Samenvatting
Summary Intermediate Financial Accounting All Tutorials 2019
- Instelling
- Maastricht University (UM)
This document contains all correct tutorial solutions for Intermediate Financial Accounting (IFA) EBC2056
[Meer zien]Voorbeeld 4 van de 84 pagina's
Voorbeeld 4 van de 84 pagina's
In winkelwagengesponsord bericht van onze partner
Gekoppeld boek
Titel boek:
Auteur(s):
- Uitgave:
- ISBN:
- Druk:
1 beoordeling
Door: audrey00 • 3 jaar geleden
Voorbeeld van de inhoud
Tutorial 1Questions
1.1 (a) Who are the major users of financial statements? Provide one example of how each user
group may use financial statements (b) IFRS assumes that focusing on the information needs
of equity investors will almost automatically serve the information needs of other user groups.
Explain why you agree or disagree with this statement.
(a) Investors and creditors are identified as the primary user group because they have the most
critical and immediate need for information in financial reports. Investors and creditors need
this financial information to assess a company’s ability to generate net cash inflows and to
understand management’s ability to protect and enhance assets of the company, which will
be used to generate future net cash inflows.
Investors are interested in financial reporting because it provides information that is useful
for making decisions (decision-usefulness approach). When making these decisions,
investors are interested in assessing (1) the company’s ability to generate net cash inflow
and (2) management’s ability to protect and enhance the capital provider’s investments.
Financial reporting should, therefore, help investors assess the amounts, timing and
uncertainty of prospective cash inflows from dividends or interests, and the proceeds from
the sale, redemption or maturity of securities or loans. For investors to make these
assessments, the economic resources of an enterprise, the claims to those resources, and
the changes in them must be understood. Financial statements and related explanations
should be a primary source for determining this information. So, investors need financial
statements for investment decisions.
Other users:
- Shareholders: investment decisions
- Managers and employees: performance assessment or compensation contracts. Internal
decision-making. Also for CEO-compensation.
- Lenders and suppliers: lending decisions and covenant compliance
- Customers: supplier health, repeat purchases, warranties and support
- Government and regulators: mandatory reporting, tax laws, regulated industries
- Auditors: accountability to public
(b) I somewhat agree, investors will need the most complete information to make informed
investment decisions. Investors risk a lot of money. The assumption is that if you give
investors the information they need, all other stakeholders have the needed information.
1.2 What are the benefits of a single-set of high-quality accounting standards for companies and
for investors?
To facilitate efficient capital allocation, investors need relevant information and a faithful
representation of that information to enable them to make comparisons across borders. A
single, widely accepted set of high-quality accounting standards is a necessity to ensure
adequate comparability between companies worldwide. Investors can make better investment
decisions if they receive financial information from Nippon Telegraph and Telephone (JPN) that
, is comparable with Deutsche Telekom (DEU). Globalization demands a single set of high-quality
international accounting standards.
IFRS requires more detailed disclosures, enhance the comparability of firms, facilitate better
measurement and recognition of additional liabilities, and reduce the scope of earnings
management. Disclosing high-quality information should increase a firm’s propensity to receive
a loan and influence the price and non-price terms of debt contracts in favor of the borrower.
Voluntary adopters of IRS are associated with lower interest rates, less restrictive covenants and
larger loans with longer maturities. Moreover, one of the major advantages is that companies
that operate under these standards can make the move toward international expansion much
easier.
!!!So the benefits are:
1. Comparability
2. Quality assurance
3. International expansion
4. Increase of access to capital
1.3 The use of US GAAP is enforced by SEC. (a) How is the use of IFRS enforced? (b) Why is
enforcement important?
(a) Because the IASB is a private organization, the IASB has no regulatory mandate and
therefore no enforcement mechanism. As a result, the board relies on other regulators to
enforce the use of its standards. For example, the EU requires publicly traded member
country companies to use IFRS.
(b) Enforcement is important, otherwise, companies could provide financial statements that do
not provide a fair representation. Fair representation is assumed to occur if a company
follows the guidelines established in IFRS.
1.4 The main difference between IFRS and US GAAP, the two global accounting standards, is that
IFRS is principles-based, while US GAAP is said to be rules-based. Can you explain this?
IFRS (by IASB) is principle-based:
- Broad guidelines for the application of accounting standards to be consistent with
objectives
- More leeway for professional judgment, can deviate depending on circumstances
- Applications of standards are less direct
US GAAP (by FASB) is rule-based:
- Detailed to cover almost all applications of an accounting standard
- Less capacity for professional judgment
- Applications of standards are more direct
1.5 Give two reasons why the balance sheet of a company does not represent the market value of
the firm. What are two possible advantages and disadvantages?
The balance sheet represents many assets based on historical costs. Only certain liquid securities
are based on their fair value and only acquired intangible assets appear on the balance sheet.
The market value of the firm is based on the share price. There is a difference between the
market value and the book value. There are intangible assets that are not captured accurately by
the balance sheet.
