Introduction to financial statements

Question 1

Financial accounting

Answer 1

Production of financial statements for external users

Question 2

Management accounting

Answer 2

Production of detailed accounts, used by management to control the business and plan for the future (internal use)

Question 3

What is financial accounting concerned with?

Answer 3

Recording and summarising the transactions of a period and presenting the summary of it.

Question 4

Recording element of accounting

Answer 4

Recording transactions as they occur

Question 5

Summarising element of accounting

Answer 5

The transactions for a period are summarised

Question 6

Balance sheet

Answer 6

shows position of business at a date

Question 7

Profit & Loss account (and other name for it)

Answer 7

shows performance of business over accounting period (statement of profit and loss)

Question 8

Income & expenditure account

Answer 8

similar to profit & loss but prepared for finding excess of income over expenditure or excess of expenditure over income

Question 9

statement of cash flows

Answer 9

shows cash flows in and out of company over accounting period

Question 10

directors’ report

Answer 10

required by UK company law. Board of directors issue a document with financial statements to confirm they’re compliant to accounting standards

Question 11

notes to the financial statement

Answer 11

allow company to give extra info. on financial statements

Question 12

auditors’ report

Answer 12

gives assurance over financial statements from an independant, external party

Question 13

Auditor’s report - title

Answer 13

clearly shows that it’s the report of an independent author

Question 14

Auditor’s report - addressee

Answer 14

it’ll be addressed as required by the circumstances of engagement

Question 15

Auditor’s report - opinion paragraph

Answer 15

paragraph detailing whether financial statements are true and fair or not

Question 16

Auditor’s report - basis for opinion

Answer 16

description of professional standards applied during audit to give confidence to users

Question 17

Auditor’s report - management’s responsibility for financial statements

Answer 17

describes responsibilities of those in organisation who are responsible for prep of financial statements

Question 18

Auditor’s report - auditor’s responsability

Answer 18

makes clear the role of auditor and what management’s role is. also explains what an audit involves and that only material misstatements are considered

Question 19

Auditor’s report - signature of auditor

Answer 19

report must be signed, either name of auditor or the firm - shows who has performed audit engagement

Question 20

Auditor’s report - date of auditor’s report

Answer 20

dated no earlier than date on which auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements.

Question 21

Auditor’s report - auditor’s address

Answer 21

name location where auditor practises - in case shareholders need to contact auditor

Question 22

Why would an organisation produce financial statements

Answer 22

• fulfill legal requirements (Companies Act 2006)
• provide info. to management to assist them in making decisions
• produce accurate financial statements which are relevant to the users
• assist in auditing the accounts and trace to source documents

Question 23

What does the financial accounting cycle (annually) include:

Answer 23

• Transactions are recorded from the year (recorded in accounting ledgers contained in computer software programs)
• Journal entries (any accounting transactions not part of everyday accounting entries)
• Trial balance ( once all transactions are recorded for period, they are summarised based on what they relate to, and compiled into a trial balance, good place to look for errors)
• Producing the final accounts (once trial balance is done, numbers can be transferred here in form of balance sheet & a profit and loss account, account in general ledger is then closed.

Question 24

Best practise for management accounting

Answer 24

• Budgets set at start of year
• Organisation performs variance analysis on these budgets
• Can also use MA to consider detailed costs of individual products in their portfolio

Question 25

Cash budgets

Answer 25

Used to help identify future cash prospects (so that company can understand if they should expect cash surplus/deficit in coming year

Question 26

What should a cash budget include?

Answer 26

- Cash receipts ( e.g. from trade, sale of non-current assets, through financing) - Cash payments ( e.g. outflows from trade, other expenses, buying non-current assets, paying off debts) - Net cash (surplus or deficit expected at end of year/period) *CASH RECEIPTS - CASH PAYMENTS*