The following text was created as part of the university module “Financial accounting according to IFRS standards”. This work will introduce the financial reporting procedure as well as the legal framework and enable the reader to create (simple) financial statements on his/her own. Several examples and numerical figures as well as visual displays support the understanding. At the end, there is a summary about the balance sheet adjustments and a kind of FAQ (as part of the exam preparation). Please be aware that the international approaches are very similar to the German ones, but are not always the same.
This work is made from the notes taken during lectures and supplemented by additional information and pictures from secondary literature, namely “Financial Accounting – International financial reporting standards”, published by Pearson and written by Walter T. Harrison Jr. and Charles T. Horngreen. Additionally, some information from this book was visually displayed in self-made figures, diagrams and compilations. If an image is not marked otherwise, it's self-created.
Table of Contents
1. Basics
2. Business Activities
3. Financial accounting statements
4. Structure of a balance sheet
5. Components of retained earnings
6. Structure of a cash flow statement
7. Statement of changes in equity
8. Why the financial statement is made
9. Relevance vs. Reliability
10. Organizing a business
11. Transactions and Double-entry system
12. What is a credit and a debit?
13. How to prepare a balance sheet starting with blank sheet of paper
14. Step One: The journal
15. Step Two: The T-Accounts
16. Step Three: The Ledger
17. Step Four: The Trial Balance
18. Step Six: Closing the Books
19. Distinction between accrual and cash-flow accounting
20. When a Revenue is Recognized
21. The Matching Concept
22. Adjustments
23. Five categories of adjusting entries
24. Book Value vs. Market Value
25. Depreciation, Amortization and Depletion
26. Assessing what is a PPE and what's it's value
27. Land as a PPE
28. Lump Sum Purchases
29. The Three Depreciation Methods
30. When to capitalize or to expense
31. Changes in estimates
32. Subsequent Measurements of PPE
33. The Impairment Test
34. How to determine fair value less costs to sell
35. How to determine the value in use / present value
36. Gains and losses on sale of PPE
37. What are intangible assets?
38. When to capitalize or expense intangible assets?
39. Goodwill
40. Inventory
41. Inventory Costs
42. Inventory Methods
43. Principles related to Inventories
44. Doubtful receivables
Objectives and Topics
This work aims to introduce students to the financial reporting procedure under IFRS standards, covering the legal framework and practical preparation of financial statements. It focuses on equipping the reader with the ability to create simple balance sheets, understand accounting entries, and grasp key reporting adjustments required for exam preparation.
- Financial reporting procedures and the IFRS legal framework
- Core concepts: Double-entry bookkeeping, balance sheets, and cash flow
- Depreciation methods and valuation of fixed assets (PPE)
- Inventory valuation (FIFO, LIFO, Average) and impairment testing
- Adjustment entries, accruals, deferrals, and doubtful receivables
Excerpt from the Book
The Three Depreciation Methods
(1) Straight-line depreciation – Used for assets that generate revenue annualy.
Depreciable costs are the purchasing / producing costs minus the estimated residual value (“Schrottwert”).
Depreciable costs divided over the useful lifetime in years reveals the annual depreciation rate.
You need to estimate the useful lifetime as well as the residual value (given in the exam).
Summary of Chapters
Basics: Introduces the necessity of information transformation in accounting and the various stakeholder groups interested in financial transparency.
Business Activities: Categorizes corporate activities into operating, investing, and financing processes essential for financial accounting.
Financial accounting statements: Defines the four primary statements: Income Statement, Balance Sheet, Cash Flow, and Statement of Changes in Equity.
Structure of a balance sheet: Explains the fundamental accounting equation (Assets = Liabilities + Equity) and the dual-sided nature of fund sources and uses.
Keywords
IFRS, Financial Accounting, Balance Sheet, Income Statement, Depreciation, PPE, Goodwill, Inventory, FIFO, LIFO, Accruals, Deferrals, Impairment, Double-entry bookkeeping, Cash flow
Frequently Asked Questions
What is the primary objective of this work?
The main goal is to introduce the reader to the financial reporting procedure based on IFRS standards, enabling them to create simple financial statements independently.
Which accounting framework does this text follow?
The text is specifically based on the module “financial accounting according to IFRS standards”.
What are the fundamental qualities of financial information?
The fundamental qualities are relevance and faithful representation, ensuring information is useful for decision-making.
Which three depreciation methods are described?
The text covers straight-line depreciation, units-of-production depreciation, and double-declining-balance depreciation.
How are internally generated intangible assets treated?
They are generally expensed as research costs unless specific capitalization criteria for development costs are met.
What is the difference between accruals and deferrals?
Deferrals involve cash changing hands before a transaction occurs (cash now, service later), while accruals involve transactions occurring before cash is exchanged (service now, cash later).
How is goodwill handled in accounting?
Goodwill is recorded as an asset when purchasing another company, but it is not amortized; instead, it is subject to annual impairment tests.
Why is the LIFO method not permitted under IFRS?
LIFO is disallowed because it fails to provide a reliable representation of a company's actual inventory flows and lacks representation faithfulness.
- Quote paper
- Mike G. (Author), 2016, Introduction into Financial Accounting according to IFRS, Munich, GRIN Verlag, https://www.grin.com/document/351180
