IASB from 2001 onward; globally adopted to promote transparency and comparability

Main Difference Between IAS and IFRS

IAS are older standards (pre-2001); IFRS are current standards issued post-2001 by IASB.

GAAP

U.S. accounting standard issued by FASB; ensures clarity, consistency, and comparability of financial statements.

IFRS Due Process (Step 1–Last)

Steering Committee → Identify Issues → Deliberate → Draft Outline → Exposure Draft → Stakeholder Feedback → Final Standard Issued.

Which body currently issues IFRS standards?

IASB

Which standard primarily applies to U.S. public companies?

GAAP

Date of IFRS for SMEs Issuance

Issued by IASB on July 9, 2009.

Definition of SME (According to IASB)

Entities without public accountability that publish general purpose financial statements for external users.

Public Accountability

When an entity trades in public markets or holds assets in a fiduciary capacity for a broad group of outsiders.

Objective of SME Financial Statements

Provide information on financial position, performance, and cash flows useful for decision-making by external users.

Simplifications in IFRS for SMEs

• Omit Topics

• Simpler Choices

• Simplify Rules

• Fewer Notes

• Clearlanguage.

• Less Burden

Eligibility for IFRS for SMEs

Any entity without public accountability; listed companies and financial institutions are excluded.

Adoption of IFRS for SMEs

Available for any jurisdiction; each determines which entities use it.

Which of the following may NOT use IFRS for SMEs?

A publicly traded company

Why was IFRS for SMEs created?

To simplify reporting for small and medium entities

Final Step in the Accounting Cycle

Post-Closing Trial Balance