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Principles for preparing FS
  • Fair representation: Faithful representation of transactions.
  • Going concern: Based on the assumption that firm will continue to exist.
  • Accrual basis: Transactions are recorded when they occur irrespective of cash flow.
  • Consistency: Consistency in presentation of accounts between periods.
  • Materiality: Free of misstatements or omissions.

IFRS framework

International Accounting Standard Board (IASB) goals:

  • Global accounting standards with transparency, compatibility, & higher reporting quality
     
  • Promote the use of global accounting standards
     
  • Convergence between national GAAP standards and global accounting standards
     
  • Needs of emerging nations & small firms in implementation of global accounting standards
 
IFRS is a largely principle based approach with following characteristics:
  • Understandability: Easy to comprehend
     
  • Comparability: Comparable among firms and across time periods
     
  • Relevance: Sufficiently detailed & relevant information
     
  • Reliability: Should reflect economic reality
 
Question:
Which of the following is least likely to be true in case of a company which report its earnings according to IFRS?

CF Operations                  CF Financing     
  1. Interest received             Interest paid
  2. Dividends paid                 Interest paid
  3. Dividend received            Dividend paid
Ans:
In case of IFRS dividend paid cannot be classified under cash flow from financing and hence answer is B.
 
Question:
Which of the following characteristics least likely to contribute to the relevance?
  1. Detailed footnotes
  2. Qualified opinion by auditor
  3. Annual report available on request

Ans:
Annual report available on request act as a barrier in information dissipation and hence does not contribute towards relevance.

US GAAP Framework

Financial Accounting Standards Board (FASB) has similar framework, but its rule based approach and differ in some aspects:
  • FASB defines assets as a future economic benefit, IASB defines it as a resource for future economic benefit.
     
  • FASB does not allow upward revision of asset prices
Question:
Which of the following is least likely to be true in case of a company which report its earnings according to US GAAP?

CF Operations                          CF Financing     

Interest paid                              Dividends paid

Dividends received                     Interest paid

Interest received                        Dividend paid

Ans:
In case of US GAAP interest paid cannot be classified under Cash flow from financing and hence answer is B.




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