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Accounting > Limited company accounts > Flashcards

Limited company accounts Flashcards

1
Q

what is a limited company

A

a company owned by its shareholders
separate legal status
can sue and be sued in its own right

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2
Q

what two types of limited company are there

A

Private
public

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3
Q

what are the characteristics of a private limited company

A

has LTD after its name
minimum shareholder of one
cannot sell its shares to the public

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4
Q

what is a public limited company

A

PLC after its name
can sell shares to the general public
can be listed on the stock exchange
minmum share capital of £50,000
needs two documents

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5
Q

what two documents are needed to set up a PLC

A

Memorandum and articles of association
statutory declaration

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6
Q

what is nominal value

A

face value/ par value of shares
decided when setting up the business

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7
Q

what is issued capital

A

nominal share capital issued to share holders
total amount of money raised from selling shares at nominal value

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8
Q

what is share premium

A

finance raised from selling shares above nominal value
nominal value £1 sale price £1.5
premium= 50p

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9
Q

what are ordinary shares

A

owners of a company
most common
full voting rights
referred as equity capital
variable dividends

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10
Q

what are preference shares

A

fixed rate of dividends
entitled to repayment of capital should the company be wound up
not normally have voting rights
safer investment

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11
Q

what is dividends

A

share of companies profit paid to shareholders as a percentage of their shareholding
interim paid half through financial year

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12
Q

what is a debenture

A

bonds recording a long term loan to a limited company
pays a fixed rate of interest on debentures
interest paid whether the company makes a profit or a loss
form of loan capital

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13
Q

what are shareholder funds

A

made up of all share capital of the company plus all reserves

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14
Q

what is loan capital

A

part of the medium to long-term capital of a limited company provided by banks or debenture holders

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15
Q

what is share issue

A

additional shares are offered at market value as a method of raising finance
sell shares to anybody

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16
Q

what are rights issue

A

rising finance by selling shares at a reduced rate to existing shareholders

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17
Q

what are bonus issues

A

making it look like money is being moved around
piggy bank for uni and for car move money from uni piggy bank to car

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18
Q

What is the difference between a limited company income statement and a sole trader?

A

Profit from operations
Profit for the year before tax
Profit for the year after tax

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19
Q

what is profit from operations?

A

earnings from its core business functions for a given period, excluding the deduction of interest and taxes

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20
Q

what is profit before tax?

A

measure that looks at a company’s profits before the company has to pay corporate income tax

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21
Q

what is profit after tax?

A

amount that remains after a company has paid off all of its operating and non-operating expenses, other liabilities and taxes

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22
Q

what should the statement of changes in equity contain?

A

opening equity balances
share issue (including premium)
rights and bonus issue
dividend paid (retained earnings)
profit or loss for the year (retained earnings)
closing balances

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23
Q

what sub-headings will be on the statement of financial position?

A

current assets
non-current assets
equity
current liabilities
non current liabilities

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24
Q

what are the financial statements for limited companies?

A

income statement
statement of changes in equity
statement of financial position
statements of cashflow
schedules of non-current assets

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25
Q

what is an issue of shares?

A

Issued shares are those that the owners have decided to sell in exchange for cash, which may be less than the number of shares actually authorized

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26
Q

what is a rights issue?

A

invitation to existing shareholders to purchase additional new shares in the company

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27
Q

what is bonus issue?

A

an issue of additional shares to shareholders instead of a dividend, in proportion to the shares already held.

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28
Q

what are the reasons for publishing accounts?

A

to report the financial activity of your company at the end of its financial year

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29
Q

what are the benefits of published accounts?

A

helps show a company’s financial strengths and weaknesses.

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30
Q

what are the limitations of published accounts?

A

drawn up on a single day, it is possible to window-dress the data to mask financial problems temporarily.

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31
Q

what are the main elements of published accounts?

A

a ‘balance sheet’, which shows the value of everything the company owns, owes and is owed on the last day of the financial year
a ‘profit and loss account’, which shows the company’s sales, running costs and the profit or loss it has made over the financial year
notes about the accounts
a director’s report

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32
Q

what is IAS1?

A

complete set of financial statements to comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity and a statement of cash flows.

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33
Q

what is IAS7?

A

requires an entity to disclose the components of cash and cash equivalents and to present a reconciliation of the amounts in its statement of cash flows with the equivalent items reported in the statement of financial position.

