Introduction to financial reporting Flashcards
(42 cards)
1
Q
What is Financial accounting?
A
- production of financial statements for external users
- report of the directors’ supervision of funds entrusted to them
- help investors compare which company to invest in and compare their investments
- IASs and IFRSs help reduce differences in ways companies draw up financial statements in different countries
- are public documents and dont reveal details
2
Q
What is Management accounting?
A
- management need more detailed and up to date information to control the business
- management accounts present information in a way that is useful to management
- Management accounting is essential part of management activity concerned with identifying, presenting and interpretating information used for:
- formulating strategy
- planning and controlling activities
- decision making
- optimising the use of resources
3
Q
What is a Sole trader?
A
- owned and operated by one person
- no legal distinction between owner and business
- owner gets all profits but fully liable for debts and losses
- capital account represents financial interest of the owner
- owner can add more funds to capital account or profits made
- capital account can be reduced by making ‘drawings’ or through losses
4
Q
What is a Partnership?
A
- owner/s receive all profit but have full liability of losses and debts
- can have between 2 to 20 partners
- joint owners/partners are jointly liable for losses
- each partner has financial interest in the business, which is divided between capital account and current account
- capital account is normally fixed and only changes when partners join or leave
- current account includes share of profit or losses each partner is entitled to minus any personal drawings made by a partner
5
Q
What is a Limited Liability company?
A
- seperate legal entity to the owners through the process of incorportation
- owners (shareholders) invest capital into the business in return for shareholdings that entitles them to a share of the residual assets
- shareholders not personally liable for debts but may loose investments
- company is not affected by insolvancy (or death) of individual shareholders
- capital structure is more formalised
- shareholders cant make drawings from the business
- shareholders receive return on their investment through dividends paid in the form of accumulated profits
6
Q
How do Sole traders operate?
A
- Accounting conventions recognise business as seperate entity to owner however legally they are the same
- business debts that cant be paid have to be done so through sale of personal assets
- are usually small as they rely on financial resources of the owner
- advantages are flexibility and autonomy (independence)
- can manage the business however they want and can introduce or withdraw capital whenever they want
7
Q
How do Partnerships operate?
A
- personal assets of partners may have to be used to pay debts
- main advantage is there is more than one owner meaning:
- more resources available; capital, specialist knowledge, skills and ideas
- administrative expenses less due to economies of scale
- partners can substitute for each other
- can introduce or withdraw capital whenever as long as partners agree
8
Q
What are the Property holdings of companies?
A
- property of limited company belongs to company
- change of ownership of shares doesnt effect ownership of company property (in partnerships property belongs to partners so they can take their share if they leave)
9
Q
What are the Transferable shares of companies?
A
- Shares can usually be transfered without consent of other shareholders
- in partnerships, partners cant be introduced without consent of existing partners
10
Q
What is the difference in Suing and being sued?
A
- As seperate legal entities Limited companies can sue and be sued in its own name
- Judgements relating to companies dont effect the members personally
11
Q
What is Security of Loans in companies?
A
- Companies are more likely to get loans and secure them with floating charges
- Floating charge = mortgage over constantly varying assets of a company providing security for lender of money
- Floating charge used when company doesnt have any non-current assets but large valuable inventories
- Law doesnt allow partnerships or individuals to secure loans with floating charge
12
Q
What is Taxation of companies?
A
- Companies are taxed seperately to shareholders as they are seperate legal entities
- Partners and sole traders personally liable for income tax on profits
13
Q
What are the disadvantages of incorporation
A
- when company is formed, have to register and file formal constitution documents with registrar, registration and legal costs have to be paid
- required to produce annual financial statements and have to be audited
- registered company accounts and certain other documents are open to public
- limited companies have strict rules on introduction and withdrawal of capital and profits
- members cant take part in management unless they are directors
*
14
Q
Which document has the foundation of the preperation of financial statements?
A
Conceptual Framework for Financial Reporting
15
Q
Who prepares the Conceptual Framework for Financial Reporting
A
International Accounting Standards Board
IASB
16
Q
What does the Conceptual Framework for Financial Reporting present?
A
the main ideas, concepts and principles which all International Financial Reporting Standards and Financial statements are based on
17
Q
What decisions does the Conceptual Framework for Financial Reporting include?
