1 - Basics of Business Accounting
What are the two fields of accounting?
- External acc.based on legal rules
- Financial accounting (Bookkeeping, inventory, financial statements)
- Internal acc: Management Accounting and really company specific
- Statistics, comparative methods, cost accounting, budgetary accoounting (investment planning)
What are cash-inflows / outflows
Change in cash or cash equivalents of a firm
- Outflow = The cash or cash equivalents of a firm decrease
- Inflow = The cash or cash equivalents increase
What are receipts / expenditures
Change in the firms financial situation (assets) = cash and cash equivalents + net receivables
- Expenditure: Change in the montary value of a firm (cash and cash equivalents + net receivables (liabilities - receivables)
- Receipts: Sale of goods
Expenditure is the monatry value of a companies acquired economic goods. This is bascially the payment plus all directly related costs at a specific point in time for either setting up an asset or increasing it's value.
A firm has an expenditure of 255.000€ to purchase and install an asset on a specific day. The asset is then placed in service and is then eligible for classification of expenses.
What is income (revenue) / expenses
Evaluated, effective and periodic creation / consumption of goods or providing / use of services
- Expenses: Negative change of the firms total capital (financial assets and other assets) that are periodised
- Depreciation expenses, expeneses (losses from disposal) from selling a good below book value
- income: Positive change in the firms assets.
- Sale of an asset over book value.
What are costs / performance
Valued, main-operation related, periodised consumption / creation of goods or providing / use of services. Related to good or service that a firm is providing
What is the difference between cost and expenditure?
- Expenditures is money spend on some kind of good, without you receiving any financial benefit from the acquisition. Buying and storing
- You pay for business cards and you just let them sit on your desk and never hand them out. There is no chance of receiving any benfit
- If you hand out the cards and your sales increase, you can deduct the costs of purchasing the business cards from the revenue you make, as the transaction you made led to a change in your financial position.
- Costs are any money you spend to make a sale. Directly attributable to your main business operations.
- If you buy business cards and you hand them out but not make any sales from them or it is hard to tell if sales are related to the business cards, you can still classify the purchase price as costs, as it is likely that sales are related to expenditure you made.
(+) Expenses are then any money you spend to run the business in general. So paying employees. This is likely reoccuring money you spend.
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.
What is the relationship between cash-inflows, receipts and income?
- Cash-inflow (Einzahlung): Actual positive cash changes of a company.
- Receipts (Einnahmen): Any money that a comany recieved including receivables and net recevables (liabilities - receivales)
- Income = Amount of money received by a company from it's main operations. Under the accrual method, revenues need to be accounted for in the period where they occured. That does not necessarly mean that the company has yet received the money for a revenue on the income statement. E.g. when a consumer pay's on credit.
- Credit payments are accounted as: Debit accounts receivables to credit sales revenues.
- Cash payments are debit cash to credit sales revenues.
Name 5 transactions that are receipts but no revenues
- Borrowing 5000€ from a bank
- Collecting / receiving 5000€ from a sale recorded as revenue a month earlier
- Selling a companies car (fixed asset) for cash, at book value.
- If you would sell over book value, there would be revenue from the sale.
- Receiving money that someone had borrowed from the company
What is the financial balance?
The balance between all receipts and expenditures within one period. Looking at the physical things that a firm bought and shipped out in one period. So all the products shipped out and all the products that entered the firm.
What is the payment balance?
The balance between physical money entering the firm and physical money leaving the firm. Balance between cash-inflow and outflow.
Recall the flowchart where all the things are listed next to eachother
What is the difference between flow and stock values?
Flows are measured over a period of time while stocks are measureable at a specific point in time
- Stock values: cash and cash equivalents
- Flow Values: cash in-/outflow
- Net receivables (receivables - liabilities)
- Stock values: financial assets
- Flow Values: receipts/expenditures
- Tangible assets
- Stock values: the businesses assets
- Flow values: income / receipts
Purchase of wooden planks on credit that are consumed in the next period
Expenditure only, as there neither a cash outflow at time of payment nor are the goods consumed.
Rental payment of a business office via bank transfer
Cash-outflow, expenditure and expense
Basics of financial accounting
What does primarcy of application mean?
What are special commercial partnerships?
Any partnerships where the personally liable partner is not a natural person. e.g GmbH § Co.KG
Who needs to prepare individual financial statements and who consolidated financial statements?
- Individual = All individual companies (merchants) and non-capital or size criteria meeting corporations
- Consolidated financial statemet = Corporations that are capital-market oriented or exceed a certain size criteria.
What option size criteria exceeding but non-capital market oriented companies with consolidated financial statements have?
If they are not capital market oriented, they can choose between consolidated according to HGB or consolidated according to IFRS. If IFSR is choosen, no HGB is required anymore.
When is company capital market oriented?