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34
Q

What is the main purpose of IAS1?

A

So that companies all publish the same information which means financial situation of different companies can be compared more easily

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35
Q

Who are the published accounts of limited companies used by?

A

Shareholders/investors/prospective investors
Customers and Suppliers (Payables/receivables)
Financial analysts/ financial press
Employees/ management
Competitors
Banks and financial institutions
Government
Local community/ pressure groups

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36
Q

What parts of a companies published accounts will a shareholder be interested in?

A

Profits as the amount that might be dividends
Profits retained in reserves (expansion)
Cash flow statement

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37
Q

Why will a shareholder be interested in a companies accounts?

A

As they own a part of the business
Want to maximise financial returns

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38
Q

What part of the accounts will mangers be interested in?

A

Profit figures

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39
Q

Why will mangers be interested in accounts?

A

As this may be how performance is assessed by directors

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40
Q

What is a more likely way a mangers performance will be monitored from published accounts?

A

Performance of relevant section they’re responsible for

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41
Q

What is divorce of ownership from control?

A

Conflict between objectives of shareholders and objectives of mangers

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42
Q

What are the shareholders and mangers objectives?

A

Shareholders= maximise profits
Mangers= maximise sales

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43
Q

What are directors in a company?

A

agents of the company, appointed by the shareholders to manage the company’s day-to-day affair

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44
Q

Why will published accounts be useful for directors?

A

Presenting the form to potential investors in most favourable light

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45
Q

What part of the accounts will be useful for directors?

A

Profits to asses performance
Want profit to be as favourable as possible

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46
Q

What will directors want to hide?

A

How profits have been generated (change in depreciation policy)

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47
Q

Where will hidden changes to increase profit be shown?

A

In the auditors report to the shareholders

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48
Q

What part of accounts will employees be interested in?

A

Profits

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49
Q

Why will employees be interest in profit?

A

Workers may be in a better bargaining position to ask for a wage increase
Jobs may be more secure
Lack of profitability may increase job insecurity

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50
Q

What does a company share scheme allow?

A

Allows employees who participate to benefit from rising profit

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51
Q

What has become more common for employees to do over the last 20 years?

A

Join company share scheme

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52
Q

Why will receivables be interested in published accounts?

A

To see whether or not the firm is likely to be continuing to trade into the future

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53
Q

What is the main indicator that receivables will be interested in?

A

Profits

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54
Q

What might mean customers ask for better price or quality?

A

Is profits are favourable in business to business situation

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55
Q

Why will payables be interested in accounts?

A

To see if the firm is capable of repaying amounts owed

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56
Q

when will most suppliers offer credit?

A

will only offer to a firm after first checking the published accounts of the firm
when the firm has profits or cash resources to repay

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57
Q

what accounts will payables be interested in?

A

current assets of the statement as information about liquidity can be acquired (ability to meet short term debts)

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58
Q

what will banks and other financial institutions check before offering a loan?

A

income statement
statement of financial position

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59
Q

what will loan lenders examine from the statements?

A

profit earned in recent years
forecasted profit
liquid resources (current assets and cash)

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60
Q

will forecasted accounts be published?

A

no but might be requested by by loan lenders

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61
Q

why will the local community want to see the published accounts of companies?

A

as all business effect their local community within which they operate some positive and some negative

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62
Q

what are some external costs that a business has on the local community?

A

pollution
congestions

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63
Q

why will pressure groups be interested in a companies accounts?

A

will want to see if the company is making a profit so they can pressure them into making donations to local causes or changing some activities that impose costs on local community

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64
Q

why will local communities want to see the success of local firms?

A

for employment opportunities
multiplier effects in generating jobs in other firms that may be come suppliers

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65
Q

what accounts will the financial media look at?

A

all of them among with additional information

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66
Q

why are financial media interested in published accounts?

A

will provide forecasts and evaluations on performance to inform potential investors

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67
Q

what headline figures will financial media use?

A

profits
sales
debt

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68
Q

why will the government be interested in a companies published accounts?

A

purposes of taxation
government are decision makers and their forward economic plans are influenced by the performance of all businesses within various sectors in the economy

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69
Q

why will competitors be interested in published accounts?

A

in order to evaluate its financial condition
knowledge they gain could alter their competitive strategies.