A
- objectives of financial reporting
- Qualitative characteristics of useful financial information
- definition, recognition and measurement of elements from which the financial statements are constructed
- the arruals (growth) and going concern concepts
- the concepts of capital and capital maintenance
18
Q
What is the objective of financial reporting?
A
is to provide financial information about the organisation to users of the financial statements, that is useful in making decisions about providing resources to the organisation and other financial decisions
19
Q
What are the concepts of fair presentation?
A
- compliant with relevant laws and regulations
- compliant with relevant financial reporting framework
- apply the qualitative characteristics of framework as far as possible
20
Q
Who are the main users of financial statements?
A
- Customers
- Suppliers
- Lenders
- Government
- The public
- Employees
- Investors
21
Q
What are the investors interested in?
A
- potential profits and security of their investment
- future profits estimated from past performance shown in Statement of Profit or Loss
- security of investment shown by financial strength and solvency of company in Statement of Financial position
- Largest and most sophisticated group of investors are institutional investors
22
Q
What are Employees and trade unions interested in?
A
- if employer can offer secure employment and offer pay rises
- have an interest in saleries and benefits of senior management
- info on divisional profitability useful if business is threatened with closure
23
Q
What are Lenders interested in?
A
- need to know if they will be repayed
- depends on solvancy of company shown in Statement of financial position
- Long-term loans backed up by security of assets, value of assets shown in Statement of financial position
24
Q
What are Government agencies interested in?
A
- need to know how economy is performing to plan financial and industrial policies
- Tax authorities use financial statements to calculate tax payable
25
What are Suppliers interested in?
* need to know if they will be paid
* new suppliers require info on financial health before agreeing to supply goods
26
What are Customers interested in?
* need to know if company can continue to supply goods in the future especially if they count on the company for specialised goods
27
What is The public interested in?
* may want to assess the effects of the company on the economy, local environment and community
* may contribute to providing jobs
* companies may run corporate responsibility programmes that public may be interested in
28
What do Management and competitors use financial statements for?
to make economic decisions
29
What do managers use as their main source of financial information?
management accounts
30
What are the five key elements that must be summarised in financial statements?
* Assets
* Liabilities
* Equity
* Income
* Expenses
31
What is a non-current asset?
* any tangible or intangible asset acquired on a long-term basis to be used in providing a service to the business
* usually over 12 months
* not held for resale in the normal course of trading
32
What is a current asset?
* Assets expected to be used in the business normal course of trading
* disclosed in the statement of financial position with the least liquid item first (usually inventory)
33
What is a non-current liability?
* long-term liability payable more than 12 months after the reporting date
34
What is a current liability?
* liabilities payable within 12 months of the reporting date
35
What are the components of the Statement of financial position?
* summarises assets, liabilities and equity balance of the business at end of reporting period
* used to be called 'balance sheet'
* standard format
* assets and liabilties classified into current and non-current
36
What are the components of the Statement of Profit or Loss?
* summarises revenues earned and expenses incurred throughout the reporting period
* used to be called 'profit and loss account'
* groups expenses together based on their function
* items accounting for in arriving at profit are recorded as having been realised (completed)
* for limited companies there may be another section for other comprehensive income
* includes unrealised gains and losses and are seperately disclosed to get total comprehensive income for the year
* revaluation surplus = when company accounts for increase in value of land/buildings
* profit for the year and items ofother comprehensive income are reflected in statement of financial position and statement of changes in equity
37
What are the components of the Statement in changes in equity?
* summarises the movement of equity balances (share capital, share premium, revaluation surplus and retained earnings) from beginning to end of period
* only applies to limitied companies
*
38
What are the components of the Statement of Cash flows?
* summarises cash paid and received throughout the reporting period
* Only for limited companies
39
What are the notes to Financial statement?
* include a statement of accounting policies and other disclosures required to allow shareholders and other users to make informed judgements about the business
* usually more detailed and longer for limited liability companies than sole traders or partnerships
40
What are Qualitative Characteristics?
teh atributes that make information provided in financial statements useful to others
41
What are the two categories of qualitative characteristics?
1. Fundamental qualitative characteristics
2. Enhancing qualitative characteristics
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