Equity instruments, so shared and similar instruments are traded on an organized market.
When is a company listed?
Just listed, if only stocks are traded.
What are the generally accpeted accounting principles?
What does accuracy mean?
Without management judgement and correct numbers.
What do the 3 accrual principles mean?
- Accruals: Only record expenses that actually occured in the period
- Realization: Account for profits only when they are actually made (difference to US GAAP)
- 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?
The not capital market-oriented Slow AG based in Germany with subsidiaries at home and abroad has had 150 employees and revenues of about 50 Million € over the last 3 years each
needs to prepare an individual financial statement applying HGB and a consolidated financial statement applying HGB or IFRS.
→ Why consolidated? Because they are trading shares, as the name "AG" indicates. However as they are only trading shares, they are only listed, which means that they can decide to make their consolidated statement according to IFRS.
Are small commercial partnerships and individual merchants basically able to apply §§ 264 ff. HGB?
D) Basically yes, but it is voluntary; questionable concerning tax accrual (§ 274 HGB).
2 - Bookkeeping
What are the three economic units (wirtschaftseinheiten)?
- Private persons
- Public Budgets (Haushalte)
- Public authorities (offentliche Betriebe und Verwaltungen)
What are the two ways to differentiate the term company?
- Functional Term = A legal or natural person is entrepreneurially planning and operating
- Institutional term = The company requires a commercial activity and a minimum level of institutional means
What does the duty to keep books §238 HGB include?
- Any merchants needs to document business transactions and preset their financial situation in accordance with the Gaap.
- Presented should be net assets, financial position, and result of operatinos
Under which conditions is the duty to keep books excluded?
§241a HGB requires
- Individual merchants (sole owner) with revenues ≤ 600.000€ and profits ≤ 60.000€ for two subsequent periods.
- Partnerships or corporation do not have that option.
⇒ Net income method (simpler than systematic calculation
What is the difference between net income method (EÜR) and the bookkeping method?
The net income method simply shows the total revenue of a company in a period minus all the expenses that occured
On a balance sheet you need to include all the assets, liability, receivables, payables and in general the capital structure and it's changes of your company.
What is the companies capital in the sense of accounting?
Debts of the company, so liabilities
- Equity capital = Debt's aginst the owners
- Outside capital = Debt's against creditors
Who can provide outside (debt) capital?
- Suppliers (with time of payments, of credits)
How can you change your firms capital?
- Capital investments (Transferring cash via e.g bank trasfer onto the commerical account of the company)
- In kind investment (transferring physical assets into the company)
What is the difference between debt and equity capital?
- Debt capital = Loans. Capital acquired that needs to be paid back and on which interest is paid to the creditor
- Equity capital = Capital aquired from shareholders in exchange for shares of the company. Shareholders have claims for future dividends and profit-shares of the company. Higher risk, thus more expensive
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?
If a supplier grants a suppliers credit to a customer for a certain period of time this period of time granted is called:
Time of payment
If a bank grants a customer a bank loan over a certain period of time, this is called a …
How do you calcualte the equity of yera 2X02 with the numbers of 2X01?
The equity account balance will be calculated by either adding or subtracting the net income. Difference between revenues and expenses.
Basic Concepts of Bookkeeping
What is a business transaction
An event that changes the companies finaicial sitution (assets or liabilities)
What is bookkeeping?
The ongoing, systematically monetary recording of all business transactions
Is a part of financial accounting.
What is the closing balance of a T-account?
The result of: The opening balance of the T-account plus any additions on that account - any reductions on the other hand.
Where is the closing balance entered upon?
How does balancing of T-accounts work?
Summing up each side and then subtracting the lower side from the higher side to determine the closing balance.
What are permanant accounts?
What are temporary accounts?
Store business transactions that effect the companies net income. Collect on separate subaccounts all revenues and expenses of a reporting period
At time of year-end closing revenue and expense accounts are closed onto the profit-loss account and then either added or subtracted from the equity capital.
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 is the difference between simple journal entries and composite journal entries
- Simple = Business Transaction that deals with only two accounts
- Cash account to Liability account
- Composite = Business transactions with more than two accounts affected
- Debit Banks to credit assets and credit income
- When selling an asset over book value and generating revenue from that.
What is a voucher?
- Document holding key information about business transaction and can thus be used to prove the transacdtion
What is the difference between external and internal vouchers?
- Internal = Own documents issued to others
- External = Documents issued from other to your company.
What is the difference between non-affecting income and affecting income?
- Non-affective = Financial situation changes, but it's neither revenue nor expense ⇒ No effect eventually on equity capital of the firm
- Affecting = FInancial situation changes. BT that is either revenue or expenses and thus when balancing on the profit loss statement, the equity capital of a firm will be affected
What are the 4 (usually profit neutral) changes that can happen to the financial situation of a company?
