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Financial Accounting Flashcards

Statement of P&L Statement of Financial Position Double-entry bookkeeping Accounting for standard transactions (78 cards)

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1
Q

What is an asset?

A

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to follow to the entity.

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2
Q

What is a liability?

A

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity embodying economic benefits.

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3
Q

What is the difference between current and non-current assets and liabilities?

A

If the entity does not expected to realise, sell or consume the asset within the next 12 months or its normal operating cycle then it is a non-current asset. IF it does then it’s a current asset.

If the entity expects to settle the liability within the next 12 months or within its normal operating cycle then it’s a current liability. IF it does not expect to do this then it’s a non-current liability.

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4
Q

What is meant by the accruals basis of accounting?

A

It’s a method where a company can record revenue before being paid by its customers and it can also record liabilities/expenses before it has paid them out of the business.

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5
Q

Explain what is the SoFP

A

The Statement of Financial position provides financial information about a company at a point in time.

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6
Q

State the the layout of the Statement of Financial Position

A

Non-current assets
Current Assets

Current Liabilities
Non-current liabilities

Net assets

Equity

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7
Q

Explain the layout of the Statement of Profit and Loss

A

Revenue
Cost of Sales
Gross Profit

Distribution costs
Admin expenses

Operating profit

Finance costs

Profit before tax

Tax costs

Profit after tax

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8
Q

What is the balance sheet equation?

A

Equity is the residual interest in the assets of the entity after deducting all its liabilities

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9
Q

List the standard line items under assets

A

Non-current assets = Property, plant and equipment

Current assets = Inventory, trade receivables and cash

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10
Q

List the standard line items under liabilities

A 
Non-current = bank loan
Current = Overdraft, trade payable and tax payable
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11
Q

List the standard line items under Equity

A

Share capital
Share premium
Retained earnings

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12
Q

What’s the difference between share capital and share premium?

A

The key difference between share capital and share premium is the equity generated through the issue of shares at face value

whereas share premium is the value received for shares that exceed the face value

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13
Q

What are the underlying concepts of financial statements?

A

To be useful, financial information that ‘must be relevant and faithfully represent what it purports to represent’

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14
Q

Explain the financial accounting overview (how do you arrive at financial statements?)

A

1) Start with recording day-to-day transactions such as sales, purchases, cash in and out of the business.
2) Produce a trial balance using this information and make any year-end adjustments to the information.
3) Produce a financial statement of that entity from accounting records and comply with accounting standards.

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15
Q

What must each transaction have in double-entry bookkeeping?

A

Must have an EQUAL and OPPOSITE transaction.

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16
Q

How do you work out the cost of sales for a financial year?

A

C.O.S = Opening Inv + Purchases - Closing Inv

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17
Q

What does the stock take at end of year mean?

A

It means that we have to work out the closing inventory based on opening inventory plus purchases minus cost of sales.

Closing Inv = Openning inv + Purchases - COS

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18
Q

What does accounting software enable us to do?

A

Show ageing

Identify payments to make

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19
Q

What are the classes of PPE?

A
  • Land and Buildings
  • Freehold property
  • Fixtures and Fittings
  • Motor Vehicles
  • Plant and Equipment
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20
Q

What is the Credit/Debit quadrant relating to SoPL and SoFP?

A

YYYY. Debit Credit

SoFP. Assets Liabilities
Equity

SoPL. Expenses Income

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21
Q

What is the purpose of a trial balance?

A
  • Summarises the ledger accounts

- Find error and correct, before a SoPL and SoFP is produced.

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22
Q

Why are year-end adjustments necessary?

A

To ensure that the financial statements give a fair picture of the performance for the period just ended and position of the entity at the end of the period

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23
Q

List the typical year-end adjustments needed on Financial statements

A
  • Accruals
  • Prepayments
  • Depreciation
  • Bad and doubtful debts
  • Interest
  • Taxation
  • Equity dividends
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24
Q

When does an entity need an accrual?

A

It has received goods or services, and has not paid or been invoiced for them before the year end.