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70
Q

why will customers be interested in public accounts?

A

order to judge the financial ability of a supplier to remain in business long enough to provide the goods or services mandated in the contract

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71
Q

What does IAS1 state a company must prepare?

A

income statement
statement of financial position
cash flow statement
statement showing changes in equity
statement of accounting policies and explanatory notes

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72
Q

What does IAS1 require documents to have?

A

financial statements are clearly shown separately from other information shown in corporate report
name of company shown
period covered
currency used and magnitude
no offsetting of income and expense or assets and liabilities
comparative information from previous periods

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73
Q

what is the use of the companies act 2006?

A

provide a simple, efficient and cost effective framework for the operation of companies

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74
Q

what did the 2006 companies act replace?

A

provisions contained in the 85 and 89 companies act

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75
Q

according to the companies act what accounts need to be published for the year?

A

income statement and statement of financial position
directors report
auditors report
groups accounts where applicable
statement of cash flow
notes of summary of significant accounting policies and explanatory information

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76
Q

how many days before the annual general meeting does every company have to send a copy of the account?

A

at least 20 days before

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77
Q

who gets sent a copy of the companies accounts before the annual general meeting?

A

every shareholder
every debenture holder
all persons entitled to receive copies (auditors)
companies house

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78
Q

what does the companies act say about authorised share capital?

A

requirement for authorised share capital is abolished but shares must still have a nominal value

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79
Q

what is the minimum authorised share capital of a public company?

A

£50,000

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80
Q

what methods can be used to communicate with shareholders under C-2006?

A

electronic methods- emails and websites

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81
Q

what is no longer needed under the C-2006?

A

memorandum of association
no requirement to have an object clause

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82
Q

what do the articles of association do?

A

set out the way in which a company conducts its business

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83
Q

what is a model for accounts provided to private limited companies?

A

article of association if they wish to adopt it

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84
Q

what must the directors report include under c-2006?

A

main trends and factors likely to affect future development, performance and position of business
info about environmental matters the company’s employees and social and community issues
info on contractual arrangements

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85
Q

how are the duties of directors controlled under C-2006?

A

set out in law

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86
Q

what is an important aim of companies act and accounting standards board?

A

make it easier to analyse published accounts and compare to other companies

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87
Q

how does C-2006 make it easier to compare and analyse?

A

reducing scope for inconsistency, fraud and misinterpretation

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88
Q

why can investors and shareholders have confidence in calculation of account figures?

A

as the values have been made in accordance with relevant standards and checked by auditors

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89
Q

who is responsible for the shareholders of the company?

A

the directors as they are appointed by shareholders

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90
Q

how are directors usually chosen?

A

major shareholders or voted in by shareholders

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91
Q

what is a directors job?

A

maximize profits/ returns to investors
value of share to rise (shareholder capital gain)

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92
Q

what happens if the business starts performing poorly? (directors)

A

the directors job to ensure the business returns to previous higher levels of performance

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93
Q

what must the directors do if they cannot return to high performance?

A

must give the illusion or look of good performance
window dressing

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94
Q

is window dressing illegal?

A

no

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95
Q

what can they not do with window dressing?

A

lie but can present accounts in the best way possible

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96
Q

why is window dressing done?

A

to make the business look more attractive then it actually is

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97
Q

what are the 2 types of director?

A

executive
non-executive

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98
Q

what is an executive director?

A

actively involved in running part of or all of business

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99
Q

what is a non-executive director?

A

not employees of the company and usually act as independent advisors

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100
Q

what are the directors responsible for?

A

whole process of completing the financial statements ready for publication

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101
Q

what factors must the directors take into account in the decision making process?

A

interests on employees
business relationships with suppliers and customers
impact on community and environment
need to maintain a reputation for high standards of business conduct
need to act fairly between shareholders of the company

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102
Q

what duties do the directors have?

A

act within their powers
exercise independent judgement
exercise reasonable care, skill and diligence
avoid conflicts of interest
not accept benefits form third parties
declare interest in any proposed transactions or arrangements with the company

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103
Q

what is the directors report?

A

report produced by the board of directors summarizing the main activities of the firm
commentary on current and future performance
any subsidiary firms controlled by the company

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104
Q

what are subsidiaries?

A

other firms, usually smaller, that the company owns a large proportion of the shares in

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105
Q

what does the directors report include details on?