What are the two main equity sub-accounts?
- Private accounts, where
- Debit side = withdrawals (by owners)
- Credit side = investments (by owners or creditors)
- Revenue and Expense account(s)
- The debit side are all the expenses
- The credit side the sales
How can the equity capital of a company change?
- Through profit or loss resulting from balancing revenue and expense accounts
- Through either debit or credit balance after closing the private accounts (investments and withdrawals)
- More investments ⇒ Increase in equity
- More withdrawals ⇒ Decrease in equity
How do you account for a sale of finshed goods?
Profit: Sale price - costs of sales
Debit costs of good sold / material expenses to credit sales
The account ‘equity’ was booked on credit side.Thus equity has …
The account "debt" was booked on the debit side. Thus current assets have...
decreased. Current assets are besides other things also cash, thus if debt decreases, it is likely that current assets (cash) has been spend to pay back (decrease) the debt.
The account ‘equity’ was booked on debit side. Thus current assets have …
Decreased. Debit equity means a reduction of equity. Equity reduces if e.g cash is spend by the company. If cash is spend current assets decrease as well.
Where to report the net assets?
On the balance sheet. Net assets are basically equity and equity is a direct part of the balance sheet, in contrast to the profit loss statement, which is like an additional statement that is opened every accounting period again.
Basic Concepts of Year-End Closings
What is stocktaking?
The comparison between financial accounts and inventory (counted) accounts.
The leftover stock of an asset is balanced against the material expenses of the respective asset and only the difference is then counted as an real expense.
On which statement are income and expenses balanced upon?
- The profit and loss statement.
- There are many different sub-revenue and expense accounts
- All the revenue accounts have credit balances on the debit side
- All the expense accounts have debit balances on the credit side
- On the debit side of the profit loss account you sum up all those individual expense accounts
- On the credit side of the PL-statement you sum all the credit balances of the revenue accounts
- Then you balance both sides
⇒ If there are more revenues, you have profits otherwise you have losses.
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 is the difference between final result and final profit?
What are the 5 steps of year-end closings?
What are significant adjusting journal entries?
- Stocktaking (Inventur)
- Depreciation (Abschreibungen)
- Loss of value of tangible and intangible fixed assets
- Independed of cash flow
- Value adjustment (Wertberichtigungen)
- current asset value adjustment if book value exceeds recoverable amount. → Strict lowest value principle
- Deffered Revenues and charges
- Accruals principle = Expense and Reveue needs to be accounted in the period where they occur. (No matter if cashflow happend in that period)
- Cashflows (payments) in the current period but income or expense in one of the folloiwing periods ⇒ deffered revenues or deffered charges
- Assets, if deffered revenues
- Liabilities, if deffered charges
- Debts of the company to third parties created at or before the accounting period, with not certain amount and/ or time of payment
What is the difference between deferred expenses and prepaid expenses?
Prepaid expenses that will very likely become expeneses within one accounting year. They are listed under the "current asset" category
Deffered Expenses (or deffered charges) are expenses prepaid that will incur longer than one period in the future and thus are listed under the "fixed asset" category. Consumption is not expected to happen within the next 12 months
For e.g insurances that are paid in advance, the amount that is not yeat expensed for the following months will be stored as an asset and over time gets decreases until the whole period of the insurance is gone.
Under which criteria are business transactions classified as other assets/liabiilities instead of deffered ....?
- Defferals (so either revenues or charges) that will occur more than one period in the future, or
- Defferals so revenues and expenses that are not realted to cashflows
In the end there are not really business transactions that are classified as deffered expenses or charges. Most of the time they get even more specified into prepaid expenses / revenues, if they are within the next period and other assets / liabilities, if they are more than one period in the future or are not related to cashflows.
Where is the private accounts closed upon and why is that?
On an interim capital account where both investments and withdrawals are balanced against eachother.
This is done because there could be investments and withdrawals form different owners.
Which accounts of the balance sheet hold opening balances?
- Profit and loss acounts do not have an opening balance. They are balanced out completely at the end of the period and the resulting balance is then added or subtracted from the equity capital.
- Only permanent accounts have openeing balances
What are the three book types for bookkeping?
Bookkeping Journal Entires
Jupiter GmbH will serve as fictive company that is currently preparing its quarterly financial statement for the three months ending March 31, 2013. Jupiter GmbH is a wholesale company, primarily engaged in reselling manufactured goods; in addition they maintain a small production plant for the production of gabion cages.
VAT here 20% but in exam 10%
(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€
- Cash = Sellinh price on invoice + VAT
- 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)
- 275€ Losses = price discount we gave. Carrying amout would be 2750€ but we sell 275€ below (10% off). Thus we "lose" 275€
- Debit 250€ office equipment.
(4) Purchase of current assets (raw material) on credit with VAT
- 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
- 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.
