Financial Accounting flashcards

Generally Accepted Accounting Principles

Financial Accounting Standards Board.

International Accounting Standards Committee.

International Accounting Stands Board.

International Financial Reporting Standards.

• 1. Develope globally accepted international financial reporting standards through IASB.
• 2. Promote the use of those standards.
• 3. Take into account the reporting needs of emerging economies and small- and medium-sized entities.
• 4. To bring about convergence of national accounting standards and IFRSs to high quality solutions.

Decision made to eliminate differences between FASB and IFRS. Basically merge other countries GAAPs to one standard.

To merge FASB and IASB and other GAAPs.

• 1. Ambitions with accounting.
• 2. Demands on accounting.
• 3. Purpose with accounting.
• 4. Theoretical concepts about accounting.
• 5. New standards shall be issued and/or interpreted in accordance with the framework.
• 6. Many actors, but mainly for investors.

• 1. Accrual basis.
• 2. Cash and income will differ.
• 3. Going concern.

Transactions are recorded when they occur, not when cash is received.

Intention to keep the business going (not threatened by bankruptcy).

• 1. Understandability.
• 2. Relevance.
• 3. Reliability.
• 4. Comparability.

People with some economic skills shall understand and be able to make use of the information provided.

As in influencing economic decisions by helping them evaluate past, present or future events. "Predictive as well as informative".

Free from material error and bias. Faithful. Presented in accordance with their substance and economic reality.

One must be able to compare the information, over time and within industries.

Too many standards. Small businesses dont have the economic resources to keep track of all standards. They also interfere with "cost-benefit-constraint".

Resultaträkning.

Balansräkning.

Another name for the Accruals Convention, it's the same thing!

• 1. For owners to see how their funds have been used.
• 2. For the company to see how they have used their funds and they need to show their shareholders what they have done.

A resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

• (Totalresultat)
• Revenues + Gains - Expenses - Losses = Earnings

( EBIT+fin.exp ) / fin.exp.

(Current Ass. - Inv.) / Curr.Liab

Curr.Ass / Curr.Liab

Current Assets - Current Liabilities.

ROE = ROCE + ((ROCE-Interest rate)*D/E)

Revenue / Tot.Ass

Net Income / Tot.Ass

• Sales / Inventory
• or
• COGS / Average Inv.
• (KOH!)

Net.Profit / Net Sales

Operating Profit / Net Sales

• Gross Profit / Net Sales
• or
• (Net Sales-COGS) / Net Sales

• Net Profit / Equity
• Opt: bf or af TAX, average equity?

(Profit bf. TAX+Fin.Exp) / (Tot.Ass-Curr.Liab)

• E/(E+D)
• or
• Long term Debt / Equity

• Taxation
• Formal valuations
• Competitive structures
• Stewardship function

• Gross inflow of economic benefits that increases equity and is not a contribution from equity participants.
• (Gross inflow = Before deduction of any expenses)

• At fair value in connection to
• - Sale of goods
• - Rendering of services
• - Interests, royalties and dividends.

• Generally:
• - Amount can be measured reliably.
• - It's probable that the economic benefits will flow to the enterprise.
• - Costs incurred for the transaction can be measured.

• For Sale of goods:
• - Risks, rewards, control and ownership of goods is transferred to the buyer.

• For Rendering of Services:
• - Stage of completion of the transaction at the balance sheet date can be measured reliably.
• - Percentage of completion can be estimated by one of two methods:
• 1. Surveys of percentage completed to date can be made.
• 2. Proportion of costs to date of total costs can be estimated.

The process of converting non-cash assets to cash or claims to cash.

• To increase transparency towards the investors.
• They might have a certain expectation of profit. To get a fair expectation you must present revaluations and unrealized changes too.

Transactions external to the company counts.

• Income should be recognized when the earnings process is complete or virtually complete and an exchange transaction has taken place.
• The exchange transaction is the basis for accountability and determines both the timing of revenue recognition and the amount of revenue to be recorded.

• Theoretically if one criteria is met but in practise several.
• - Expected to be realised in the entity's normal operating cycle.
• - Held in purpose of beeing traded.
• - Expected to be realised within 12 months.
• * All other assets are classified as NON-CURRENT ASSETS.

Time aspect, valuation technique. If you wont realise their value (by selling) you wont really know what exactly they're worth.

• It decides if an asset is current or non-current.
• I.e with shares: If planned to be kept a long time they are non-current, if for a short time they're current.

• Cash: Current value
• AR: Expected future value.
• MS: Fair value or amortized cost.
• Inv: Current or past value.
• Invest: Fair value, amortized cost or result of applying the Equity method.
• PPE: Past value adjusted for depreciation OR regular Revaluations, depending on kind of asset (i.e. computer or real estate).

• - Held for sale in the ordinary course of the business.
• - In the process of production for such sale.
• - Materials or supplies to be consumed in production process or in rendering of service.

• - Costs of purchase.
• - Costs of conversion.
• - Net Realisable Value (Estimated selling price less estimated cost of completion or cost to get it sold).

• - Unit cost.
• - FIFO.
• - LIFO.
• - Weighted average.
• - (Net Realisable Value).

• Inventories shall be measured at the lower of cost or Net Realisable Value).
• - Om man får mer betalt för varan än vad den kostat, räknas vad den kostat.
• - Om det kostade mer än vad man får betalt, räknas vad man fått betalt.
• - Then you dont get surprised by Unrealised Losses.

Rather safe than sorry.

• - Tangible (materiella) - Property.
• - Financial - Shares.
• - Intangible - R&D.
• - PPE - Land, building, machinery.

