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AAT Level 4 > Financial Statements > Flashcards

Financial Statements Flashcards

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1
Q

Statement of Profit & Loss and Other Comprehensive Income - Description

A

Provides information on the performance of a business as well as the gains and losses that are not recognized in profit or loss

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2
Q

Statement of Financial Position - Description

A

Shows the assets and liabilities of the company

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3
Q

Statement of Changes in Equity - Description

A

Provides information about how the equity of a company has changed over a period

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4
Q

Statement of Cash Flow - Description

A

Shows the movement of cash into and out of the business

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5
Q

Users of Financial Statements

A

Bank - Lending, security, they want your custom
Suppliers - Credit terms, amount of supply
Shareholders - Return on their investment, whether to buy or sell their inventory
HMRC - VAT, corporation tax, PAYE, NI, imports & exports
Employees - Job security, room for growth
Directors - Decision making, performance related bonuses

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6
Q

Statement of Profit & Loss and Other Comprehensive Income - Layout

A

Revenue
(Cost of Sales)
= Gross Profit
(Distribution Costs)
(Admin Expenses)
= Profit From Operations
(Finance Costs)
= Profit Before Tax
(Income Tax Expense)
= Profit For The Period

Other Comprehensive Income
Revaluation Gain
= Total Comprehensive Income For Year

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7
Q

Statement of Financial Position - Layout

A

Non-Current Assets
Property, Plant & Equipment
Intangible Assets

Current Assets
Inventories
Trade & Other Receivables
Cash & Cash Equivalents

Total Assets

Equity
Share Capital
Share Premium Account
Retained Earnings
Revaluation Surplus
Total Equity

Non Current Liabilities
Long Term Loans or Debentures

Current Liabilities
Trade & Other Payables
Bank Overdrafts
Tax Payable

Total Liabilities

Total Equity & Liabilities

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8
Q

IAS 1

A

Requirements For Company Financial Statements
SPL + other comprehensive income
SFP
Statement of changes in equity
Statement of cashflows
Notes to the accounts

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9
Q

IAS 2

A

Inventories
Inventory is valued at the lower of cost or net realisable value
Cannot use LIFO

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10
Q

IAS 36

A

Impairment Of Assets
Compare carrying amount against the greater of
Fair selling value
Value in use

Dr - Impairment expense
Cr - Asset

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11
Q

IAS 16

A

Property, Plant & Equipment
Cost = purchase price + directly attributable costs
NOT TRAINING
Land is not depreciated

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12
Q

Revaluation

A

IAS 16 - Property, Plant & Equipment
Reverse accumulated depreciation
Correct asset
Complete double entry
Bottom of P&L For Info Only

IF INCREASED VALUE
Dr - accumulated depreciation
Dr - asset
Cr - revaluation

IF DECREASED VALUE
Dr - accumulated depreciation
Dr - revaluation (if there is anything in the reserve)
Dr - expense
Cr - asset

Must revalue entire class of assets, cannot pick and choose

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13
Q

Debt Financing

A

Loan, mortgage, overdraft

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14
Q

Equity Financing

A

Selling shares in the company

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15
Q

Debt Financing - Advantages

A

Can improve credit score

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16
Q

Debt Financing - Disadvantages

A

Interest, admin fees
Committed to a repayment
Application process / acceptance
Effects their ratio analysis

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17
Q

Equity Financing - Advantages

A

No credit checks
More people in the company - more knowledge

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18
Q

Equity Financing - Disadvantages

A

More people to agree on decisions
More people to pay dividends to
Dilution of control

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19
Q

Nominal Value Of Shares

A

The set price of a share, decided when the company is formed

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20
Q

Share Premium

A

Anything paid over the nominal value

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21
Q

Issuing Shares - Double Entry

A

Dr - Bank
Cr - Share Capital
Cr - Share Premium

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22
Q

Issuing Bonus Shares - Double Entry

A

Dr - Share Premium (IF AVAILABLE) / Retained Earnings
Cr - Share Capital

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23
Q

Dividends - Double Entry

A

Dr - Dividends
Cr - Bank

Dividends can only be accounted for when ACTUALLY PAID

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24
Q

IFRS 16

A

Leases
Long term rental, right to use asset but does not belong to us.

