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Learning how to prepare financial statements using International Financial Reporting Standards (IFRS)

105 important questions on Learning how to prepare financial statements using International Financial Reporting Standards (IFRS)

What is accrual-basis accounting?

Revenues are recognised when earned, expenses when incurred

What is cash-basis accounting?

Revenues are recognised when cash is received, expense when cash is paid

When are adjusting entries made?

At the end of each accounting period

What are prepaid expenses?

Expenses paid in advance and initially recorded as assets

What are unearned revenues?

Cash received before services are performed (liability)

What does depreciation expense affect?

- increase expenses
- decreases equity

What is accumulated depreciation?

A contra-asset account that accumulates total depreciation

What is book value?

Cost of the asset

What are accrued revenues?

Revenues earned but not yet received in cash or recorded

What are accrued expenses?

Expenses incurred but not yet paid or recorded

Which 2 measurement principles are mainly used under IFRS?

Historical cost principle and fair value principle

What is the fair value principle?

Assets and liabilities are reported at their current market value

What are temporary accounts?

Accounts that relate to one accounting period and are closed at the end of the period.

Which accounts are temporary?

All revenues, all expenses, and dividends

What are permanent accounts?

Accounts that continue from one period to the next.

Which accounts are permanent?

Assets, liabilities, and equity

What is the purpose of closing entries?

To transfer temporary account balances to Retained Earnings.

When are closing entries recorded?

At the end of the accounting period.

How are revenues closed?

Debit all revenue accounts and credit Income Summary.

How are expenses closed?

Debit Income Summary and credit all expense accounts.

How is net income closed?

Debit Income Summary and credit Retained Earnings.

How are dividends closed?

Debit Retained Earnings and credit Dividends.

What happens to temporary accounts after posting closing entries?

They all have zero balances.

What is a post-closing trial balance?

A trial balance prepared after all closing entries are posted.

Which accounts appear in the post-closing trial balance?

Only permanent accounts.

What is the operating cycle?.

The operating cycle is the average time to buy inventory, sell it, and collect cash from customers

What are non-current liabilities?

Non-current liabilities are debts a company will pay after one year.

What is Property, Plant and Equipment (PPE)?

PPE are long-term physical assets used in business operations.

What is accumulated depreciation?

It is the total depreciation recorded on an asset since it was purchased.

What are Retained Earnings?

Profits kept in the business instead of being distributed to shareholders.

What is Share Capital – Ordinary?

It is the money invested by shareholders in the company.

Main parts of equity in a corporation?

Share Capital – Ordinary
Retained Earnings

What is a merchandising company?

A company that buys and sells goods instead of providing services

What is the main source of revenue for a merchandising company?

Sales revenue (sales of merchandise).

What are the two main types of expenses in a merchandising company?

Cost of Goods Sold and Operating Expenses.

What is Cost of Goods Sold?

The total cost of merchandise sold during the period.

How is Net Income calculated in a merchandising company?

Sales Revenue – Cost of Goods Sold = Gross Profit
Gross Profit – Operating Expenses = Net Income (or Loss)

What is the flow of costs in a merchandising company?

Beginning Inventory + Purchases = Cost of Goods Available for Sale
Cost of Goods Available for Sale – Ending Inventory = Cost of Goods Sold

What are the two inventory systems?.

Perpetual system and Periodic system

What is a perpetual inventory system?

Inventory is updated continuously after every purchase and sale.

What is a periodic inventory system?

Inventory is updated only at the end of the period after a physical count

How are purchases recorded under a perpetual system?.

Inventory increases and Cash or Accounts Payable increases

What is the journal effect of a cash purchase under a perpetual system?

Debit Inventory, Credit Cash

How is freight paid by the buyer recorded?

It is added to Inventory (part of inventory cost).

When is sales revenue recorded under the revenue recognition principle?

When the goods are transferred from the seller to the buyer and the sales price is set

How many journal entries are made for each sale in a perpetual system?

Two journal entries

Why do companies sometimes use more than one sales account?

To monitor sales trends of different product lines.

What type of inventory does a merchandising company have?

Only one type: merchandise inventory (goods ready for sale)

Why do companies using a perpetual system take a physical inventory?

To check record accuracy and detect losses or theft.

Why do companies using a periodic system take a physical inventory?

To determine ending inventory and cost of goods sold.

What are goods in transit?

Goods being transported at the end of the period.

What are consigned goods?

