Financial Accounting Recall Questions

1 - Basics of Business Accounting

What is the relationship between expenditure, expenses and costs?

• Costs are expenditures that are either unexpired or expired.

• If they are unexpired, costs turn into an asset

• If costs are expired they turn into expenses.
• Also consumed assets turn into expenses
• As long as goods are not sold, they are reported on the statement of financial position and classfied as assets.
• Once the assets are sold, the costs to aquire those become costs of goods sold, which is an expenese.

Recall the flowchart where all the things are listed next to eachother

 

Basics of financial accounting

What are the generally accpeted accounting principles?

What does accuracy mean?

Without management judgement and correct numbers.

What do the 3 accrual principles mean?

1. Accruals: Only record expenses that actually occured in the period

2. Realization: Account for profits only when they are actually made (difference to US GAAP)

3. Imparity: You need to account for all the risks that you as a company are expecting, even if they might occur in the next period or later.

Which parts of the GAAP are for the purpose of documentation and which of them for information?

 

What are the requirements for a merchant by definition?

 

2 - Bookkeeping

What are assets of a company in accounting terms?

Cash, Cash Equivalents (in commerical account) and Assets of a company.

 

What are the differences between equity and capital?

 

Basic Concepts of Bookkeeping

When do we have a credit balance and when a debit balance?

 

What are charts of accounts?

For simplification education uses fixed assets, current assets, equity capital and outside capital.

However below that there are hundreds of individual accounts for

• Each Business transaction can be traced back to one of the 4 umbrella terms.

What are the 4 (usually profit neutral) changes that can happen to the financial situation of a company?

Basic Concepts of Year-End Closings

Where are profits or losses balanced upon?

The equity capital account. Thus either an increase of equity capital or a decrease.

If you have positive equity capital, the opening balance of the equity capital account will be on the credit side. Now if you have profits, those profits will be added upon that opening balance, leaving you with an increase closing balance on the debit side of the equity account.

What are the 5 steps of year-end closings?

 

What are the three book types for bookkeping?

 

Bookkeping Journal Entires

(1) Purchase of fixed assets (Machinery) + VAT

 

(2) Paying VAT liablity from the last fiscal year to tax office

(3) Sale of fixed asset at carrying amount for cash with price discount of 10% and accumulated depreciation of 250€

1. Cash = Sellinh price on invoice + VAT

2. Credit 3000 office equipment calculation = real carrying amount of printer
• 2475€ (selling price on invoice) includes 10% discount, thus this is 90% of the actual carrying amount
• If 2475 is 90%, what amount(x) is 100%
💡
2475/90 = x/100 ⇒ Cross multiply and solve x. Result: 2750€
• However, this is still not the historical amout for acquiring the printer, because there is 250€ of accumulated depreciation. ⇒ 2750€ + 250€ = 3000€ (historical amount of the printer that we need to credit completely upon disposal)

3. 275€ Losses = price discount we gave. Carrying amout would be 2750€ but we sell 275€ below (10% off). Thus we "lose" 275€

4. Debit 250€ office equipment.

(4) Purchase of current assets (raw material) on credit with VAT

1. Debit Raw Material account calculation: 2400 is 120% price. 20% are additional VAT on top of the actual selling price
💡
2400/120 = x/100 ⇒ Cross multiply and solve for x Result: 2000

2. Prepaid VAT = Difference between what we just calculated and the gross (120%) selling price

(5) Payment for above credit transaction made within discount period, resulting in 2% discount.

1. Debit Trade payables → Reduction of full outstanding amount

2. Credit bank → Subtract from full amount (2400) 2400*0,02 (2%).

3. Credit supplier cash discount = The supplier grants a discount only on the selling price of the asset without VAT. As calculated above, this price is 2000€.
💡
2000€*0,02 = 40 ⇒ Cash discount on asset

4. Credit prepaid VAT = Prepaid VAT is asset side account, thus credit positing decrease the account balance. We also need to adjust the prepaid VAT account, but separately, by 2%
💡
400€*0,02 = 8€ ⇒ Reduction of the amount VAT prepaid. Prepaid is the VAT you pay towards other parties.