- Debit Trade payables → Reduction of full outstanding amount
- Credit bank → Subtract from full amount (2400) 2400*0,02 (2%).
- 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
- 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
- Debit Expenses GfR = Costs of the good sold. The costs of conversion or construction of the asset that was sold
- 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€
- Credit VAT = Difference full price and revenue we just calculated
- 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
- Debit trade receivables = The gross selling price (with VAT) that is written on initial invoice to the customer.
- Expesenses Good for Resale = Same as above. This is the price the company paid for this specific asset. Recall costs of conversion.
- 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.
- Credit VAT = Difference
- 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
- 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€.
- 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€
- 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.
- 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
- 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
- Debit VAT = VAT liability for the good needs to reduced.
- 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.
- Credit banks = The company needs to repay the gross invoice selling price (Revenue + VAT) paid for the good by the cusomter.
- 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)
- Debit Cash = Gross invoice price to credit historical amount of machiene, which is 12.000€ as we know from the task.
- Debit Machiene (should be depreciation expense account of machiene) = Here we debit all depreciation expense realted to the machiene.
- 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€
- 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.
- 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€
- Debit depreciation = those 1250 are given in the task
Second Business Transaction (sale of the asset)
- 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
- 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)
- 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
- 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
- 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.
- 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.
- 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
- Debit VAT (liability) = We decrease the initial VAT liability of 8000€ by half, which is 4000€.
- 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.
- 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
- 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.
- 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
- Debit Custoemr bonuses = Income account, which means that a debit posting will decrease the total income at the end of the period.
- Debit VAT (liability) = As customer boni are view as income, their issuing is due VAT liability of 20%.
- 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%)
- Debit Wages and Salary = Expense account on which the gross wages are accounted on
- Credit Bank only 1882€ = Net salary that emplyee receives after 20% social security and 17,25% payroll withholding are deducted. 3000 - 600 - 518
- Debit Payroll Expenses 600 = 20% social security taxes on 3000€ that firm needs to bear. For them this is another expense
- 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
- Debit Wages = Gross wages also include any rental payments that the company makes for the employee
- Debit payroll expense = social security expense of gross wage
- 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.
- 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
- Debit both liability accounts, as debit posting are decreases
- Credit banks in amount of the total sum.
(24) Lawsuit (provision) against the company for additional wage payment
- 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
- 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.
- 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.
- 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.
- Write off's = Expense account here the impairment
- Credit Vehicle Fleet = The value of the fleet decreased. If you credit an asset, you decrease it's value
Prepaid Expenses / deffered charges or same for revenues
Technical closing entries
(2) 5.500 of 18.000 opening balance "work-in-progress" goods are deterimed to be left over after stocktaking
- 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
- 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€
- 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
- 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
When looking at account 9999: Income statement account within the annual financial statements there is a balance of 25.000 EUR on credit side. Whereas on debit side of account 2100: Private account there is a balance 10.000 EUR. The opening balance of account 2900: Capital subscribed amounts to 250.000 EUR. What’s the correct amount of equity in the corresponding closing balance for the current financial year ?
235.000€ so a decrease of 15.000€
→ Why: A balance of 25.000 on the credit side of the income statement means that after balancing expenses and revenues, there are more expenses and thus a debit balance which is written on the credit side of the income statement
A balance of 10.000 on the debit side of the private account is a credit balance which means that there must have been investments of 10.000 more than withdrawals in the period. More credit on the private account results in an increase of equity.
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.
If the balance of account 2100: private account is on debit side, equity increases.
yes, as a balance means that credit side postings exceed debit side postings. As credit positngs on the private account mean investments, there is an increase in equity.
Debit postings themself, so not the final balance mean reductions or withdrawals. If those exceed the investments in the end there would be a debit balance on the credit side.
JUPITER is buying a patent for an improved polishing procedure on logs for 15.000 EUR (net). Payment is on credit.
Debit Patents or Intangible Assets 15000 to credit trade accounts payable 16500
Debit Prepaid VAT 1500
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 reasons for convergence of accounting principles?
What is the mission of the International Accounting Standart Board (IASB)?
- Transparancy and good decisions through comparability and high quality information
- Reduce information gap between investors and companies
How is the IFRS funded?
- International companies and accounting firms
- Some self-generated income
Is the IASB independend?
- Members could represent their own countries
- Companies hold most of the financing, thus IASB could act in their interest to keep funding
Pros and Con's of the endorsement process?
- Long time
- If standart fails close to the end, a lot of time wasted
- good process of gathering informations
- higher chance of making a well-developed and thought-through decision
What is the role of the EFRAC during the endorsement process?
European comitee requests opinion on IFRS standart → EFRAC issues endorsement advice
What is and where does the ARC play a role in the endorsement process?
After the endorsement advice of the EFRAC, the comitee presents a proposal which the Accounting Regulatory commitee then votes on.