1) Account for asset (deposit & liability)
Dr - Asset
Cr - Lease Liability / Bank (deposit)

2) Work out depreciation policy over the right of use period

3) Unwind the liability - account for payments & interest each year
Payment
Dr - Lease Liability
Cr - Bank
Interest
Dr - Finance Costs
Cr - Lease Liability

4) Split the liability into current and non current
Paying In Advance
CL = Payment
NCL = Difference

Paying In Arrears
CL = Difference
NCL = Next Years Balance

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25
Excess Depreciation Journal
IAS 16 - Property, Plant & Equipment To adjust retained earnings due to excess depreciation from revaluation - to keep shareholders happy with dividends Dr - Revaluation Reserve (If funds allow) Cr - Retained Earnings
26
Disposal Of Revalued Asset
If there is any money in the revaluation surplus, this will be moved to retained earnings Dr - Revaluation Reserve Cr - Retained Earnings
27
Gross Profit Margin
Gross Profit / Revenue X 100 = % For every £1 of sales, the % converted to gross profit ONLY SALES & COST OF SALES
28
Operating Profit Margin
Operating Profit / Revenue X 100 = % For every £1 of sales, the % converted to operating profit DISTRIBUTION & ADMIN EXPENSES
29
Net Profit Margin
Net Profit / Revenue X 100 = % For every £1 of sales, the % converted to net profit TAX
30
Specified Expense Ratio
Specified Expense / Revenue X 100 =% For every £1 of sales, the % spent on a specific expense
31
Return On Capital Employed
Profit From Operations / Capital Employed X 100 = % Shows profit made from long term funding / investment Capital Employed = Total Equity + NCL OR Total Assets - CL
32
Return On Net Assets OR Shareholders Funds
Net Profit / Equity X 100 = % Showing the profit made (goes to retained earnings) from equity only
33
Asset Turnover
Revenue / Capital Employed = no of times The amount of times the long term funding is converted to revenue Capital Employed = Total Equity + NCL OR Total Assets - CL
34
Non Current Asset Turnover
Revenue / NBV of Non Current Assets Shows how much revenue is generated from assets
35
Total Asset Turnover
Revenue / Total Assets Shows how much revenue is generated from assets
36
Current Ratio
Current Assets / Current Liabilities = X:1 How the many times the Current Assets would cover Current Liabilities Ideal 2:1 Measure of liquidity
37
Quick Ratio (Acid Test)
Current Assets - Inventory / Current Liabilities = X:1 How the many times the Current Assets, without inventory, would cover Current Liabilities Inventory is the least liquid / slowest moving asset Ideal 1:1 Measure of liquidity
38
Inventory Holding Period (Inventory Days)
Closing Inventory / Cost of Sales X 365 = X Days Average days inventory is held in the stock room
39
Inventory Turnover
Cost of Sales / Closing Inventory How many times the stock room has been refilled
40
Trade Receivables Collection Period (Receivable Days)
Trade Receivables / Credit Sales X 365 = X days The average time to collect money from credit customers Puts pressure on credit control
41
Trade Payables Collection Period (Payable Days)
Trade Payables / Cost of Sales X 365 = X days Average time to pay credit suppliers
42
Working Capital Cycle
Inventory Days + Receivable Days - Payable Days The days the company has to fund itself
43
Interest Cover
Profit From Operations / Finance Costs The amount of times the profit can cover the finance costs
44
Gearing Ratio
Non Current Liabilities / Equity + Non Current Liabilities X 100 = % The % of the company that is funded by debt High gearing = High risk
45
IAS 38
Intangible Assets
46
What is an Intangible Asset?
An asset with no physical form Must either: Be capable of being separated or divided from entity Arise from contractual or other legal rights Cost can be measured reliably (have invoice for it) Internally generated intangible assets cannot be recognized Amortise - Not Depreciate
47
When Does Research Become Development?
Research cannot be capitalised Development can be capitalised if: Probable future economic benefits Intention to complete and use / sell Resources adequate to complete and use / sell Ability to use / sell Technical feasibility Expenditure can be readily measured
48
Amortisation Double Entry
Dr - SPL - Amortisation Expense Cr - SFP - Accumulated Amortisation
49
Performance Indicator Written Question Model Answer
Introduction - repeat the question back Write one sentence describing each ratio State whether there has been an increase / decrease, use figures and percentages State if there is an ideal and how they compare State any possible reasons for the changes Conclusion - State whether the performance has improved / declined, state areas of concern which require further investigation
50
Underlying Assumption
Going Concern Assumes that the entity will continue in operation for the foreseeable future
51
Fundamental Qualitative Characteristics
Relevance Faithful representation
52
Enhancing Qualitative Characteristics
Comparability Verifiability Timeliness Understandability
53
IAS 12
Income Taxes Accrue for tax paid using accruals
54
IFRS 15
