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:

What is the Guiding principle of financial accounting?

                                               


           

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

Balance Sheet structure

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:

Show main Busness Activities and Financial Statement Elements

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

Accounts in the context 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:

What is the Accounting Worksheet Approach?

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

Flow of Information in an Accounting System + Definitions

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:

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:

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

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

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

Show main Busness Activities and Financial Statement Elements

Financial Statement Elements (fundamental Building Blocks)

                                       

Operating                                                                                     

• Sell products or services to generate revenue

• Incur expenses while generating revenue


Investment  

• Acquire and dispose long-term assets


Financing    

• Borrow from creditors, creating a liability

• Sell ownership interest (equity) to shareholders

                                               


           

MM2: Financial Accounting

Accounts in the context of Financial Accounting


Most countries provide general guidelines through standard charts of accounts

           

Accounts provide individual records of increases and decreases in a specific asset, liability, component of owners’ equity, revenue, or expense.

                       

Within the financial statement elements, accounts are subclassifications.

                       

Unlike the financial statement elements, there is no standard set of accounts applicable to all companies.

                      

A company must establish accounts and account groupings that fit to the business.

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

What is the Accounting Worksheet Approach?

Business activities are recorded by using an accounting worksheet approach which is based on the accounting equation.

-The approach shows directly how transactions impacts the balance sheet and income statement (if applicable).

 

The accounting equation implies that every transaction affects at least two accounts in order to keep the equation in balance.

-This way of recording transactions is often refered to as double- entry accounting.

 

The expanded accounting equation is used to introduce basic accounts of owner‘s equity.

MM2: Financial Accounting

Flow of Information in an Accounting System + Definitions

1. Journal: Jorunal Entries and Adjusting Entries

2. General Ledger: Ledger Entries and T-accounts

3. Trial Balance: Trial Balance and Adjusted Trial Balance

4. Financial Statements: Financial Statements

         

Some Definitions:

                                                           

A journal is a document in which business transactions are recorded by date.         

                                                           

A general ledger is a document in which all business transactions are recorded by account.            

                                                           

T-accounts are simplified versions of ledger accounts that take the form of the capital letter T.      

                                                           

Double-entry accounting ensures that the general ledger is always in balance.

                                                           

Trial balances are typically prepared at the end of an accounting period as a first step in producing financial statements.                       

A key difference between a trial balance and a ledger is that the trial balance shows only total ending balances.

An initial trial balance assists in the identification of any adjusting entries that may be required. Once these adjusting entries are made, an adjusted trial balance can be prepared.

                                                          

The financial statements are prepared based on the account totals from an adjusted trial balance.

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

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.

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