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?
What kinds of financial statements does a firm need to prepare under IFRS?
- Statement of Financial Position
- An entitiy is planning to restructure something in their business
- there is a detailed formal plan for the restructuring; and
- a company has raised a valid expectation in those affected that the plan will be implemented – i.e. either by starting to implement the plan or announcing its main features to those affected. [IAS 37.72]
- Probable economic benefits associated with entity and cashflow
- Costs or value can be measured reliably.
Including: (name the definition)
Present economic ressource controlled by the entity as a result of past events
expected to be realized one the entity’s normal operating cycle (=time from buying raw materials until selling finished goods); held primarily for the purpose of trading; expected to be realized within 12 months after the reporting period; cash and cash equivalents
all other assets
present obligation of the enterprise (against outsiders) arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits
expected to be settled within the entity’s normal operating cycle; held for purpose of trading; due to be settled within 12 months; for which the entity does not have an unconditional right to defer settlement beyond 12 months
residual interest in the assets of the enterprise after deducting all the liabilities (=assets - liabilities)
What is the percentage of completion principle?
= Applies for construction of new builings. While building is still in progress, the progress percentage amount can be deduced and thus already be valued as an asset.
What is a restructuring provision
Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a restructuring provision is recognised only when both of the following conditions are met:
What is the requirement for the recognition of a business transaction as part of the statement of financial position?
- Statement of performance (Profit/Loss)
increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increase in equity, other (NOT) than those relating to contributions from equity participants
decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants
In what three ways can equity change?
What is the recycling principle?
When other comprehensive income is added or subtracted from the profit loss statement. This is the case, if faithful represenatation will be enhanced.
What are the two ways of presenting performance?
- Statement of changes in equity
What do we need to restate here?
The statement of performance is basically added or subtracted on this statement from the opening balance on the equity statement
- Statement of Cash Flows
How can you differentiate between different property types?
Property held to earn capital appreciation or rentals
- Future economic benefits from the investment property flowing into entitiy
- Costs can be measured reliably
Measurement at costs. The debit amount of the asset that is recognized at time of purchase.
What are the two ways of accounting for government grants and when are we allowed to account for them?
- Deducting it from the asset costs. This will decrease the amount of depreciation expenses
- Debit cash to credit deffered income.
- The grant will be received
- The entity will comply with all the requirements of the grant
What are borrowing costs?
Including costs of getting an asset ready for "use" if the process takes a very long time. Such assets are called qualifying assets>
What two ways can be used for subsequent measurement of investment properties asset value?
- Cost Model
- Initial costs (asset balance) minus any accumulated deprecitaion and impairment losses
- Fair value changes of that asset are not considered in the book value but shall be disclosed in the notes
- Fair Value Model
- The value of an asset is annually measured again, and according to that the book value is adjusted
- Increases: Debit Asset to credit Income
- Decreases: Debit Expenses to credit Asset
What is the depreciable amount?
The costs of an asset less the residual value (the value at selling time, carrying amount)
What are the different depreciation methods (for investment properties)?
- Straight Line Depreciation
- Diminishing balance
- Sum of units/machine-hours
What are the different formulas for the depreciation methods?
- Straight Line:
- Depreciable amount / useful life.
- Diminishing balance:
- Units/machine hours method:
Depreciable amount (Costs - residual value) * units(hours) used up/ total estimated hours
When do we consider an impairment test?
- Only in the cost model
- There is the indication that an asset may be impaired at the end of the period from:
- External indicators:
- Fall in market value
- Material adverse changes → Loss in the companies value
- Material adverse changes in the markets
- Internal indicators
- Major reorganizations
- Loss of key personnel
- Losses or net cash outflows from operating activites with the property and those need to continue.
How is an impairment recognized?
Debit: loss on impairment in amount of the differece between fair value (recoverable amount) and book value (carrying amount) to Credit: Value of the asset.
When do we have impairement losses?
- If the carrying amount is larger than the recoverable amount
After application of the cost model, the book value of the asset after deducing depreciation
The higher number between value in use and net selling price
Value in use
Present value of asset could be future cash flows from disposed of less any an asset‘s continuing direct selling costs use
Net selling price
Amount at which the Present value of asset could be future cash flows from disposed of less any an asset‘s continuing direct selling costs us
How do we account for impairment increases?
We debit the asset and credit an account called revaluation surplus which is accounted in other comprehensive income sub-section of the owners equity account.
- The second account is an liabilty side account, thus credit side means a monetary increase.
What is the hirarchy of determining the fair value amount of an asset?
When do we need to derecognize investment property?
- If disposed or not in use anymore, so that no future economic benefit is possible anymore
- If selling over or under book value
- Over: Debit cash to credit income from disposal / credit asset
- Profit = Net disposal - carrying amount (or book value)
- Under: Debit Cash and losses to credit asset.