(6) Purchase of current assets with cash

 

(7) Sale of finished goods / goods for resell via bank transfer

1. Debit Expenses GfR = Costs of the good sold. The costs of conversion or construction of the asset that was sold

2. Credit Revenue (NOT profit) = The price that we charged for the good that we sold, before VAT was added. If 8000€ was the price on the invoice, this is again 120%. We again want to know however what 100% is.
💡
8000/120 = x/100 ⇒ Cross multiply and solve for x Result: 6.667€

3. Credit VAT = Difference full price and revenue we just calculated

4. Credit Goods for Resell = As we don't have the asset in our company now anymore, we need to remove it's full historical (buying) value from the balance sheet. Crediting the amount that we bought it for, will balance the current asset account.

(8) Consumption of raw material / consumables / and supplies in production

• You debit the monetary value consumed of the current asset to the expense account, while you credit the actual asset account by the same amount.

(9) Sale of current asset on credit to customer

1. Debit trade receivables = The gross selling price (with VAT) that is written on initial invoice to the customer.

2. Expesenses Good for Resale = Same as above. This is the price the company paid for this specific asset. Recall costs of conversion.

3. Credit Revenue = Same as above. Number on invoice (1500) is 120%. However revenue is only 100% of that. So we need to the cross multiplication again.

4. Credit VAT = Difference

5. Debit Goods for resell = If the current asset is deliverd, it is not in possesion of the company anymore. Thus we need to remove it from the balance sheet.

(10) Payment for the above credit sale is received within discount period, thus applicable for a sales cash discount

1. Debit Bank = Full price (without discount) on invoice, was 1.500€. However, as cash discount applies, we only receive the full amount less 2%, which is 1470. Or 2% of 1500 is 30€.

2. Debit customer cash discount = Cash discout only on the good sold. Thus 2% discount on the revenue. Applying the revenue calculation from above yields 1250€. 2% of that are 25€

3. Debit VAT = Adjusting the original VAT liability amount 250€ by 2%, which is 5€. Debit, because VAT resulting from sales is liability. Liabilities increase on the credit side and decrease on the debit side. As we have a 2% discount, we need to decrease VAT.

4. Credit Trade Accounts Receivables = Initially this credit payment was a debit accounts receivable transaction. We needed to debit the full amount, without 2% off to those receivables. Now, as the transaction happened, we need to balance this account back to 0, which means we need to credit everything, the whole 1500€

(11) Return of current assets after payment was made

1. Debit Revenue = The revenue (selling price without VAT) was 500 for the good. As the good is now returned the revenue account needs to be adjusted

2. Debit VAT = VAT liability for the good needs to reduced.

3. Debit goods for resell = This is the costs of the goods sold (in this case the price that the company paid for the good). As the good is now back in possesion of the company, the asset can be added back to the balance sheet.

4. Credit banks = The company needs to repay the gross invoice selling price (Revenue + VAT) paid for the good by the cusomter.

5. Credit expenses = Opon disposal, the book value of the current asset was debitted to the expense account. As the disposal is now reversed, we need to adjust this account again. Credit expenses is reduction

(12) Cash sale of fixed asset (machine) + need to account for depreciation. Costs of conversion 12.000€, useful life 10 years, straight-line, depreciation for last two months. Depreciation till two months before was 2700€.

Business Transaction 1: (Depreciation)

• Straight-Line Method: Costs / Useful life
• 12.000/10 = 1.200€ depreciation per year. Or 100€ per month

⇒ Debit 200 Depreciation expenses to credit value of machine.

⚠️

Pay attention to the time at which deprecitation can be applied for a certain month. Here the sale is made march 10, however deprecition for a month can only be accounted for if the 15th of the month has passed. Thus march depreciation cannot be included.

Business Transaction 2 (Sale of this fixed asset)

1. Debit Cash = Gross invoice price to credit historical amount of machiene, which is 12.000€ as we know from the task.

2. Debit Machiene (should be depreciation expense account of machiene) = Here we debit all depreciation expense realted to the machiene.

