MM2: Financial Accounting at Karlsruher Institut für Technologie

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Study with flashcards and summaries for the course MM2: Financial Accounting at the Karlsruher Institut für Technologie

Exemplary flashcards for MM2: Financial Accounting at the Karlsruher Institut für Technologie on StudySmarter:

Internal Control over Financial Reporting

                                               


           

Exemplary flashcards for MM2: Financial Accounting at the Karlsruher Institut für Technologie on StudySmarter:

Conceptional Framework: Recognition of Financial Statement Elements

Exemplary flashcards for MM2: Financial Accounting at the Karlsruher Institut für Technologie on StudySmarter:

Balance Sheet structure

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Exemplary flashcards for MM2: Financial Accounting at the Karlsruher Institut für Technologie on StudySmarter:

What is the Guiding principle of financial accounting?

                                               


           

Exemplary flashcards for MM2: Financial Accounting at the Karlsruher Institut für Technologie on StudySmarter:

From the Basic to the Expanded Accounting Equation using Components of Owners’ Equity

Exemplary flashcards for MM2: Financial Accounting at the Karlsruher Institut für Technologie on StudySmarter:

Working Capital Requirment

Exemplary flashcards for MM2: Financial Accounting at the Karlsruher Institut für Technologie on StudySmarter:

What is the IASB Conceptional Framework, Markus?

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Exemplary flashcards for MM2: Financial Accounting at the Karlsruher Institut für Technologie on StudySmarter:

Conceptional Framework: Objective of Reporting?

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Audit of Financial Statements and Objectives of independent audits

Exemplary flashcards for MM2: Financial Accounting at the Karlsruher Institut für Technologie on StudySmarter:

Standard-setting bodies and regulatory authorities

Exemplary flashcards for MM2: Financial Accounting at the Karlsruher Institut für Technologie on StudySmarter:

How do IFRS, IAS and Accounting Standards relate to each other?

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Exemplary flashcards for MM2: Financial Accounting at the Karlsruher Institut für Technologie on StudySmarter:

What does a complete set of financial statements include?

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Exemplary flashcards for MM2: Financial Accounting at the Karlsruher Institut für Technologie on StudySmarter:

MM2: Financial Accounting

Internal Control over Financial Reporting

                                               


           

Internal control is a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. 


Management is responsible for maintaining effective internal control.

                                                           

Some countries extends the requirement for public companies to maintain systems of internal control, requiring management to certify and the independent auditor to attest to the effectiveness of those systems. (SOX)

MM2: Financial Accounting

Conceptional Framework: Recognition of Financial Statement Elements

Recognition means that an item is included in the balance sheet or income statement.

 

An item that meets the definition of an element should be recognized if:

-it is probable that any future economic benefit associated with the item will flow to or from the entity; and

-the item has a cost or value that can be measured with reliability.

MM2: Financial Accounting

Balance Sheet structure

Assets:                                                 

Current assets                       

 Cash and cash equivalents 

 Accounts receivable 

 Inventory
 Prepaid expenses                      

Noncurrent assets                      

 Intangible assets
 Property, plant and equipment 

 Financial assets
 Equity investments 

 Investment property

                                               

Liabilities                                                           

Current liabilities                       

 Short-term debt 

 Accounts payable 

 Accrued expenses                      

Noncurrent liabilities                       

 Long-term debt 

 Pension liabilities 

 Provisions 

 Deferred taxes                 

Owner‘s equity                      

 Contributed capital 

 Retained earnings

MM2: Financial Accounting

What is the Guiding principle of financial accounting?

                                               


           

Provide useful financial information to outside decision-makers.

                                                           

Financial information includes financial statements and other types of reports.


Financial statements are the output of the accounting process and provide information about an entity’s financial position, performance, and liquidity.

                       

Financial reporting acts as the communication process to those outside the entity.


MM2: Financial Accounting

From the Basic to the Expanded Accounting Equation using Components of Owners’ Equity

Assets = Liabilities + Equity


Assets = Liabilities + Contributed Capital + Ending Retained Earnings


Assets = Liabilities + Contributed Capital + Beginning Retained Earnings + Net Income - Dividends


Assets = Liabilities + Contributed Capital + Beginning Retained Earnings + Revenue - Expenses - Dividends

MM2: Financial Accounting

Working Capital Requirment

  • Investments needed to get Into Operation                                      
  • Operating assets and operating liabilities are managed together.
  • Its components are summed up into the working capital requirement (WCR):
  • WCR indicates the net investment required to support the firm’s operating cycle.

                                               

  WCR =  [Operating assets] – [Operating liabilities]

           = [Accounts receivable + Inventories + Prepaid expenses] – [Accounts payable + Accrued expenses]

                                               


           

                                               


           

                                               


           

                                                                                                                                                                                                                               

MM2: Financial Accounting

What is the IASB Conceptional Framework, Markus?

Sets out the concepts that underlie the preparation and presentation of financial statements to external users.

 

The Conceptual Framework deals with:  

- the objective of financial reporting,

- the qualitative characteristics of useful financial information,

- the definition of the elements from which financial statements are constructed,

- criteria for recognizing assets and liabilities in financial statements,

- measurement bases for items to be recognized.

 

All other aspects of the framework flow from the central objective.

MM2: Financial Accounting

Conceptional Framework: Objective of Reporting?

To provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. Those decisions involve

--> buying, selling, or holding equity and debt instruments, and

--> providing or settling loans and other forms of credit.

MM2: Financial Accounting

Audit of Financial Statements and Objectives of independent audits

Certain companies’ financial statements are required to be audited by an independent accounting firm in accordance with specified auditing standards.


Objectives of an Independent Audit

           - To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement (whether due to fraud or error), enabling the auditor to opine on whether the statements are prepared in accordance with applicable financial reporting standards (e.g. IFRS).

  • -To assess the going concern assumption.                                

    -To report on the financial statements.

      

The audit opinion is clearly stated as a separate paragraph in the audit report.


MM2: Financial Accounting

Standard-setting bodies and regulatory authorities

Standard-setting bodies are typically private sector, self- regulated organizations.

-Board members are experienced accountants, auditors, users of financial statements, and academics.

-Standard-setting bodies set the standards. -> Big 4 etc.

 

Regulatory authorities are governmental entities that have the legal authority to recognize and enforce the standards in their jurisdictions.

Regulators can overrule private sector standard-setting bodies.

 Governmental entities with final saying



Examples for Standard-Setting Bodies:

The International Accounting Standards Board (IASB)

-Sets IFRS (International Financial Reporting Standards).

   

The U.S. Financial Accounting Standards Board (FASB) 

-Sets U.S. GAAP (Generally Accepted Accounting Principles).

 

The Global Reporting Initiative (GRI)

-Sets GRI standards for sustainability reporting. They feature a modular, interrelated structure, and represent the global best practice for ESG reporting (Environmental, Social & Governance).

MM2: Financial Accounting

How do IFRS, IAS and Accounting Standards relate to each other?

Accounting standards are a set of requirements followed by companies when they prepare their financial statements.


Standards set by the IASB are called IFRS and are intended to be applied by profit-oriented entities which have public accountability.


Standards set by the Board’s predecessor body, the International Accounting Standards Committee (IASC), are called IAS.

MM2: Financial Accounting

What does a complete set of financial statements include?

  • Statement of financial position 
  • Statement of profit or loss and other comprehensive income (e.g. Remeasurements) ==Comprehensive Income
  • Statement of changes in equity 
  • Statement of cash flows
  • Notes to the financial statement


FS must be clearly identified and distinguished from other information in the same published document.

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