Property Plant and Equipment
Recognition criteria [IAS 16.7]: Recognition if future economic benefits associated with the item will probably flow to the entity and the cost of the item can be measured reliably•
- Aggregation of individually insignificant items (tools, drills,...) on which the measurement and valuation is then applied on aggregated
What is the component approach?
- Each part of a PPE with cost that is significant in relation to the total cost is recognized and depreciated separately
- E.g Aircraft Body, Engines, and Interior
- All with different useful lives but very different significant costs to total asset.
How does initial measurement work?
Costs, which is the purchase price (including import duties and non-refundable taxes) BUT NOT price discounts. The price needs to be net.
(+) costs directly attributable to asset
- side preparation
- initial handling
- professional costs
- interest fees
If the payment is deffered, you need to turn the cash price of that future date into the current value of that cash amount. The difference between the current value and the future value is called interest.
What method is used for subsequent measurement?
Cost Model or revaluation model
- Revaluation model is combination of fair value and accumulated depreciation and impairment
The Bavarian car manufacturer WMB AG has purchased a building on February 2, 20X1. The purchase price was 3.570.000€ (incl. 19% VAT). WMB negotiated a cashback of 2% of the purchase price in case they pay the amount within 14 days. The WMB AG transfers the purchase price on the Feburary 10, 20X1. The purchase of the building is supported by a governmental grant of 250.000€ that needs not to be refunded. A certifying notary charges fees of 23.800€ (incl. 19% VAT). The WMB AG has to pay a real estate transfer tax of 150.000€. An internal employee was busy with searching a suitable building for 50 hours by assessing various alternatives and her wage is on average 50€ per hour. Moreover, the WMB AG has to do some refurbishment work so that it can use the buliding for renting it out (directly attributable costs for the work: 200.000€, production overheads for the work: 10.000€). The useful life of this building is 20 years.
- Calculation of Asset Costs:
- Recognition Bookkeping Entry
- Subsequent Measurements Bookkeping Entry
The WMB AG lets several apartments in Munich. Because of a rent regulation Act in 20X1 the future rents will decrease. The carrying amount is 10 Mio€ and the apartments can be sold for 9 Mio€. Costs for selling are 100.000€ and the value-in-use is 8.5 Mio€.
yes, there is an indication of a loss. The higher amount is the net selling price with 8.9Mio. Thus:
- Debit impairment losses to credit asset.
Identifiable non-monetary assets without physical substance
Identifyable = Separable from the entity or based on a contract or law
What are the three criteria attributes?
- Identifiable: Separapable or arising from contratual claims or legal rights
- Control: power to obtain economic benefits from the asset as a result of past event
- Future economic benefits → Through selling it and collecting revenues or through own usage and thus economic advantages
What are examples of intangible assets?
- Patent technology
- video and audio material
What are the general recognition requirements?
- Probabale future economic benefits that will flow into the entitiy
- Costs can be measured reliably
What two types of intangible assets do we need to differentiate upon recognition?
- Acquired asset: recognition as intangible asset allowed, as requirement of economic benefit is assumed to be fulfilled
- Self-generated: The asset has to fulfill additional requirements especially related to research and development, in order to determine if economic benefit is given or not.
What kind of costs related to the new services or products need to be expense and cannot be accounted on the asset?
- Start-up, pre-opening costs [IAS 38.69]
- Training costs [IAS 38.69]
- Advertising and promotional cost, including mail order catalogues [IAS 38.69
What kind of intangible assets are for sure not allowed to be recognized?
- Mastheads (imprints)
- publishing titles
- customer lists
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?
What are the consequences of costs recognition?
Depreciation amount changes for the following accounting periods
What role does earnings management play in relation to R&D?
Structuring provisions can be enforced by the managemant to influence the profit loss situtaition of the company. Less R&D more profits, as there are less expenses.
How does initial measurement work?
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?
On 1 January 20X1 an entity acquired a patent for € 500,000. Management measured the amortization of the license at € 100,000 per year. At 31 December 20X3 in response to the entry into the market of a competing firm the entity assessed the recoverable amount of the patent at € 180,000. Determine the carrying amount of the patent at the end of the years 20X1, 20X2 and 20X3. Also show the booking entries in the year 20X3!
Debit Intangible assets to credit cash
Debit amortization to credit asset 100.000
Debit amortization to credit asset 100.000
Debit amoriztaino to credit asset 100.000
Debit impairement 20000 to credit asset 20.000
Assets that are:
- Held for sale in the ordinary course of business
- In the process of production, to be eventually sold
- Materials or supplies that are used to produce a certain finished good
What are exceptions to inventories?
- Work in progress from construction contracts
- Financial Instruments
- Biological Asssets related to agricultural produce at the point of harvest.