3. Credit earning fr. disposal of ... = The profit that the firm made with the sale.
• Therefore we need to know the book value at point of selling the asset.
💡
Current Book value = Historical price - accumulated deprecition to the point of time of selling ⇒ 12.000-2900€ = 9100€
• We know that the revenue (price charged without VAT) is 10.000€ ⇒ The profit they made is the difference, so 900€

4. Credit machiene = Machiene is gone, we need to balance the historical costs price of the asset.

 

(13) Upfront Purchase of insurance contract lastung 1 1/2 years with monthly payment of 300€

= Deffered charges / Prepaid Expenses / Other assets depending on the lenght of the period and the certaincy of cashflows.

1. Debit 5700€ = summed up amount of insurance payments for 300€ over the course of the 1 1/2 years

(14) Credit Sale of fixed asset + depreciation (1250€) for 3 months. Accumulated depreciation before the last 3 months was 58.750€

1. Debit depreciation = those 1250 are given in the task

Second Business Transaction (sale of the asset)

1. Debit other receivables = Other receivables instead of trade receivables, because there is no term for the payment specified on the invoice. No period ⇒ Other receivables
• 48.000 is the gross selling price

2. Debit Buildings (I would also say that we should use depreciation expense account instead of the actual asset account here) = 60.000€ are the costs related to that asset upon the time of payment (acc. depreciation)

3. Credit Buildings = historical amount
💡
If carrying amout is given in the task, this is the book value of the asset after deprectiation is subtracted, thus you need to add the acc. depreciation to this amount to get the amount we need to credit of the asset, as we dispose.

(15) Customer with outstanding accounts paybles (accounts receivables for company) is experiencing financial difficulties. Half of outstanding accounts receivables (48.000 total) are not expected to be received and thus reduced

1. Credit Allowance for doubtful accounts = Contra Asset account against the accounts receivable account, holding the amount of the trade receivables directly and only related to asset, that are likely to not be received.
• The total asset price without VAT is 40.000€. As half of it is not expected to be received, those 20.000€ are credited to the allowance account

2. Debit specific reserve (bad debts) = Double entry balancing expense account that increases every time when the allowance account is credited or increased. Expesenses "increase" on debit side.
• 20.000€ here, as it "balances" the 20.000 increase of the allowance account.
• If a company does not choose this allowance method, they are using the direct write-off method.

3. Credit Other Receivable 24.000 = Half of the total (including VAT) accounts receivable are probabaly not going to be received, thus the accounts receivables are reduced, which means credited, as it is an asset account.

4. Debit allowance ... = Entry used to balance the 24.000 of the other receivables. Resulting is a debit balance of 4000€ in the allowance account. Those 4000 will be balanced out once the payment actually settles.

(16) The reduced accounts receivables are paid by the customer

1. Debit VAT (liability) = We decrease the initial VAT liability of 8000€ by half, which is 4000€.

2. Credit Allowance ... = We now make use of the remaining debit balance in the allowance account, so that the whole account is back to 0 again.

3. Credit Other receivables = We decrease the asset account other receivables now completely, because the customer now paid for the remaining.

(17) Cash Sale of fixed asset + shipping costs for which thrid party is engaged. + Depreciation

Income of 500, because the carrying amount of the asset at selling time is 3500 but the revenue is 4000. Thus 500€ profit.

For the sale we have VAT Liability but for the freight carrier we have prepaid VAT.

 

(18) Private Cash withdrawal from owner

1. Debit private withdrawal = WIthdrawals decrease equity. As this account is on the liablity side, this corresponds to a debit posting, as those decrease. Is kind of like an expense.

2. Credit Cash = The asset side account cash (in commercial accounts or in banks) decreases.

(19) Rental Payment of 750€ via Bank Transfer

 

(20) Customer Bonus

1. Debit Custoemr bonuses = Income account, which means that a debit posting will decrease the total income at the end of the period.

