MFIN 603 Preparation questions

(a) Qualitative characteristics are defined as an attitude that make information on financial
reports useful to existing and potential investors, lenders, and other creditors for making
financial decisions. This information has decision-making functions which means its
relevance, materiality and faithful representation are three required qualities. Besides
that, to enhance the usefulness of the information, comparability, verifiability,
timeliness, and understandability are also essential qualities.

(b) An asset is one of elements in financial accounting which is related to the value of
economics. Not only individual but corporations own or control with expectations that
assists will provide future benefits. The feature of an asset includes, it is reported on the
balance sheet of the company, also, it might reduce expenses or improve sales,
regardless of whether it's manufacturing equipment or a patent. Assets can be classified
as current, fixed financial or intangible.

(c) Financial statements record activities and financial performances of the company.
Financial statements are used by investors, creditors, and market analysts to evaluate the
health of the company and its potential earnings.
There are three major financial statements are : Balance sheet, income statement, and the
statement of cashflow. The balance sheet provides an overview of assets, liabilities, and
shareholders' equity in time which is generally in the end of reporting period. Income
statement covers a rage of time, which is a year for annual financial statements and a
quarter for quarterly financial statements. The income statement provides an overview
of revenues, expenses, net income, and earnings per share. As for the statement of
cashflow, it measures how well a company generates cash to pay its debt obligations,
fund its operating expenses, and fund investments.
(d) Financial statement footnotes are used as additional information by individuals reading
financial statements. The notes are used to explain the assumptions used to prepare the
numbers in the financial statements as well as the accounting policies adopted by the
company.
(e) The annual reports provide a wide rage of information, not only financial statements, but
some information for its readers who will be able to get a good overview of the
company’s overall performance in the preceding year : a letter from the president or
CEO, performance highlights from the preceding year, performance highlights from the
preceding year, and the format.
(f) Generally accepted accounting principles, or GAAP, a common set of accounting rules,
standards, and procedures that encompass the details, complexities, and legalities of
business and corporate accounting. Public companies in the U.S. must follow GAAP
when their accountants compile their financial statements. GAAP is often compared
with IFRS, which is considered more of a principles-based standard.
(g) Accounting policy choices are rules and guidelines that are selected by a company or the
specific standards that implemented by the company. These choices are used when
preparing financial statements, which is important to follow this framework because it
provides comparable and consistent standard financial statements across years and
relative to other companies.
(h) Accounting policies help employees evaluate accounting transactions in a standardized
manner, it can be defined into two different principles. In U.S., they use Generally
Accepted Accounting Principles (GAAP) as their accounting principle while
International Financial Reporting Standards (IFRS) are the accounting standards used in

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 over 110 countries around the world. GAAP is considered a more “rules based” system
of accounting, while IFRS is more “principles based". Both GAAP and IFRS aim to
provide relevant information to a wide range of users. However, GAAP provides
separate objectives for business entities and non-business entities, while the IFRS only
has one objective for all types of entities. In many companies, accountants may be
examining financial activity and, due to the judgment required in accounting decisions,
these accountants may determine different accounting treatments for the same
transaction.
(i) If an accounting policy is chosen by management, this choice would be backward-
looking sometimes or positive in other days, which means this choice might not
equitable anymore. As a result, the best group to take the chosen responsibility is an
independent board’s. Since one of the purpose of accounting policies is increasing the
comparability of financial statements among international companies and reduce the cost
of raising funds in the international capital market, an independent board is out off these
interests or business, which means it can provide decision and principles fairly and
correctly.
(j) A professional judgement generates a true and fair view of the company’s financial
position and financial performance. In many cases, to reach a conclusion which is relied
with accounting standards, professional judgements provide recommends under these
situations. Besides that, many countries had accounting sandal happened before,
accounting professions have lost their credibility in private companies or the public,
professional judgments’ main elements are accountant’ knowledge and expertise, is
increasingly important in the practice of this profession.
(k) Accountants exercise a high degree of verification and utilize solutions that show the
least aggressive numbers when faced with uncertainty, called accounting conservatism.
This rule has a guideline “losses is recorded as soon as they are qualified, while gains
are only recorded when they are assumed of being realized.” With this principle
undergoing, it brings some advantages to the company. First, accounting conservatism
leads to higher margin of security, which encourages managements to face exaggerated
uncertainty in its decisions. Second, accounting conservatism might lead to objective
book value and make it easier for investors to compare performance across different
markets and periods. Although accounting conservatism achieves some goals, it brings
limitations as well. Firstly, the asymmetric information of the relationship between
income and economic gain and loss can be interpreted. In this case, the management of a
company may manipulate accounting values to their advantage. Secondly, accounting
conservatism leads to income transferring. Transactions that do not meet the reporting
requirements of the current period may be delayed to the next period. As a result, the
shareholders’ complaints might be triggered by accounting conservatism that adopted by
this large public company.