- Costs of converstion (if purchased)
- Costs of production (if self-generated)
- For both you can add all costs directly related to preparation of the asset for usage (location and condition)
- Borrowing costs → if qualifying asset → e.g wine
What is the alternative (more common) method of initially measureing costs?
→ Costs can be approximated for interchangeable items
- Weighted average
- First in First Out
- Those items purchased or produced first, are the ones that are going to be sold first. Thus the COGS of those sold goods is based on the first ones
- Last in First out (not allowed under IFRS, but HGB)
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
A retail trader fixes his sale price by adding 25% to the cost of every item purchased. You are informed that opening inventory was 284.400€, purchases were 842.800€ (equal purchase prices for all itmes) and sales were 985.500€. Closing inventory should be
284400 + 842800 -(985500*100/125) = 338300€
In a period of rising prices, the inventory method which is allowed under IFRS and tends to give the highest reported cost of goods sold is:
Liabilities against the entity of uncertain timing and amount
- Present obligations against the company as a result of past event which are probable to result in an outflow of economic benefits
guaranties/warranties, land contamination, pending lawsuits/litigation risks, obligations for personnel and social expenses (e.g. unused vacation days, performance-related remuneration components), leases -> separate standard IAS 17, pensions -> separate standard IAS 1
- A present obligation
- Legal → Lawsuits, legislation
- Lawsuits are present obligation if, when taking into account the best estiamates, an present obligation is more likely than not
- Constructive → Past practise patterns of company or public announcements ⇒ Creating public expectations of certain behavior
- Result of past events
- Something happend before
- No alternative to actually settling the obligation
- Outflow of economic benefits is probable (more likely than not)
- Grouping together provisions of similar type (warranties)
- The amount can be estimated reliably
- Estimation not reliably only in rare cases
- Different methods for estimation can be used
- The entitiy cannot avoide the obligation with future actions
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
How does the initial measurement work?
Best estimate of:
- Amount that the entitiy would rationally need to pay in order to settle the obligation
- Expenditure that entitiy would need to pay at balance sheet date to settle obligatino
What are the types of provisions and how the initial measurement differ between them?
When are we allowed to recgonize reimburesements?
If there is a thrid party (like insureance) which would reimburse the costs of the provision and this compensation is virtually possible.
How do we subsequently measure provisions?
- At each balance sheet date, we review and adjust provisions if they have changed.
An entity wins a lawsuit in 2016 for which a provision of 1 Mio. € was recognized in 2015 for the case of a loss. What are the necessary booking entries?
Debit provisions to credit income
What are the different IFRS (IAS) standarts related to finacial instruments and what do they cover?
Contracts that gives a rise to a financial asset of one entity and a financial liability or equity of another entitiy.
What is an financial asset?
- Equity instrument of another entity
- Deposits, Treasury bonds, accounts receivables
- Forwards or options (Derivatives)
- contractual right to receive cash or another financial asset fron the other party
- Contractual right to exchange financial assets under favorable conditions
What is a financial liabillity?
- Contractual obligation to deliver cash or another financial asset to another entity.
- Accounts payable, bankloans, issuing bonds
- Obligation to exchange financial asset or liabilities for potentially unfavorable conditions
What needs to happen with financial assets upon recognition?
- Equity instrument (shares)
- Ownership of anther company, where shareholder has right to claim profit distribution
- Debt instrument (bonds)
- Because there is interest paid. More like a loan from investor to company.
- For investor this is an asset while for the company this is a liablity
- Derivatives, Options, Forwards
- Value changes depending on development of underlying asset + no or small initial investment which is settled at future date
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?
What is the recognition requirement of financial assets?
The entitiy is allowed to recognize financial instruments once it becomes part to the contractual provision of the instrument (both asset and liability)
Overview (table) subsequent measurement of Financial asset vs financial liabilities
How do we account for dividend payments?
D: Cash C: Income (from dividends)
How do we acount for interest payments?
D: Cash C: Interest Income
How do FVTOCI bookkeping entries look like?
Only affecting subsequent measurements:
- Increases in fair value are book as;
- D: Financial asset C: OCI
- D: OCI to C: Financial Asset
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.
How do we measure derivates?
- Futures or options are only able to be recognized as FVTPL
How do we account for negative developments of the future you bought?
At January 1, 20X1, entity A buys a bond for 10 million Euros which pays interest of 2% per year. The business model is to hold the bond until maturity and the SSPI criterion is fulfilled. The fair value of the bond at December 31 is 9.9 million Euros. What are the booking entires on Jan 1 and Dez 31?