A

Main activities of the company during the year and any changes made
Names of all directors and their interests (shareholdings)
Employees statistics/ health and safety information/ employment of people with disabilities
Donations to charitable concerns over the year (political orgs)
Dividends recommended for shareholders
Research and development activities
Any significant changes to fixed assets

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106
Q

what are auditors?

A

Independent of the company and act as unbiased checking device that declare financial information and the companies position is accurately reported

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107
Q

what is the role of the auditor?

A

form an opinion and declare whether a true and fair view is provided
will asses whether the accounting policies used by the firm are appropriate

108
Q

what are auditors entitled to?

A

any information they require to enable them to form an opinion

109
Q

what can auditors never do?

A

state the final accounts are 100% accurate because they can only check the information the company provides them with

110
Q

what do all auditor reports include?

A

respective responsibilities of the directors and auditors
basis of the audit opinion
opinion

111
Q

what will auditors do if they are happy with the published accounts?

A

sign off the accounts as unqualified

112
Q

what is an unqualified auditor report?

A

no further adjustments are needed

113
Q

what might lead to an unqualified auditors report?

A

financial statements prepared properly
they give a true and fair view of a company’s affairs in accordance with IFRS as adopted by EU
info in the directors report consistent with financial statements

114
Q

what is a qualified audit?

A

would mean certain aspects of the firms accounts must be adjusted

115
Q

what can make a audit qualified?

A

if the auditors feel certain parts of the financial statements have not been dealt with correctly and is important enough to be bought to the user of the accounts

116
Q

what is the job of the auditors?

A

ensure the directors do not mislead the general public and existing shareholders

117
Q

what act requires both directors and auditors reports?

A

companies act

118
Q

what is the main difference between auditor and director reports?

A

directors report variable between companies while auditor similar

119
Q

what notes are required by IAS1?

A

basis of preparation of financial statements
information required by international standards
any additional information that is relevant to understanding of financial statements

120
Q

what are notes to the accounts?

A

in effect explanations given to accompany the published accounts
some are legally required
some just help inform potential and current investors

121
Q

what must the notes of account contain?

A

disclosure of accounting policies
turnover/ revenue
directors emoluments
earnings per share
non-current assets
interest
income
rent from land
hire of plant and machinery
auditors remuneration
taxation
particulars of staff
share capital
auditors report
dividends

122
Q

what are accounting policies?

A

decisions made by managers in deciding on which are the most appropriate accounting techniques to use

123
Q

what will disclosure of accounting policies cover?

A

depreciation policy
valuing inventories

124
Q

why shouldn’t accounting policies be changed when decided?

A

as it allows more meaningful comparison between different period

125
Q

what is turnover?

A

the amounts received from the sale of goods and services of what is considered the companies main activities

126
Q

what is income from other forms of income called?

A

non operating income

127
Q

Why might turnover need to be broken down?

A

if the company has different types of sales income
sales vary significantly according to different geographical areas

128
Q

what are directors emolument?

A

earnings of each director of the company

129
Q

what are some examples of directors emoluments?

A

total earnings
pension contributions
fringe benefits (company car)
pensions paid to past directors

130
Q

what is a requirement of companies quoted on the stock exchange?

A

should show their earnings per share

131
Q

how do you work out earnings per share?

A

profits divided by the number of ordinary shares

132
Q

how should NCA be shown in the notes to the accounts?

A

should be shown at cost (or revalued amount if applicable) at the beginning of the year
Additions (purchases) and disposals (sales) during the year must be included
provision for depreciation of NCA at beginning and changes must be included
any revaluation shown in revaluation reserve

133
Q

how should interest be treated in notes to the accounts?

A

interest on bank loans and overdrafts and any other loan must be put in expenses when paid and total shown in liabilities on SFP

134
Q

what is income?

A

amount received form investments on any recognized inventories exchange

135
Q

how should rent form land be treated in notes to the accounts?

A

net amount should be shown it it represents a significant proportion of companys earnings for that year

136
Q

how should hire of plant and machinery be treated in notes to the accounts?

A

amount charged to the years income statement for hire of plant and machinery should be included

137
Q

how should auditors remuneration be treated in the notes to the accounts?

A

amount charged to income statement in respect of fees due to the auditors by the company

138
Q

what details on tax should be included in the notes to the accounts?