2. Debit VAT (liability) = As customer boni are view as income, their issuing is due VAT liability of 20%.

3. Credit Cash = Cash in bank is transferred to the customer.

(21) Employee receives mothly salary in amount of 3000€ gross (social security rate 20%, payroll withholding tax 17,25%)

1. Debit Wages and Salary = Expense account on which the gross wages are accounted on

2. Credit Bank only 1882€ = Net salary that emplyee receives after 20% social security and 17,25% payroll withholding are deducted. 3000 - 600 - 518

3. Debit Payroll Expenses 600 = 20% social security taxes on 3000€ that firm needs to bear. For them this is another expense

4. Credit liabilities due to social securities = Here you can clearly see that the firm also has it's own social security liabilities for the 3000€. Credit liabilities means an increase of liabilities.

(22) Employee receives monthly salary of 4500€ plus lives in an company owned apartment with costs 500€ per month and the company pays for

1. Debit Wages = Gross wages also include any rental payments that the company makes for the employee

2. Debit payroll expense = social security expense of gross wage

3. Credit banks 2.637 = 4500 (monetary wage) - (5000*0,2) - (5000*0,1725).
• 4500 - 1000 - 863 = 2637
• Both rates are applied to the gross gross wage, not only the monetary amount. Thus net wage that the employee receives results after deducting those amounts from however only the monetary amount.

4. Credit Rental Income = This posting has two reasons. First make the rental income just visible, although it isn't really income. Second balance the whole business transaction. Without this positing the credit side would only come out to 5500. However to balance both sides, those additional 500€ are needed.

(23) Payment of social security liabilities and payroll withholding taxes to the tax office via bank transfer

1. Debit both liability accounts, as debit posting are decreases

2. Credit banks in amount of the total sum.

(24) Lawsuit (provision) against the company for additional wage payment

1. Debit wages = Wage expense account, as the claim against the company is for wages.
• This could however be any other expense that could occure against the company. E.g. expenses for restoration of a plot of land

2. Credit provisions = Provisions are liabilities. Thus as there are new provisions, this is an increase, which needs to be posted on the credit side of that account.

(25) Jupiter did not recieve invoice for payment of rental yet, but normally there were rental expenses due for the last 3 months.

1. Debit Expenses = Due to the accruals principle, expenses and revenues need to be recorded when they occur or normally are due. Thus we still need to record the usual rental expense of 5.400€ for the last quarter.

2. Credit other liabilities = Any expenses that not yet have a certain date of occurance or are of uncertain amount are classified as other liablities.

Closing Journal Entries

Significant closing entries

(1) Impairment losses of 20.000 on a fixed asset due to damages.

1. Write off's = Expense account here the impairment

2. Credit Vehicle Fleet = The value of the fleet decreased. If you credit an asset, you decrease it's value

Technical closing entries

(2) 5.500 of 18.000 opening balance "work-in-progress" goods are deterimed to be left over after stocktaking

1. Debit Change WIP = 18.800-5.500 = 13.300 which has been "consumed" / changed. We post that change on the debit side of a new income subaccount. Debit positing on income accounts are decreases of income. This consumption of WIP does reduce income

2. Credit WIP = As the amount of this asset has decreased by 13.300, we need to credit (decrease) the corresponding asset account.

(3) The finished goods stock is determined to be 9.545€. The opening balance was 3000€

1. Debit finished goods = There is an increase of 6.545€ in the stock of finished goods, as 9.454 exceeds 3000€. Thus we debit the corresponding account by this amount

2. Credit change in finished goods = We credit an income account, which will mean that there is an increase of equity corresponding to that.

(4) Close all the sub-subaccounts onto the slightly bigger subaccounts.

(5) Close private accounts

 

(6) Close VAT Accounts

 

(7) Close income statement account (revenues and expenses)

 

(8) Closing equity account (private, and incomestatement accounts on here)

 

(9) Closing the whole balance sheet

 

(10) Formatting the balance sheet

 

Additional Bookkeping Questions

JUPITER is selling wardrobes to a customer for the price of 20.000 EUR (net). Since the customer is paying cash, a discount of 5 % is granted. Which of the following postings represents the business transaction correctly?

