FSA PRE-REQ

Question 1

What are assets?

Answer 1

A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. Assets are what a company owns (e.g., inventory and equipment).

Question 2

What are liabilities?

Answer 2

A present obligation of the entity to transfer an economic resource as a result of past events. An obligation is a duty or responsibility that the entity has no practical ability to avoid. Liabilities are what a company owes (e.g., bank borrowings).

Question 3

What is equity?

Answer 3

Assets less liabilities. Equity is the residual interest in the assets after subtracting the liabilities.

Question 4

What is income?

Answer 4

Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims. Income includes both revenues and gains. Revenues represent income from the ordinary operating activities of the enterprise (e.g., the sale of products or provision of services). Gains may result from ordinary activities or other activities (the sale of surplus equipment).

Question 5

What are expenses?

Answer 5

Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims. Expenses include cost of goods sold (which may include wages and rent) and selling and administrative expenses. Losses are also considered expenses and can result from the sale of assets at less than their carrying values, impairments of asset values and a variety of other items.

Question 6

Underlying Assumption 1: What is ‘accrual accounting’

Answer 6

The use of “accrual accounting” assumes that financial statements should reflect transactions in the period when they actually occur, not necessarily when cash movements occur. For example, a company reports revenues when they are earned (when the performance obligations have been satisfied), regardless of whether the company received cash before or after delivering the product, at the time of delivery. Accrual accounting helps ensure related revenues and expenses are recognized in the same reporting period, resulting in a more meaningful measure of net income.

Question 7

Underlying Assumption 2: What is a ‘going concern’

Answer 7

“Going concern” refers to the assumption that the company will continue in business for the foreseeable future. To illustrate, consider the value of a company’s inventory if it is assumed that the inventory can be sold over a normal period of time versus the value of that same inventory if it is assumed that the inventory must all be sold in a day (or a week). Companies with the intent to liquidate or materially curtail operations would require different information for a fair presentation.

Question 8

What does recognition mean?

Answer 8

Recognition means that an item is included in the balance sheet or income statement. Recognition occurs if the item meets the definition of an element and satisfies the criteria for recognition. Recognition is appropriate if it results in both relevant information about assets, liabilities, equity, income and expenses and a faithful representation of those items, because the aim is to provide information that is useful to investors, lenders and other creditors.

Question 9

What is historical cost?

Answer 9

Historical cost is simply the amount of cash or cash equivalents paid to purchase an asset, including any costs of acquisition and/or preparation, such as transportation expense or sales tax. If the asset was not bought for cash, historical cost is the fair value of whatever was given in order to buy the asset. When referring to liabilities, historical cost means the amount of proceeds received in exchange for the obligation.

Question 10

What is Amortised cost?

Answer 10

Historical cost adjusted for amortisation, depreciation, or depletion and/or impairment.

Question 11

What is current cost?

Answer 11

In reference to assets, current cost is the amount of cash or cash equivalents that would have to be paid to buy the same or an equivalent asset today (i.e., replacement cost). In reference to liabilities, the current cost basis of measurement means the undiscounted amount of cash or cash equivalents that would be required to settle the obligation today.

Question 12

What is the realisable (settlement) value?

Answer 12

In reference to assets, realizable value is the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. For liabilities, the equivalent to realizable value is called “settlement value”—that is, settlement value is the undiscounted amount of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business.

Question 13

What is present value?

Answer 13

For assets, present value is the net present value of the future expected cash inflows that the asset is expected to generate in the normal course of business, discounted at an appropriate interest rate. For liabilities, present value is the present value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business, discounted at an appropriate interest rate.

Question 14

What is fair value?

Answer 14

Fair value is defined as an exit price, the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This may involve either market measures or present value measures depending on the availability of information.

Question 15

What does the balance sheet do?

Answer 15

The balance sheet (also called the statement of financial position or statement of financial condition) presents a company’s financial position by disclosing the resources the company controls (assets) and its obligations to lenders and other creditors (liabilities) at a specific point in time.

Question 16

What is owners’ equity?

Answer 16

Owners’ equity (sometimes called “net assets”) represents the excess of assets over liabilities. This amount is attributable to the company’s owners or shareholders. Owners’ equity is the owners’ residual interest in (i.e., residual claim on) the company’s assets after deducting its liabilities. The total amount of owner’s equity is also known as the “book value” of a company.

Question 17

How are assets, liabilities, and owners’ equity related in the balance sheet?

(This is the balance sheet equation/accounting equation

Answer 17

Assets = Liabilities + Owners’ equity.

This equation (sometimes called the accounting equation or the balance sheet equation) shows that the total amount of assets must equal or balance with the combined total amounts of liabilities and owners’ equity.

Question 18

What does the statement of comprehensive income do?

Answer 18

The income statement presents information on the financial performance of a company’s business activities over a period of time. It communicates how much revenue and other income the company generated during a period and the expenses it incurred to generate that revenue and other income.

Question 19

What is revenue?

Answer 19

Revenue typically refers to amounts charged for the delivery of goods or services in the ordinary activities of a business. Other income typically includes gains or losses that do not arise from the ordinary activities of the business, such as profit on a business disposal.

Question 20

What are expenses?

Answer 20

Expenses reflect outflows, depletions of assets, and incurrences of liabilities that decrease equity. Expenses typically include such items as cost of sales (cost of goods sold), selling and administrative expenses, and income tax expenses and may be defined to include losses. Net income (revenue plus other income minus expenses) on the income statement is often referred to as the “bottom line” because of its proximity to the bottom of the income statement.

Question 21

What is the income statement also referred to as?

Answer 21

The income statement is sometimes referred to as a statement of operations or profit and loss (P&L) statement. The basic format of the income statement is Revenue – Expenses = Net income.

Question 22

What is the statement of changes in shareholders’ equity?

Answer 22

The statement of changes in equity, sometimes called the “statement of changes in owners’ equity” or “statement of changes in shareholders’ equity,” primarily serves to report changes in the owners’ investment in the business over time. The basic components of owners’ equity are paid-in capital and retained earnings. Retained earnings include the cumulative amount of the company’s profits that have been retained in the company. In addition, non-controlling or minority interests and reserves that represent accumulated OCI items are included in equity.

The statement of changes in equity is organized to present, for each component of equity, the beginning balance, any increases during the period, any decreases during the period, and the ending balance.

Question 23

What does the statement of changes in equity do?

Answer 23

The statement of changes in equity provides additional information regarding the changes in a company’s financial position over a period of time.

Question 24

What is the cash flow statement?

Answer 24

The cash flow statement classifies all cash flows of the company into three categories: operating, investing, and financing. Cash flows from operating activities generally involve the cash effects of transactions involved in the determination of net income and, hence, comprise the day-to-day operations of the company. Cash flows from investing activities are associated with the acquisition and disposal of long-term assets, such as property and equipment. Cash flows from financing activities relate to obtaining or repaying capital to be used in the business. IFRS permit more flexibility than US generally accepted accounting principles (GAAP) in classifying dividend and interest receipts and payments within these categories.

Question 25

What is the MD&A?

Answer 25

Along with the required financial statements, a company typically provides additional information in its financial reports. In many jurisdictions, some or all of this additional information is mandated by regulators or accounting standards boards. The additional information provided may include a letter from the chairman of the company, a report from management discussing the results (typically called management discussion and analysis [MD&A]), an external auditor's report providing assurances that the financial statements comply with applicable accounting standards and that internal controls over financial reporting are functioning, a governance report describing the structure of the company’s board of directors, and a corporate responsibility report.