A

UK corporation tax
UK income tax
irrecoverable corporation tax
tax attributed to dividends received from other UK companies

139
Q

what details should be included on the particulars of staff?

A

average number of persons employed during financial year
average number of employees within each category of employment
wages and salaries paid in the year
social security costs
other pension costs
number of employees earning over £30,000 within each band of £5,000 over that amount

140
Q

what should the notes to the account do with share capital?

A

authorized share capital
number and aggregated nominal value of each class of share
dates and details for any redeemable shares

141
Q

how are dividends treated in the notes to the accounts?

A

interim paid halfway through year (based on profit reported by company)
Final dividend are paid on the profits based on the results of the whole year being considered
only dividends paid are recorded in financial statements

142
Q

what do published accounts not provide information on?

A

non-financial factors such as quality of the workforce and business location
factors outside businesses control (inflation, exchange rates)

143
Q

what is window dressing?

A

businesses deliberately mislead shareholders and investors to make the business look better or worse than it really is

144
Q

what are some limitations of published accounts?

A

lack of detail
historical information
non-money factors and intangible assets
subjectivity
differences in accounting policy
window dressing

145
Q

why is lack of detail a limitation of published accounts?

A

published accounts only provide a summary of financial position
not on relative performance of different parts of the business
only contain the figures for 2 years so cant make trends

146
Q

why is historical information a limitation of published accounts?

A

info published based on historical data so is outdated when published
so might not be a reliable guide to current or future performance

147
Q

what is the information contained in the financial accounts mainly focused on?

A

factors measured in monetary terms

148
Q

what are some non-financial factors that are important?

A

workforce and management
location
intangible assets

149
Q

why are workforce and management important?

A

quality of people working for business can significantly affect performance

150
Q

how can workforce enhance performance?

A

well trained
highly motivated
flexible
loyal

151
Q

why is the location of a business important?

A

can be benefitted or negatively affected by location does it meet a demand in the locations its based

152
Q

when would you include intangible assets in the accounts?

A

if they have been purchased

153
Q

what assets are extremely valuable to the business but not measured in monetary value?

A

goodwill
brand names
patents
trademarks

154
Q

what will happen if a business doesn’t include intangible assets?

A

SFP will tend to undervalue business

155
Q

what has to be done when dealing with subjective accounts?

A

must be interpreted with care

156
Q

what is an example of subjectivity in accounts?

A

businesses can decide whether to value assets at historical cost or at current market valuation

157
Q

what is differences in accounting policy?

A

businesses have considerable leeway in deciding how to draw up their accounts

158
Q

why can differences in accounting policy be a limitation to published accounts?

A

because different techniques are used comparing accounts of different companies can be misleading

159
Q

how can comparisons of a business overtime be misleading?

A

if a company changes its method of depreciation

160
Q

what reasons might a company window dress their accounts?

A

fend off a takeover bid
attract investment
increase market price of share
lower market price of shares
reduce taxation

161
Q

How can window dressing fend off a takeover bid?

A

by making a company look stronger than it is really shareholders might want to hold onto shares preventing unwanted bids as a string company is expensive to buy

162
Q

how can window dressing attract investment?

A

exaggerating the financial strength of a business it might be possible to persuade potential investors to provide funding

163
Q

how can window dressing increase the market price of shares?

A

if mangers have received a share option that allows a share to be bought at a particular price
profit can be made if share price increases

164
Q

why would a company want to lower the market value of shares?

A

to encourage shareholders to sell shares causing the price to fall allowing directors to buy shares at a lower price knowing the price of shares is false

165
Q

how can window dressing reduce taxation?

A

company might try to disguise the amount of profits it makes in order to reduce the amount of corporation tax paid

166
Q

what ways can accounts be manipulated?

A

earnings management
depreciation
payables and receivables
inventories valuation
asset manipulation

167
Q

what is earnings management?

A

in some industries its possible for a business to choose when to recognise business income

168
Q

why will a business do earning management?

A

by choosing to recognise income in the next financial period current years profit will be reduced so tax liability is reduced

169
Q

how can depreciation be manipulated?

A

companies can choose the method of depreciation to be used in their accounts
so assets can be depreciated faster or slower
higher depreciation reduces profit and value of assets on SFP

170
Q

How can changing a companies depreciation policy for research and development manipulate their accounts?

