Ch 6 - Corporate Governance

Question 1

What is CORPORATE GOVERNANCE?

Answer 1

The means by which a company is DIRECTED and CONTROLLED.

Question 2

What has driven the need for REGULATION and GUIDANCE on how companies should be operated and the info they disclose?

Answer 2

Corporate Accounting Scandals have driven the need.

Question 3

What are the different approaches to Corporate Governance?

Answer 3

• Rules based - e.g. US
• Principles based - e.g. UK

Question 4

Can you explain RULES based approach?

Answer 4

Instils the code into LAW and appropriate penalties for transgression.

Question 5

Can you explain PRINCIPLES based approach?

Answer 5

Requires the entity to adhere to the SPIRIT rather than the letter of the code.

Question 6

Corporate Governance Rules suggest COMMITTEES should be used within an entity as control mechanisms by having specialist to co-ordinate, what?

Answer 6

• Internal & external AUDITORS
• Deal with REMUNERATION
• Risk and NOMINATIONS

LEADERSHIP is not a Corporate Governance driven committee

Question 7

What are the 5 elements of the financial statements?

Answer 7

Assets, Liabilities, Equity, Income & Expenses

Question 8

How does the IASBs Conceptual Framework define EQUITY?

Answer 8

The residual interest in the assets of the entity after deducting all its liabilities - shows the net amount invested in the business by the owners.

Question 9

In the accounting equations calculate ASSETS?

Answer 9

Liabilities + Capital

Question 10

In the accounting equations calculate CAPITAL?

Answer 10

Assets - Liabilities

Question 11

In the accounting equations calculate LIABILITIES?

Answer 11

Assets - Capital

Question 12

The IASBs Conceptual Framework identities 2 fundamental qualitative characteristics?

Answer 12

• Relevance
• Faithful representation

Question 13

The IASBs Conceptual
Framework identifies 4 enhancing qualitative characteristics?

Answer 13

• Caparability
• Verifiability
• Timeliness
• Understandability

Question 14

How does the IASBs Conceptual Framework define ASSET?

Answer 14

ASSET
a present ECONOMIC RESOURCE controlled by the entity as a result of past events.

Question 15

Explain an ECONOMIC RESOURCE?

Answer 15

Economic Resource
is a right that has the potential to produce economic benefits

Question 16

What is the objective of financial reporting?

Answer 16

to provide information about the reporting entity that is useful to users in making decisions relating to providing resources to the entity.

Question 17

How does the IASBs Conceptual Framework define LIABILITY?

Answer 17

LIABILITY
as a PRESENT OBLIGATION of the entity to TRANSFER an ECONOMIC RESOURCE as a result of past events.

Question 18

How does the IASBs Conceptual Framework define INCOME?

Answer 18

INCOME
increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims.

Question 19

How does the IASBs Conceptual Framework define EXPENSE?

Answer 19

EXPENSES
decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims.

Question 20

What 3 elements are used in the accounting equation?

Answer 20

• Assets
• Liabilities
• Capital

Assets - Liabilities = Capital

Question 21

What accounting statement does the accounting equation form the basis for?

Answer 21

SOFP - Statement of Financial Position (BS)

It therefore demonstrates the relationships that exist within any business entity.

Question 22

What does Capital Transactions relate to?

Answer 22

Costs incurred that will affect the entity in the long term - could be the purchase of NCA such as buildings, P&M etc

Capital costs will NOT be included as an expense in the SOPL but as a NCA in the SOFP (BS)

Question 23

What does Revenue Transactions relate to?

Answer 23

Revenue transactions relate to expenses that will only affect the entity in the current ac period, example wages, rent, vehicle running costs.

Revenue expenses will be included as expenses in the SOPL and NOT in the SOFP.

Question 24

Explain QUALITATIVE characteristic?

Answer 24

Refers to a quality or attribute that describes a thing based on its non-numerical aspects, meaning it cannot be measured with numbers but rather assessed through subjective evaluation. Involves personal judgement.

Question 25

Explain QUANTITATIVE characteristics?

Answer 25

Expressed as numbers.

Question 26

The Framework identifies 2 FUNDAMENTAL qualitative characteristics of USEFUL INFO what are they?

Answer 26

* Relevance, also (materiality) * Faithful representation, also (completeness, neutrality, free from error) see pg 25 in Cert Book.

Question 27

The Framework identifies 4 ENHANCED qualitative characteristics of USEFUL INFORMATION, what are they?

Answer 27

* Comparability * Verifiability * Timeliness * Understanding

Question 28

Can you give a brief understanding of MATERIALITY?

Answer 28

According to the Framework, information is material if its omission or misstatement could influence the decisions of users.

Question 29

Explain COMPARABILITY as an Enhanced Qualitative Characteristic?

Answer 29

Users must be able to compare financial statements over a period of time in order to identify trends in financial position and performance. In order to achieve comparability, similar items should be treated in a consistent manner from one ac period to the next and from one entity to another.

Question 30

Explain VERIFIABILITY as an Enhanced Qualitative Characteristic?

Answer 30

Verification can be direct or indirect. Direct verification means verifying an amount through direct observation, counting cash. Indirect verification means checking the inputs to a model, formula, i.e. recalculating inventory amounts using the same cost-flow assumption such as first-in, first-out method.

Question 31

Explain TIMELINESS as an Enhanced Qualitative Characteristic?

Answer 31

Timeliness means having info available to decision makers in time to be capable of influencing their decisions. Generally, the older the info is the less useful it becomes.

Question 32

Explain the Historical Cost Convention?

Answer 32

Normally, transactions are recorded at historical cost. For example, the cost of raw materials purchase from a supplier, or the cost of a machine purchase for use int he business entity as well as sales transactions THEY WILL BE recorded at the agreed monetary value when the transaction takes place.

Question 33

Explain the reasons / theory behind Capital Maintenance?

Answer 33

Example the entity bought 10,000 widgets for £10 each and sold them for £10.50 you would think there is a £5,000 profit however what if the price of replacing that inventory has gone up by to £11 per widget you now haven't got a profit and not enough capital to replace inventory. Your business has just SHRUNK. Therefore the historical cost concept overstates profits and understates statement of financial position asset values.

Question 34

Why is Capital Maintenance therefore important?

Answer 34

It implies profit is only earned if the value of the entity's net assets or operating capacity has increased during the Ac Period.

Question 35

With regard to Capital Maintenance what does the Framework make reference to?

Answer 35

FINANCIAL CAPITAL MAINTENANCE :- profit is made only if the financial amount of net assets at the end of the reporting period exceeds the amount at the start of the period PHYSICAL CAPITAL MAINTENANCE :- profit is made only if the physical productive capacity of the entity exceeds the physical productive capacity at the start of the period.

Question 36

What are the alternative bases other than historical used for some transactions?

Answer 36

FAIR VALUE :- considered the market value of an item (what price could it be sold NET REALISABLE VALUE :- this is the estimated selling price of an item, less any further costs that must be incurred to sel the item.