, So gaps between market and book value:
1. Assets are based on historical costs – market values will change and the historical cost will
become irrelevant
2. Network, brand value, etc. is not on the IFRS balance sheet
Advantage: it is generally thought to be a faithful representation of the historical amount paid
for a given item. The benefit of having a conservative balance sheet: when you are a debt holder
of the firm, the market value is at least the book value of the firm.
Disadvantage: changes in the value of assets are not reflected on the balance sheet.
1.6 Which conditions need to be satisfied in order to recognize an asset or a liability on the
balance sheet?
An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
So the criteria are:
1. Controlled by the entity
2. As a result of a past event
3. Inflow of future benefits
Extra criteria:
4. Estimate of asset can be reliably established
5. Probable
A liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.
Equity is residual interest in assets of an entity
1.7 (a) Describe the main criteria for the recognition of income and expenses. (b) How do the
revenue and expense recognition principles increase the relative informativeness and
usefulness of earnings compared to cash flow?
(a) Income are increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in
equity, other than those relating to contributions from equity participants.
Expenses are decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of liabilities that result in decreases in equity,
other than those relating to distributions to equity participants.
So:
Income Expense
Economic profit Increase Decrease
Assets Inflow Outflow
Liabilities Decrease Increase
Equity Increase Decrease
, The revenue recognition principle requires that companies recognize revenue in the
accounting period in which the performance obligation is satisfied.
In practice, the approach for recognizing expenses is, “let the expense follow the revenues”.
This approach is the expense recognition principle. That is, by matching efforts (expenses)
with accomplishments (revenues), the expense recognition principle is implemented in
accordance with the definition of expense (outflows or other using up of assets or incurring
of liabilities).
What does earnings capture which you don’t see in cash flows? -> Earnings capture non-cash
components as well. Cash flows can give you an incomplete picture, they may not capture
the full economic position.
(b) In accounts for income and expenses on an accrual basis, and not a cash basis. The accrual
basis is a more accurate reflection of the entity’s transactions, as cash can be prepaid or
postpaid.
1.8 The life of a business is divided into specific time periods, usually a year, to measure results of
operations for each such time period and to portray financial conditions at the end of each
period. (a) This practice is based on the accounting assumption that the life of the business
consists of a series of time periods and that it is possible to measure accurately the results
from operations for each period. Comment on the validity and necessity of this assumption.
(b) What has been the effect of this practice on accounting? What is its relation to the accrual
basis of accounting?
(a) The periodicity (or time period) assumption implies that a company can divide its economic
activities into artificial time periods. The shorter the time period, the more difficult it is to
determine the proper net income for the period. A month’s results usually prove less reliable
than a quarter’s results, and a quarter’s results are likely to be less reliable than a year’s
results. Investors desire and demand that a company quickly process and disseminate
information. Yet the quicker a company releases information, the more likely the
information will include errors. This phenomenon provides an interesting example of the
trade-off between relevance and faithful representation in preparing financial data.
It is valid and necessary. It allows for consistency and proper comparison between different
entities. If not valid, the entity must be valued based on a liquidation basis.
(b) Accrual-basis accounting means that transactions that change a company’s financial
statements are recorded in the periods in which the events occur.
Periodical statements are important because they provide crucial information to
stakeholders.
Voordelen van het kopen van samenvattingen bij Stuvia op een rij:
Verzekerd van kwaliteit door reviews
Stuvia-klanten hebben meer dan 700.000 samenvattingen beoordeeld. Zo weet je zeker dat je de beste documenten koopt!
Snel en makkelijk kopen
Je betaalt supersnel en eenmalig met iDeal, creditcard of Stuvia-tegoed voor de samenvatting. Zonder lidmaatschap.
Focus op de essentie
Samenvattingen worden geschreven voor en door anderen. Daarom zijn de samenvattingen altijd betrouwbaar en actueel. Zo kom je snel tot de kern!
Veelgestelde vragen
Wat krijg ik als ik dit document koop?
Je krijgt een PDF, die direct beschikbaar is na je aankoop. Het gekochte document is altijd, overal en oneindig toegankelijk via je profiel.
Tevredenheidsgarantie: hoe werkt dat?
Onze tevredenheidsgarantie zorgt ervoor dat je altijd een studiedocument vindt dat goed bij je past. Je vult een formulier in en onze klantenservice regelt de rest.
Van wie koop ik deze samenvatting?
Stuvia is een marktplaats, je koop dit document dus niet van ons, maar van verkoper jwindcaller. Stuvia faciliteert de betaling aan de verkoper.
Zit ik meteen vast aan een abonnement?
Nee, je koopt alleen deze samenvatting voor €6,35. Je zit daarna nergens aan vast.
Is Stuvia te vertrouwen?
4,6 sterren op Google & Trustpilot (+1000 reviews)
Afgelopen 30 dagen zijn er 53340 samenvattingen verkocht
Opgericht in 2010, al 14 jaar dé plek om samenvattingen te kopen