→ The total payment of 22.000 before the cash discount is reduced to a 20.900 payment. Both revenue and VAT need to be reduced individually by 5% for the bookkeping entry.

On May 5th 2012 JUPITER has sold a company car at it’s residual value of EUR 25,000 to a fellow entrepreneur on credit. In case of payment within one week an early payment discount of 2 % is granted. The fellow entrepreneur pays on May 7th 2012 via bank transfer. Which of the following postings represents the business transaction correctly?

• The gross payment amount is reduced by 2% to 26.950€

• The net payment amount (without VAT) is reduced individually by 2%, which is 25,000*98/100 = 24500, so we need to debit expenses. Expenses instead of customer cash discounts because this account is only used for customer transactions. As we are selling fixed assets here, we debit operating expenses to separate the two accounts.

• The VAT amount of 2500 originally also needs to be reduced by 2% which means 2500 * 98/100 = 2450. So we debit the VAT Liability account by 50

The interest rate (6 % p.a.) for a loan of 1.000.000 EUR, is payable quarterly in advance. The rate for the period of Dez.1st until Feb. 28th of 15.000 EUR was transferred on Dez.1st . Which is the correct posting for Dez.31st 2013?

Our goal is that for the month december, there are correctly posted interest expenses of 5000€ as this is the amount of interest we are paying per month based on the yearly amount of 60000.

In the beginning of december there has been a posting of debit interest expenses 15.000 to credit cash of 15.000. With the posting of 10.000 to the credit side of the interest expenses, we remain with a balance of 5.000 on this account, which is exactly what we wanted.

However we need to balance this posting with a debit double entry. Thus we debit deffered charges.

A liability insurance is completed for the period from February 2013 until end of January 2014. There is a monthly insurance premium of 100 EUR. The entire premium for the whole term has to be paid by JUPITER in advance in January 2013. Which of the following postings represents the business transaction of prepaid expenses on Dez 31st at the end of the financial year 2013 correctly ?

• When prepaying the insurance permium, so the posting in January was a debit insurance (expense) posting to credit deffered charges / prepaid expenses.

• Yes, the deffered charges account is an asset account that is credited upon recognition of any deffered chared (e.g prepayments).
• Over the course where the expenses actually occur, this asset account is substantially decreases by making debit postings, e.g each month if there is a payment due each month. To balance this, we need to credit the expense account for e.g insurances, as we also need to adjust here for the debit posting at the beginning of the period.

At the end of financial year JUPITER has outstanding receivables form accounts receivable from trading of 165,000 EUR. From past experience it is known that only 98 % of such claims are actually paid. How to post this situation from JUPITER’s perspective?

• General Reserve only holds the net amount of money (without VAT) that we will not receive. The adjusting of the VAT happens in another account

• So to get the amount that we debit on the general reserve account, we use the folllowing calculation
• 165.000 - 165000*98/100 = 3300
• This is the gross amount of receivables including VAT
• Calculate the amount which is lost without VAT (here VAT is 20%)
• 3300 - 3300*100/120 = 2750
• This is the amount we are allowed to debit into general reserve, which is an expense account.

During financial year, the owner of JUPITER company has done a one-time withdrawal of 5.000 EUR in cash. There has been no further transfer of cash between company and its owners in this financial year. What is the correct posting for closing the account 2120: Private withdrawals at the end of financial year?

• To balance the private withdrawal account we need to make a credit posting on it, as any withdrawals are posted on the debit side during the year. They are one the debit side, as withdrawals represent a reduction of the companies equity.

• As withdrawals mean a reduction of equity and any reductions are posted on the debit side on the liability side of the balance sheet, we need to debit the private account.

An associate of JUPITER withdraws 300 EUR in cash as well as a computer with a residual value of 2.500 EUR. How to post those withdrawals correctly?

• Only the computer is subject to 10% VAT.

JUPITER is selling an used machinery for its residual value of 5,000 EUR (net) via bank transfer. For the transport a transport insurance for the price of 300 EUR (incl. insurance tax) is concluded, which is also paid via bank transfer. How to post the bank transfer regarding the transport insurance correctly?

