Chapter 6

Question 1

Purpose of Financial Accounting

Answer 1

• identifies, measures, records and communicates information
• provides financial information to stakeholders
• ensures the publication of statutory accounts

Question 2

Content of Statutory Accounts

Answer 2

• narrative reports from chairman and chief executive
• strategic reports covering strategy, business model, risks and corporate responsibility
• legal requirements
• financial accounts

Question 3

Components of Financial Statements

Answer 3

• balance sheet
• income statement
• cash flow position

Question 4

Companies Act 2006

Answer 4

Requirements:
- adequate accounting records
- accounts preparation duties for directors
- consistent financial reporting within a group

Question 5

Financial vs Management Accounting

Answer 5

Financial : external focus, records transactions and presents financial statements to stakeholders

Management : internal focus, uses financial and other data to aid managers in fulfilling responsibilities

Question 6

Financial Accounting

Answer 6

• relies on daily transactional data for financial statements
• reports financial impact of events organisation wide
• based on historical transactions, not future
• regulated by law (Companies Act 2006)
• audited by external bodies

Question 7

Management Accounting

Answer 7

• uses transactional data plus other info
• segmented information
• includes historical data but emphasises forecasting
• no external regulatory constraints
• kept private, not disclosed publicly

Question 8

Owners

Answer 8

Individuals, members, partners or shareholders

Needs financial information to assess the performance of the business and decide on capital investments

Question 9

Directors and Managers

Answer 9

Responsible for overall management of the business

Uses financial information to evaluate strategic objectives and resource efficiency

Question 10

Employees

Answer 10

Interested in job security

Uses financial information to assess organisational performance and wage stability

Question 11

The Public

Answer 11

Potential investors, pressure groups and job seekers

Interested in monitoring the organisation’s activity and performance

Question 12

Other Bodies

Answer 12

• tax authorities
• financial analysts
• creditors and lenders
• competitors
• brokers
• customers

Question 13

Shareholders Equity

Answer 13

Represents shareholders’ stake in the company

Total Assets - Total Liabilities

Question 14

Regulatory Capital

Answer 14

Regulatory Capital : equity + long term debt

Question 15

Deprectiation

Answer 15

Allocation of tangible asset costs over its useful life
Reflects value usage and impacts profit calculation

Question 16

The Accounting Equation

Answer 16

Assets = Equity + Liabilities

Question 17

Double-Entry Principle

Answer 17

Records financial transactions reflecting two-fold effects
Ensures the accounting equation remains balanced

Question 18

Balance Sheet

Answer 18

Statement of net wealth at a specific time

Assets = Equity + Liabilities

Difference between assets and liabilities is shareholders’ equity

Question 19

Assets

Answer 19

Non-Current Assets : held for more than one year (goodwill, property, investments)

Current Assets : used within twelve months (stock, cash, debtors)

Question 20

Liabilities

Answer 20

Non-Current Liabilities : payable after twelve months

Current Liabilities : payable within twelve months

Question 21

Long-Term Sources of Finance

Answer 21

• bank loans
• mortgages
• bond issues
• shares
• retained profits

Question 22

Income Statement (Profit and Loss Account)

Answer 22

Shows profit or loss over the financial year

Total Income - Total Expenses = Profit

Question 23

Gross Profit

Answer 23

Turnover - Cost of Sales

Question 24

Components of Profit

Answer 24

Financial Income
Financial Costs
Overheads
Taxation

Question 25

Movement in Equity

Answer 25

Reserves increase with profit, decrease with dividends IFRS requires reporting movements (foreign currency adjustments etc)

Question 26

Insurance Broker Accounts

Answer 26

Revenue from commission and client fees Balance Sheet : Non-Current Assets - office equipment, property Current Assets - bank premiums, commissions owed Liabilities - premiums owed to insurers, business loans

Question 27

Insurance Company Accounts

Answer 27

Include 2 years data for comparison Differ from broker accounts in complexity and regulations

Question 28

Profit vs Cash Flow

Answer 28

Profit - difference between total income and total expenses Cash Flow - movement of cash inflows and outflows

Question 29

Importance of Financial Statements

Answer 29

Cash Flow : shows ability to generate cash Income : reflects trading conditions Balance : demonstrates financial strength (assets vs liabilities)

Question 30

Format of Cash Flow Statements

Answer 30

Operating : cash generated by trading activities, including tax Investing : cash inflows/outflows from investments Financing : changes in loans, share capital and dividends payments

Question 31

Management Accounting Purpose

Answer 31

- helps design systems align with business objectives - provides information on key operations like costs, procurement, sales and performance - aids decision-making to achieve business goals

Question 32

Budgets and Zero-Based Budgeting

Answer 32

Annual budgets set for profit and cost centres Primarily used for financial control

Question 33

Increase/Decrease in Cash and Cash Equivalents

Answer 33

Sum of operation, investing and financing cash flows shows net change in cash IFRS requires insurance companies to include long-term business cash flows