Revenue From Contracts With Customers COPAR 1. Contract 2. Obligations 3. Price 4. Allocate price into obligations 5. Recognise revenue when obligation is satisfied
55
Indicators That Control Has Passed To The Customer (Satisfied Obligation)
Customer has physical possession of the asset Customer has significant risks and rewards of ownership Customer has the legal title The seller has a right to payment
56
IAS 37
Provisions, Contingent Liabilities & Contingent Assets
57
Provision Definition
A liability where there is uncertainty regarding either the exact amount and/or the timing of the payment Need to be estimated using a best estimate
58
When To Recognise A Provision?
IAS 37 If there is an obligation If it is probable that there will be an outflow of economic benefits (money) If the outflow of economic benefits can be reliably measured (best guess) A provision cannot be made for future operating losses
59
Provisions - Double Entry
IAS 37 DR - Expense (SPL) CR - Provisions (SFP) - Payables When paid: DR - Provision (SFP) CR - Bank (SFP) At year end, re estimate the provision and adjust if required
60
Contingent Liability
IAS 37 A possible obligation, the outcome will be determined by future events outside of their control An obligation which cannot be reliably measured will also be treated as a contingent liability
61
Contingent Asset
IAS 37 A possible asset, the outcome will be determined by future events out of their control
62
How To Account For Contingent Assets / Liabilities?
IAS 37 It is not recognised in the financial statements (No double entry) Should be disclosed in the notes - brief description and estimated financial effect
63
IAS 10
Events After The Reporting Period Events which occur between the SFP date and the date accounts are sent to companies house (9 months + 1 day)
64
Examples of Adjusting Events
IAS 10 Post year end court case Bankruptcy of a credit customer Sale of inventory at less than cost Discovery of fraud / error in statements
65
Examples of Non-Adjusting Events
Mergers and acquisitions Reconstructions The issue of shares or debentures Purchase / sale of NCA or investments Loss of assets as a result of catastrophe Dividends (only accounted for when paid)
66
Cash Flow From Operating Activities Layout (Profit Before Tax)
Profit before tax Adjust for: Depreciation (Gain)/Loss on disposal of PPE Finance Costs (Investment Income) (Increase)/decrease in inventory (Increase)/decrease in receivables Increase/(decrease) in payables = Cash generated from operations (Tax Paid) (Interest Paid) = Net Cash From Operating Activities
67
Cash Flow From Operating Activities Layout (Profit From Operations)
Profit from operations Adjust for: (Gain)/Loss on disposal of PPE (Investment Income) (Increase)/decrease in inventory (Increase)/decrease in receivables Increase/(decrease) in payables = Cash generated from operations (Tax Paid) (Interest Paid) = Net Cash From Operating Activities
68
Statement of Cash Flows Layout
Net Cash From Operating Activities Cash Flows From Investing Activities (Purchase of PPE) Proceeds from sale of PPE Interest Received Dividends Received = Net cash from investing activities Cash Flows From Financing Activities Proceeds from issue of shares Proceeds from long term borrowing (Dividends paid) = Net cash from financing activities Net increase / (decrease) in cash Cash at beginning of the year = Cash at end of the year
69
Consolidation Workings (SFP)
W1 - Group structure - who owns who? W2 - Goodwill - Difference between what was paid and what we physically get - Compare cost of investment + NCI against Equity W3 - Consolidated retained earnings W4 - Value of NCI - W2 + W3
70
How To Calculate Consolidated Retained Earnings
R/E as per question (R/E at purchase) = After purchase R/E Transfer % To Parent From Sub (Impairment) (PURP Adjustment For Seller) = Group Retained Earnings
71
Provision For Unrealised Profit Adjustment (PURP)
1. Who was the seller? 2. How much profit is in the sale? 3. How much is still in inventory? (%) Reduce inventory and profit by 2 x 3
72
Consolidation Workings (SPL)
1. Look for inter company transactions (sales, dividends) 2. PURP Adjustment - reduce profit & inventory 3. Group Structure (% of ownership) 4. Profit share working Profit for Sub From Question (PURP) X NCI % = Sub Profit Parent Profit = balancing figure
73
Measurement - Conceptual Framework
Measurement - Determining the monetary amounts items are recognised in the financial statements Historical cost - Assets are recorded at the value of the cost incurred to acquire them plus any transaction costs Current value: - Current cost - the amount it would cost to currently replace the asset - Fair Value - the amount you would get for selling the asset - Value in use - the amount the asset will generate for the business
74
The Elements of Financial Statements
Assets - present economic resource controlled by the entity, as a result of past events Liabilities - present obligation to transfer economic resource, as a result of past events Equity interest - what is left after all liabilities Income - consists of revenue and gains Expense - expenditure and losses

AAT Level 4 (7 decks)

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