Goods held for sale by someone who does not own them.

What does the cost of inventory include?

All costs necessary to acquire the goods and prepare them for sale.

What are cost flow assumptions?

Methods that assume how inventory costs flow.

What are the two permitted cost flow methods?

FIFO and Average-Cost.

What is the formula for COGS in a periodic system?

(Beginning Inventory + Purchases) − Ending Inventory

Under FIFO, which costs go to COGS?

The oldest purchase costs.

How is ending inventory calculated under average-cost?

Units in ending inventory × weighted-average unit cost

How is cost of goods sold calculated under average-cost?

Units sold × weighted-average unit cost

What formula is used to calculate Cost of Goods Sold (COGS)?

Beginning Inventory + Purchases − Ending Inventory.

If beginning inventory is understated, COGS is…

Understated.

If ending inventory is understated, COGS is…

Overstated

Inventory errors affect how many periods?

Two accounting periods.

What happens to next year’s income if this year’s ending inventory is wrong?

It has the opposite effect.

What is Net Realizable Value (NRV)?

Selling price minus costs to complete and sell.

What is inventory turnover?

How many times inventory is sold during the year.

Inventory turnover formula?

Cost of Goods Sold ÷ Average Inventory.

Formula for days in inventory?

365 ÷ Inventory turnover.

What is FIFO in a perpetual system?

Oldest costs are charged to COGS at each sale.

What is the moving-average method?

Average cost is recalculated after every purchase

What is the gross profit method used for?

To estimate ending inventory.

Step 1 of the gross profit method?

Net sales − Estimated gross profit = Estimated COGS.

Step 2 of the gross profit method?

Cost of goods available for sale − Estimated COGS = Ending Inventory.

Under FIFO in inflation, net income is usually…

Higher.

Under FIFO in inflation, taxes are usually…

Higher

What is the retail inventory method?

It is a method used to estimate ending inventory at cost using retail prices and a cost-to-retail ratio

Why is the retail inventory method used?

It is used when there are many items with low unit cost and it is too slow to count each item at cost.

What information is needed for the retail method?

Goods available for sale at cost
Goods available for sale at retail
Net sales

Step 1 of the retail inventory method?

Goods available for sale at retail − Net sales = Ending inventory at retail

Step 2 of the retail inventory method?

Goods available for sale at cost ÷ Goods available for sale at retail = Cost-to-retail ratio

Step 3 of the retail inventory method?

Ending inventory at retail × Cost-to-retail ratio = Estimated ending inventory at cost

Under LIFO, which costs go to Cost of Goods Sold (COGS)?

The most recent purchase costs go to COGS.

Under LIFO, which costs stay in ending inventory?

The oldest purchase costs remain in ending inventory

In inflation, does LIFO give higher or lower net income?

Lower net income

Why does LIFO give lower taxes in inflation?.

Because COGS is higher, so taxable income is lower

Main disadvantage of LIFO on the balance sheet?

Ending inventory may be much lower than current market value.

What are accounts receivable?

Amounts owed from credit sales, usually collected in 30–60 days.

What are notes receivable?

Written promises to pay, usually with interest.

What is a sales discount 2/10, n/30?

2% discount if paid in 10 days, otherwise full in 30 days.

Two methods for bad debts?

Direct write-off and Allowance method.

What is the allowance method?

Estimating uncollectible accounts at period end.

What is cash realizable value?.

Accounts Receivable minus Allowance for Doubtful Accounts

Two methods to estimate the allowance?

Percentage of receivables and Aging of receivables.

What cost does the retailer pay for credit card sales?.

A service fee to the credit card issuer (usually 2–4% of the invoice)

What are the three ways to state a maturity date?

1. On demand

2. On a stated date

3. At the end of a stated period of time

How is time expressed if the note is in days?

Days ÷ 360

How is time expressed if the note is in months?

Months ÷ 12

How many days are usually assumed in a financial year for exercises?

360 days

What is the entry when a company accepts a note for an account?

Debit Notes Receivable

Credit Accounts Receivable

At what value are short-term notes receivable reported?

At cash (net) realizable value.

Which allowance is used for notes receivable?

Allowance for Doubtful Accounts.

What amount is paid at maturity?

Face value + Interest

What does the accounts receivable turnover measure?

How many times per year receivables are collected.

Formula for average collection period?

365 ÷ Accounts Receivable Turnover

What does the average collection period measure?

The average number of days to collect receivables.

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AFR

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