A

can either write it off immediately as an expense or can capitalise it and treat it as an intangible asset

171
Q

what happens if you change the research and development policy to an intangible asset?

A

depreciated over a period of time

172
Q

what is the difference between immediately writing of depreciation and if expense is capitalised?

A

if written off profits reduced immediately
if capitalised effect is to reduce profits in the future

173
Q

how can manipulation of receivables and payables affect the business outlook?

A

by collecting all debts at the end of the financial year a company
can reduce total receivables on balance sheet
or pay bills to reduce payables

174
Q

What is IAS2?

A

in UK inventories can be valued in different ways either on average cost or most resent inventory

175
Q

What asset manipulation?

A

a way to improve liquidity by selling some NCA and leasing them back provides cash to be used to pay payables
raising liquid capital ratio

176
Q

what is the problem with asset manipulation?

A

long term will likely be expensive

177
Q

what external factors will have a significant effect on turnover and profitability but are not shown on final accounts?

A

economic cycle
government legislation
exchange rates
interest rates
inflation

178
Q

what is the econmic cycle?

A

periods of high demand for a product and business confidence usually followed by recession where demand and investment falls

179
Q

how can government legislation effect turnover and profitability?

A

changes in the law can affect the performance of businesses

180
Q

what is an example of how government legislation affects a business?

A

minimum wage introduced in 1999 raising labour costs for some businesses

181
Q

what is the main area that will be affected by a change in exchange rates?

A

profitability

182
Q

what types of business will be directly affected by a change in exchange rates?

A

businesses that import or export goods and servives

183
Q

what type of will company be indirectly affected by a change in exchange rates?

A

businesses that produce goods with foreign components and those which compete with foreign supplier

184
Q

what happens when interest rates change?

A

the cost of borrowing changes

185
Q

how will the impact of changing interest rates vary between companies?

A

a rise in interest rates will increase costs for a highly geared business with large bank loans may cause a reduction in demand as less demand and disposable income

186
Q

what is inflation?

A

a general and persistent rise in prices

187
Q

how can inflation affect the accounts?

A

hard to make comparisons over time
if inflation high turnover and profit may be overstated

188
Q

how can inflation affect IAS2?

A

assets should be valued at historical cost or NRV but inflation might make replacement cost higher

189
Q

what characteristics should companies that you want to compare have in common?

A

should be in same industry
should be roughly the same size
similar capital structure
performance of business/ info used should be from the same period

190
Q

What does IAS1 require details of?

A

revenue
finance costs
taxation
profit for year after tax

191
Q

when publishing IS what do companies not need to do?

A

not have to give details on individual expenses and overheads as it would give too much info to opposition

192
Q

what can businesses do with expenses and overheads?

A

acceptable to summarise some of the info

193
Q

what 2 ways can expenses be grouped?

A

nature
function

194
Q

what is nature grouping of expenses?

A

more appropriate for manufacturing businesses e.g. raw materials, employees costs, depreciation etc

195
Q

what is function grouping of expenses?

A

commonly used by trading companies
e.g. cost of sales, distribution expenses, sales and marketing, admin expenses etc

196
Q

what does IAS1 say must be on the SFP?

A

property, plant and equipment
investment property
intangible assets
inventory
trade and other receivables
cash and cash equivalents
trade and other payables
tax liabilities
issued share capital

197
Q

what must be included in the further info for the SFP? (Shares)

A

number of shares authorised (if applicable)
number of shares issued that are full or part paid
nominal value per shares or that shares have no value

198
Q

what is a schedule of non-current assets?

A

a summary of what has happened to NCA between beginning of the year and the end of the year

199
Q

what will be on schedule of NCA?

A

assets bought (additions)
assets sold (disposals)
any changes to existing NCA (revaluation/ impairment)
depreciation

200
Q

what is the cost at the start on schedule of NCA?

A

original cost of NCA before depreciation is applied

201
Q

what is revaluation on schedule of NCA?

A

how much NCA have increased in value

202
Q

what are additions on schedule of NCA?

A

any NCA bought throughout the year at cost

203
Q

what are disposals on schedule of NCA?

A

any NCA which has been sold during the year at original cost

204
Q

what is impairment on the schedule of NCA?

A

the loss in value when something negative happens to the asset (fire)

205
Q

what is cost at end on schedule of NCA?