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25
When does an entity need a pre-payment?
it has paid for, or has been invoiced for goods or services, and has not received them before the year end.
26
How is the pre-payment amount worked out?
Invoice amount x No. of months after Year End/No. Months covered
27
What is the debit and credit transaction needed when a business receives an invoice?
Debit - Expense | Credit - Trade Payable
28
What are the two methods of measuring inventory on a cost of inventory basis? (not the overall figure from other years but how is the amount worked out)
- FIFO (First in, first out) use up first inventory at price before the new batch at another price. - Average cost (Each time inventory is added, it is then recalculated)
29
How much expense should be recognised each year according to IAS 16 PPE?
Dep expense = Depreciable Amount / Useful Econ life
30
What does depreciable amount mean?
Cost minus residual value at the end
31
What does economic life mean?
How long the asset is expected to be used by the entity
32
How do we work out the net book value?
PPE, at cost - (accumulated depreciation)
33
What are the two types of depreciation methods?
- Straight line (same each year) | - Reducing balance (different amount depending on net book value)
34
How is the depreciation expense calculated using the reducing balance method?
Dep expense = % x Net book value
35
How is a profit/loss calculated on a disposal?
P/L = Sales proceeds - (net book value)
36
Typically, how many adjustments are made per disposal?
4 adjustments Normally: - Debit any cash proceeds - Debit the accumulated depreciation (remove it) - Debit the P/L on disposal - Credit the cost of asset (remove original cost)
37
How is interest expense measured?
Int expense = Interest rate x Outstanding balance
38
If interest is paid during the year, what is the debit and credit transaction?
Debit Interest expense | Credit cash
39
What happens if all of the interest is not paid during the financial year for a loan? (What do we need to debit and credit)
We need to recognise an accrual on the Statement of Financial Position. Debit - interest expense Credit - Interest payable
40
What does PCTCT mean?
Profits chargeable to corporation tax
41
When is Corporation tax typically paid by Small and medium sized businesses?
9 months after year end or in instalments
42
What is a dividend?
Method for companies to distribute profits to shareholders
43
At what point is a dividend recognised in financial statements?
At the point at which the shareholders APPROVE the proposed dividend.
44
What are the two dividend formulas?
Div = Pence per share x Number of shares in issue Div = % x Nominal value x Number of shares in issue
45
What are the two names for Dividend on Statement of FP?
Interim dividend - paid during year | Final dividend - paid after year end
46
What is the debit and credit transaction for: - Dividend paid before year end - Dividend not paid before year end
Before: Debit retained earnings Credit cash After: Debit retained earnings Credit dividend payable
47
What is prudence?
The exercise of prudence means that assets and income are not overstated and liabilities and expenses are not understated. It can also be the other way meaning that they shouldnt be understated.
48
What is impairment?
The effect of events that cause part or all of the historical cost of the asset to be no longer recoverable
49
What do we use to determine the recoverable amount in prudence?
The higher of either: - Value in use or - Net realisable value
50
Whats the going conern assumption?
The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future
51
When is the going concern assumption no longer applicable in prudence?
When a business is no longer going to be in operation in the future. It then goes to a break-up basis and accounting standards do not apply.
52
What does trade receivables mean?
Amount owed by cutomers to a business
53
What are bad debts?
Amounts that are very unlikely to be paid, for example if the customer has gone into administration.
54
How do we remove bad debts from an entity? Using credit and debit transaction
Debit - bad debt expense | Credit - Trade receivables
55
What is a doubtful debt?
Used to cover for unforeseen bad debts as we cannot identify who might not pay. Usually a percentage of the trade receivables balance We make a provision and include it in the SoFP.
56
What is the formula for provision for net trade receivables?
Trade receivables - Provision for Doubtful debts = Net trade receivables
57
How do we calculate the change in Provision for doubtful debts? and what do we do if there is an increase/decrease in PDD
Change in PDD = Closing prov - Opening prov ``` Increase = Increase expense in SoPL Decrease = Decrease expense in SoPL ```
58
What is the 5 step process for bad and doubtful debts?
1) Have all bad debts been written off? 2) Apply doubtful debt percentage to trade receivables 3) Compare new and old provisions and calculate movement 4) Recognise change in provision in SoPL 5) Calculate net trade receivables balance with provision for doubtful in SoFP
59
How is inventory measured when doing a write down?
Inventory is measured at the lower of cost and net realisable value
60
How do we calculate Net realisable value?
NRV = Selling price - Costs to complete - Cost to sell
61
What are three typical causes of a loss in inventory?
1) Beocming obselete/ damaged beyond repair = 0 2) Close to best before/Damaged by saleable = Discounted selling price 3) Requiring remedial work before it can be sold = Selling price minus costs to repair
62
Whats the three step process for calculating NRV of inventory and what do we do with this information?
1) Calculate NRV 2) Compare NRV to cost 3) If Cost > NRV then reduce value of inventory down to NRV. (if not no adjustment is needed)
63
What happens if there is an update to the value of closing inventory through a write down?
Cost of sales figure needs to be adjusted as closing inventory figure has changed.
64
What is the objective of financial reporting? (According to IASB Conceptual Framework.)
The objective of general purpose financial reporting is to provide financial information about the reporting entity that is USEFUL to existing and potential investors, lenders and other creditors in MAKING DECISIONS relating to providing resources to the entity
65
What makes conceptual framework information useful?
- Relevance (difference to decisions of users) - Faithful representation (completeness, neutrality and freedom from error) - Comparability - Verifiability - Timeliness - Understandability
66
What does the statement of pl show?
Shows the financial performance of the entity
67
What does the statement of FP show?
Shows the financial position of the entity
68
What does the statement of changes in equity show?
Reconciles the owners' interest
69
What are the primary statements for a company?
Statement of PL Statement of FP Statement of Changes in Equity Statement of Cash flows
70
What is the definition of Income?
Income is increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.’
71
What are the types of income?
Revenue - ordinary activities | Other income - Not revenue e.g. property sale
72
What is the defintion of expenses?
Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims
73
What is the definition of a liability?
A liability is a present obligation of the entity to transfer an economic resource as a result of past events.’
74
What is the definition of Equity?
equity is the residual interest in the assets of the entity after deducting all its liabilities.’
75
How does the statement of changes in equity look?
``` Balance at start of year Share issue Profit for year Dividends Balance at the end of the year ```
76
What is the rules of debit and credit table?
``` Asset INC DEC Liability. DEC. INC Equity DEC INC Income DEC INC Expenses INC DEC ```
77
Equity is defined in the Conceptual Framework as
The residual interest in the assets of the entity, after deducting all of its liabilities.
78
A Trial Balance is
A summary of the individual ledger accounts balances at the year end

FFMA (2 decks)

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