• Insurances are not subject to VAT.

In December JUPITER transfers the next month's rent of 2.400 EUR for a warehouse. How to post this business transaction?

• Rental payments are not due to VAT and also rent expenses are only postet as such in the period where they actually occur, so here in the next period. As the firm pays in advance, we need to debit deffered charges.

A long-time customer who has bought furniture from JUPITER repeatedly in the recent months obtains a loyalty bonus from JUPITER in the amount of EUR 5,000 (net) in cash. Which of the following postings represents the payment of the bonus correctly?

• Consumer Boni is an income account which is why a debit posting here means a decrease of income and thus in the end potentially decreased equity.

• Consumer boni are due to VAT

3 - IFRS Basics

What are the three requirements for the endorsement of new IAS (IFRS) regulations?

 

What is hirarchy of application of IFRS standarts to business transactions / events?

 

Whom are for what things does the conceptual framework help?

 

What are the qualitative characteristics of the conceptual framework?

 

How can you differentiate between different property types?

 

Investment Property

Initial Measurement

Measurement at costs. The debit amount of the asset that is recognized at time of purchase.

What is the hirarchy of determining the fair value amount of an asset?

 

Property Plant and Equipment

Defintion

 

Intangible Assets

How do you determine whether R&D costs can be attributed to the costs (initial book value) of an intangible assets?

What are the addotional six criteria for future economic benefits of an self-generated intangible asset?

 

What are research costs?

• Costs related to acquisition of new knowledge

• Just searching for possible applications of the research findings

What are developement costs?

• Application of research findings and other knowledge for the productinon of new/substantially imporved materials, products, services,... before commercial production

What happens if there is no clear distinction between research and development possible?

How does subsequent measurement work?

When it comes to recognition of amortization, between what kinds of intangible assets to be need to differentiate and what is the effect of that?

 

Inventories

How does subsequent measurement of the book value of inventories work?

• Lower value of costs of conversion and net realisable value (NRV) at time time of reporting date

How do you determine the NRV?

Estimated selling price in the ordinary course of business less the estimated cost of completion and estimated costs necessary to make the sale

• Selling price based on market view

When are we allowed to account for write downs and how does it work?

• Write downs only under NRV method

• Income or expenses balanced with corresponding asset account

Provisions

What are the recognition requirements for contigent liabilities?

Alternative to provision, if

• Occurance of provision depends on another uncertain event in the future

• Obligation is present but an outflow of future economic benefits is just possible (< 50%) or cannot be measured reliably

• Probablility however cannot be remote

⇒ Disclosure in the notes

What are the types of provisions and how the initial measurement differ between them?

 

How do we subsequently measure provisions?

• At each balance sheet date, we review and adjust provisions if they have changed.

Financial Instruments

What are the different IFRS (IAS) standarts related to finacial instruments and what do they cover?

In what ways can financial instruments be classified on the balance sheet and what effect does that have to the measurement?

What is the SPPI criteria?

 

Overview (table) subsequent measurement of Financial asset vs financial liabilities

 

How do bookeping entries under amortized costs look like?

They ignore the fact that the debit instrument lost in fair value.

We only account for interest payments on the bond and eventually the repayment.

4 - Earnings Management

What is the fade from white to black earnings ^management?

 

What are structuring provisions (real earnings management)?

 

What are the different patterns of earnings management?

 

What are the different flexibilites for earnings management?

 

5 - Financial Statement Analysis

Income and CF-Statement

What are the most important earnings figures?

 

How do we calculate net cash flow?

CFO + CFI + CFF

Financial Ratios

What are the different financial ratio types you can look at?

Profitability ratio

 

Liquidity Ratio

• Ability of a firm to satisfy current liabilites with different forms of assets

How are those referece value interpreted?

 

Leverage Ratio

1. Upper part of right side of balance sheet to the asset side

2. Lower parts of the right side of balance sheet to the assets side

Share Investment Ratio

In what two ways can investors make money?

1. Dividends

2. Stock price increases

Non-financial Measures / Ratios

Often not in IFRS consolidated statement, but in a separate report.