A

total value of all NCA held at the end of the year as valued at cost
after any additions, disposals, revaluation or impairments accounted for

206
Q

what is depreciation at start on schedule of NCA?

A

accumulated depreciation at the start of the year

207
Q

what is disposals of depreciation on schedule of NCA?

A

depreciation that was attached to an asset that has been disposed of needs to be removed as it will be included in start figure but you no longer have asset at the end

208
Q

what is impairment of depreciation on schedule of NCA?

A

if an asset is impaired then remove all previous depreciation and then start depreciating afresh

209
Q

what do you do when an asset is depreciated on schedule of NCA?

A

ignore any previous depreciation

210
Q

what is charge for the year on schedule of NCA?

A

depreciation for the year based on assets held

211
Q

what is depreciation at the end of year on schedule of NCA?

A

depreciation at the start less disposals/ revaluation/ impairment + this years depreciation charge

212
Q

what is net book value?

A

cost at end less depreciation at the end of the year
amount that appears on SFP

213
Q

what is stage one of schedule of NCA?

A

enter the cost of NCA at start of accounting period

214
Q

what is stage 2 of schedule of NCA?

A

if there was a revaluation include this by adding to cost at start only add amount of increase (to or by what amount)

215
Q

what is stage 3 of schedule of NCA?

A

disposals need to be removed at the price paid for them

216
Q

what is stage 4 of schedule of NCA?

A

addition/ cost needs to be entered the same way as revaluation

217
Q

what is stage 5 of schedule of NCA?

A

calculate closing balance of top half of schedule showing closing cost of NCA

218
Q

what is stage 6 of schedule of NCA?

A

insert depreciation provision for the start of the year

219
Q

what is stage 7 of schedule of NCA?

A

disposals so must remove any depreciation involving any sold assets so subtract figure

220
Q

what is stage 8 of schedule of NCA?

A

revaluation/impairment usually start again so remove all depreciation to that asset

221
Q

what is stage 9 of schedule of NCA?

A

calculate depreciation charge for the year this will be added might need to include or remove assets for calculation

222
Q

what is stage 10 of schedule of NCA?

A

calculate total depreciation by subtracting any disposals, revaluation and impairment and add charge for year

223
Q

what is stage 11 of schedule of NCA?

A

NBV calculated cost at end of year minus depreciation at end of year

224
Q

What does IAS7 require?

A

all but small limited companies must prepare a statement of cash flow

225
Q

What does the statement of cashflow show?

A

shows how cash has been generated (cash inflow) and how cash has been spent (cash outflows)

226
Q

What does the cash flow statement focus on?

A

cash inflows and outflows (money movement)
liquidity of business as lack of cash/ poor liquidity that causes a business to fail

227
Q

What are some examples of money in?

A

sales
loans
debentures
shares

228
Q

what are some examples of money out?

A

dividends
purchases (cash)

229
Q

What are the 3 main sections of the cash flow statement?

A

Cash from operations after interest and tax paid
Investing activities of business (purchase of NCA)
Financing activities of the business (increase or decrease in loan/ share capital )

230
Q

What are some cash and cash equivalents?

A

Cash in hand
Money in the bank
Short term high liquidity investments (readily convertible to known cash amount)
Bank overdraft (repayable on demand, component of cash or equivalents)

231
Q

what concept does the cash flow statement use?

A

money measurement

232
Q

what items on the income statement need some judgement?

A

recognition of sales/ revenue
distinction between capital and revenue expenditure
depreciation methods and policies

233
Q

why is money measurement a good concept for cash flow statement?

A

hard to manipulate as cash can be seen as an accurate measure of business success or failure

234
Q

how does the cash flow statement link profit with changes in cash?

A

without profit the company cannot generate cash (unless sells NCA) and without cash it cannot pay bills as they fall due

235
Q

what makes the cashflow statement important in judging financial performances?

A

emphasis on:
liquidity and solvency
investment in assets
financing methods

236
Q

who are the users of the cash flow statements?

A

shareholders
loan/ debenture holders
payables
Managers and employees

237
Q

why will shareholders be interested in the cash flow statement?

A

it demonstrates the ability of the company to generate cash from operating activities and clearly identifies the liquidity of the business
Investment in NCA (increasing profits) leading to increased share price and dividends paid

238
Q

why are loan/ debenture holders interested in the cash flow statement?