Depreciation.

• - Straight line.
• - Declining Balance-method ("Accelerated").
• - Units of activity, activity level, output. (Tricky to keep track of)

When cost prolongs the life of the asset.

• A deferred liability or deferred asset that occurs when an unrealised value change happens. Realizing would inflict that deferred tax to actual tax.
• Normal tax is found in the Income Statement but Deferred tax is found in the Balance Sheet.

• Capital Lease = Financial Lease
• Operating Lease

Financial Lease: With all risks and rewards incidental to ownership. Everything else is Operating Lease.

• By the end of the lease, ownership transfers to the lessee.
• Option to buy the asset at a fixed price at the end of the lease.
• Lease is for major part of the economic life of the asset.
• Leased assets are customized for the lessee.
• If lessee cancels the lease, losses are borne for the lessor which the lessee has to pay for.
• Gains or losses from fluctuation of the fair value on the asset accrue to the lessee.
• Lessee has ability to lease for a secondary period for an even lower rent.

• - As an asset or Liability.
• - Present Value of minimum lease payments where discount factor is the implicit interest rate in the lease.
• - At start of lease, the asset and liability values are the same in the lessors' and lessees' balance sheets.
• - Each lease payment reduces the obligation and finance charge for the lessor.
• - The asset is depreciated as corresponding things are with the lessor.
• - Lessor shall recognize finance leases as Receivables at the amount equal to the net investment in the lease.

• - As Expenses in the Income Statement.
• - Rental expenses consist of: - Minimum rent under the lease divided equally over the years. - and any contingent rent relating to that year.
• - Non-Current Asset for the lessor.
• - Depreciated with the lessor's policy for similar things.
• - Costs and depreciation for Earning the lease income are recognized as expenses.
• - Lease incomes are usually recognized in a stright line even if the it aint that way.

• DEFINITION:
• - An obligation from past transactions or events which is expected to result in an outflow of resources as of economic benefits.
• - Obligation is an event that creates a legal or constructive obligation having to do something.

• RECOGNITION:
• - Must meet the definition of liabilities above.
• - Must be measurable.

• MEASUREMENT:
• - Should be measured at the present value of the future cash flows, discounted or not.

• DEFINITION:
• - A provision is a liability of uncertain timing and amount.

• RECOGNITION:
• - An entity has a present obligation as a result of past event.
• - A probable outflow of resources embodying economic benefits will be required to settle the obligation.
• - A reliable estimate can be made of the amount of the obligation.

• MEASUREMENT:
• - The amount recognized shall e the best estimate of the expenditure.
• - Uncertainties shall be measured by the weighting of all possible outcomes (expected value).
• - Discount when the time effect matters.
• - Take into account the future effects of technology or law changes when probable.

• DISCLOSURE:
• - Movement in provision during a year needs to be explained.
• - Each provision needs:
• A Description, Expected timing of outflows, Describe any incertainties, Amount of unexpected reimbursements (återbetalningar).

If big loss one year, then it doesnt matter if the company adds more losses as the market wont get any more disappointed.

• - Due to Big bath accounting.
• - Creation of provisions where no obligation to a liability exists.
• - The use of provisions to smooth profits.

• (Eventualförpliktelse, utanför balansräkningen MEN med på samma sida)
• A contingent liability becomes a real liability if and when an unvertain future event actually occurs.

• A present obligation but still not recognized as:
• - It's not probable that an outflow of resources will be required to settle the obligation.
• - The amount of the obligation cannot be measured with sufficient realibility.

Contingent Liabilities occur when one or more of the conditions for Provisions are not met.

• - Brief description.
• - Estimate of its financial effect.
• - Indicatino of uncertainties to the amount OR timing of outflow.
• - Possibility of any reimbursement? (ersättning)

• Current Tax = What should be payed.
• Deferred Tax = (uppskjuten skatt) To get a true and fair view, resulting from temporary differences or timing differences between accounting value of assets and liabilities and their value for tax purposes.

Differences between carrying amount of an asset or liability revognized in the statements of financial position and the amount attributed to that asset or liability for that purposes.

On all taxable temporary differences except goodwill.

• - Tax rates and laws.
• - Balance sheet date
• - Apply in periods which the assets or liabilities are realized or settled.
• - Liability method.
• - (Generally not discounted)

• Defined Contribution = The amount paid every month by the employer to the employees pension.
• Defined Benefit = The amount the employee will receive when retired.

• Income statement approach.
• Income tax is related to the period in which income is recognized. Deferred tax occurs due to temporary differences. It is not changed afterwards.

• Balance sheet oriented.
• Shows what tax assets or liabilities one has now with todays temporary differences. If the temporary differences change, so does the deferred tax on the Balance Sheet.

(EBIT / Fin.exp)

(Current assets - Inventory) / Current Liabilities

Current Assets / Current Liabilities

• Parent Company = Entity with one or more subsidiaries.
• A subsidiary = Entity controlled by another entity.
• Group accounting = Necessary when entities have subsidiaries with significant common economic interests.

Total revenues and expenditures of the parent and subsidiary are included.

Must be used when one company takes over another company's net assets and control.

• 1. Who receives the larger portion of the Voting Rights.
• 2. All equal, the largest Minority Interest is the acquirer.
• 3. All equal, the one appointing the largest part of the governing body.
• 4. All equal, the Senior Management that dominates.
• 5. All equal, the part paying a market premium is the acquirer.

• 1. Determine the cost of the acquisition.
• 2. Any excess cost is allocated as goodwill.

Two companies become one new. The old ones seize to exist. All combined assets are revalued.