Debit financial asset 10 Mio to credit cash 10Mio
Debit Cash 200.000 to credit income from interest 200000
At January 1, 20X1, entity A buys a bond for 10 million Euros which pays interest of 2% per year. The business model is to hold and sell the bond and the SSPI criterion is fulfilled. The fair value of the bond at December 31 is 9.9 million Euros
Hold and Sell ⇒ FVTOCI
Debit finanicial asset to credit cash 10Mio
Debit cash 200.000 to credit interest income
Debit OCI 100.000 to credit financial asset 100.000
At January 1, 20X1, entity A buys a bond for 10 million Euros which pays interest depending on the value of gold (=SSPI criterion is not fulfilled). The business model is to hold and sell the bond. The fair value at December 31 is 9,9 million Euros and the interest payment according to the price of gold is 300,000.
Hold and sell + sppi not met ⇒ FVTPL
Debit financial asset to credit cash 10Mio
Debit cash 300000 Credit interest income 300.000
Debit Expenses 100000 to Credit financial asset 100000
At January 1, 20X1, entity A becomes party to 1,000 forward contracts to buy 1,000 barrels of crude oil at March 31, 20X3 for 60 Euros per barrel. The fair value at December 31, 20X1 is 2 million Euros because the oil price increased. The fair value at December 31, 20X2 is -3 million Euros because the oil price decreased
⇒ Derivatives ⇒ FVTPL
Debit Financial asset to credit incoome 2000000
Dez 31 2002
Debit expenses 5.000.000 credit finaicial asset 2.000.000
credit financial liability 3.000.000
At January 1, 20X1, entity A buys shares of entity B for 10 million Euros which are held for trading. The fair value at December 31 is 9.9 million Euros and the dividend payment is 200,000 Euros. Determine the booking entries for 20X1!
Debit financial asset to credit cash 10Mio
Debit cash to credit income from dividends 200.000
Debit expenses 100.000 to credit financial asset 100.000
At January 1, 20X1, entity A buys a shares of entity B for 10 million Euros. The entity designates the shares at FVTOCI. The fair value at December 31 is 9.9 million Euros and the dividend payment is 200,000 Euros. Determine the booking entries for 20X1
FV changes in OCI and Dividends in Profit Loss
Same as above
Debit cash to credit income 200.000
Debit OCI to credit financial asset 100.000
4 - Earnings Management
What do you need to be aware of when reading financial statement?
Don't trust the numbers, as accounting is subject to managers judgement on how to present the company. This can be done during the accounting period or at the end.
What are two common but different definitions of earnings management?
- use of managers judgement and structuring provisions to alter financial reporting, to
- misslead some stakeholders about economic peroformance
- influence contractual outcomes that depend on accounting numbers
- "reasonable and legal management decision making and reporting" to
- achieve stable and predictable financial results
- Earnings management is not using illegal activities to manipulate financial statements and report results that do not reflect the reality. ⇒ Called "cooking of books"
How and when does judgement work? (Accouting earnings management)
Jugement is needed if:
- No rules apply to business transactinos
- Rules are wooly
- Rules require estimates
→ Unknow events that have not yet been reported for the company
→ Standarts give discretion to managers to elic managers private information
What is the fade from white to black earnings ^management?
What are structuring provisions (real earnings management)?
What are incentives (reasons) for earnings management?
- Meeting goals
- Prevent debt convenants (at leat 30% equity ratio)
- Quite life
- Manager Buyout's or trying to achieve performance based compensation
- Preparing for investments / Raising capital
- Influence contractual outocomes
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 is the definitinon of financial statement analysis?
Choose, analyze and interprete accounting information of a firm to then determine how well the firm is currently doing or has been doing in the past.
What are the most important earnings figures?
What are the most important cash-flow figures?
Cash flow from operations / Operating Cash Flow
CFO: Cash generated from production and sales of goods and services.
- Deducted need to by any costs directly attributable to the production of these goods or services (variable costs)
Free Cash Flows:
FCF: Cash generated from normal business operation minus any cash outflows on non-current (or capital) assets, e.g. investements in building, equipent, stock, and bonds. All assets that are held longer than one period.
⇒ Represents only the cash flows that are currently (and liquiditly) available for the shareholder.
Cash flow from investing activites
CFI: The amount of cash used for acquisiting of (lon-term) assets such as PPE or investments in entire businesses.
Investments are normally a good sign, because a firm needs them to maintain current capacities and have potential for growth in the future.
Cash flows from financing activites (CFF):
Cash flow results of a companies capital structure (debt and equity).
- Issuing equity to shareholders
- paying dividends
- repurchasement of equity
- repayment of debts
How do we calculate net cash flow?
CFO + CFI + CFF
What are the different financial ratio types you can look at?
- Ability of a firm to satisfy current liabilites with different forms of assets
How are those referece value interpreted?
- Upper part of right side of balance sheet to the asset side
- Lower parts of the right side of balance sheet to the assets side
Share Investment Ratio
In what two ways can investors make money?
- Stock price increases
Non-financial Measures / Ratios
Often not in IFRS consolidated statement, but in a separate report.