A

lenders can see the cash available at the year end thus demonstrating the security of loans and debentures and the likelihood of them being paid

239
Q

why are payables interested in cash flow statement?

A

show liquidity
likelihood of being paid for goods or services provided
see if company is financing themselves through lending (paid before TP) or shareholders (paid after TP)

240
Q

what will payables be able to see in cash flow statement?

A

cash at year end which might be used for future development providing more business for suppliers

241
Q

why will mangers and employees be interested in cash flow statement?

A

highlights state of companies finances that wont be available from IS or SFP

242
Q

what is the point of the bank reconciliation statement?

A

to reconcile the balance as per the cash book with balance as per the bank statement

243
Q

What three areas must cash flow be analysed between?

A

operation
investing
financing

244
Q

What three areas must cash flow be analysed between?

A

operation
investing
financing

245
Q

what are operating activities?

A

the main revenue producing activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees

246
Q

what are investing activities?

A

acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents

247
Q

what are financing activities?

A

activities that alter the equity/ capital and borrowing structure of equity

248
Q

what is part one of the Reconciliation of operating profit, to Net cash flow from operating activity?

A

operating profit (profit before deduction of tax and interest)

249
Q

what is part 2 of the Reconciliation of operating profit, to Net cash flow from operating activity?

A

ADD back depreciation (not real cash expense)

250
Q

what is part 3 of the Reconciliation of operating profit, to Net cash flow from operating activity?

A

ADD loss on disposal/ Minus profit
as actual proceeds will be shown in investing section

251
Q

what is part 4 of the Reconciliation of operating profit, to Net cash flow from operating activity?

A

ADD decrease in inventory/ Minus increase in inventory
Decreased stock improves cash flow as less cash tied up so more cash available

252
Q

what is part 5 of the Reconciliation of operating profit, to Net cash flow from operating activity?

A

ADD decrease in trade and other receivables
MINUS increase in trade and other receivables
decrease shows debts collected quicker so improved cash flow

253
Q

what are other receivables/ payables?

A

accruals and repayments

254
Q

what is part 6 of the Reconciliation of operating profit, to Net cash flow from operating activity?

A

ADD increase in trade payables
MINUS decrease in trade payables
Increase suggests business is delaying payment to suppliers improving short time cash flow

255
Q

what is part 7 of the Reconciliation of operating profit, to Net cash flow from operating activity?

A

Equals cash (used in)/from operations

256
Q

what is part 8 of the Reconciliation of operating profit, to Net cash flow from operating activity? (After sub total)

A

DEDUCT finance costs/ interest paid in the year
Loans and overdraft actually paid (might need working out)

257
Q

what is part 9 of the Reconciliation of operating profit, to Net cash flow from operating activity?

A

DEDUCT taxation paid
Tax actually paid on income for the year (might need working out)

258
Q

What goes on the cash flows from investing activities section?

A

Purchase of NCA (MINUS)
Proceeds from sale of NCA (ADD)
Interest received (ADD)
Dividends received (ADD)
Net cash(used in)/ from investing activities

259
Q

What goes on the cash flows from financial activities section?

A

Proceeds from issue of share capital (ADD)
Repayment of share capital (MINUS)
Proceeds from long term borrowing (ADD)
Repayment of long term borrowing (MINUS)
Dividends paid (MINUS- amount paid in year)
Net cash (used in)/ from financing activities

260
Q

How will revaluation of non-current assets be treated in a cash flow statement?

A

Book entry so no cash movement it will not be entered

261
Q

What will the treatment of a bonus issue of shares be on the cash flow statement?

A

Don’t cause any movement of cash so wont be shown in cash flow

262
Q

what concept is used in the cash flow statement?

A

Money measurement (only money transactions

263
Q

What must you consider when looking at positive cash flow from operating activities section?

A

sub total cash (used in)/from operations (cash from revenue)

264
Q

What can you make a comparison between on the cash flow statement?

A

profit and cash generated from operations and talk about major differences

265
Q

What can the net cash (used in)/from operations tell you?

A

if its a positive figure it shows that the company had been bale to meet its interest and tax obligations

266
Q

What does the investing section of the cash flow statement show?(generally)

A

amount of investment during the year should be a link between cost of investment and increase in loan/share capital

Accounting (30 decks)

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