Meaning of GAAP 1

Question 1

What is the purpose of accounts?

Answer 1

Accounts have the objective of providing information about the financial position, performance and cash flows of the company

Question 2

How would you define reliability?

Answer 2

When it is free from material error and bias. It represents the position faithfully.

Question 3

Legal ownership of an asset is necessary to be recognised in accounts?

Answer 3

False, the company must have control over the access to future economic benefits regardless of legal ownership.

Question 4

What is the definition of a liability?

Answer 4

The company must have a present obligation, not necessarily legal. It can be constructive.

Question 5

What is equity?

Answer 5

The residual interest in assets after deducting the liabilities

Question 6

What is income?

Answer 6

Any item which increases net assets, except for those which involve transactions with owners in that capacity

Question 7

What is the recognition criteria for assets?

Answer 7

It should have a cost or value which can be measured reliably.
And it is probable that future economic benefits will flow

Question 8

What is Historical cost?

Answer 8

The amount of cash actually paid.

Question 9

What is fair value?

Answer 9

The amount the asset could be exchanged for

Question 10

What are the steps for choosing an appropriate accounting policy

Answer 10

1. FRS 102 for specific guidance
   
   2. If within the scope of the Statement of Recommended Practice (SORP), then specific guidance within that
   3. Definitions, recognition criteria, and measurement bases for assets, liabilities, income and expenses

Bonus point for IAS

Question 11

What are prior period adjustments used for?

Answer 11

Correcting retrospective material errors.

Question 12

How are changes in accounting estimates accounted for?

Answer 12

They are accounted for prospectively

Question 13

When is there a change in accounting policy?

Answer 13

Change in recognition or measurement basis and change in basis of presentation.

Question 14

When can accounting policies be changed?

Answer 14

If the change is required by changes in accounting standard, or if it produces more relevant and reliable information.

Question 15

If information was not available at the time that the accounts were approved, how would you account for a change in accounting estimates. For example, a fault was discovered following approval which required a greater warranty provision.

Answer 15

You would apply the change prospectively for an accounting estimate.

Question 16

If there was an increase in accounting estimates, what would the double entry be?

Answer 16

Dr expenses in the P&L

Cr provision for liabilities in BS

Question 17

What is a prior period error?

Answer 17

A prior period error is when information was available but not acted on or obtained. Prior Period Errors should be accounted for retrospectively

Question 18

If a revenue transaction is deferred beyond normal credit terms how do we treat it?

Answer 18

The revenue transaction is recognised at the present value of the future receipt. It should exclude amounts collected on behalf of other parties

Question 19

What is revenue?

Answer 19

Revenue is income arising in the course of ordinary activities of the company.

Question 20

How would you recognise revenue on the sale of an item where the seller has retained managerial involvement/control?

Answer 20

You wouldn’t. A condition for recognising revenue is that the risks and rewards of ownership have been transferred to the buyer.

Question 21

How is interest income recognised?

Answer 21

It is recognised using the effective interest rate

Question 22

If it is uncertain that a construction contract may recover the costs, how would you recognise it?

Answer 22

If the recovery of construction contract costs is not probably, we recognise it as an expense immediately

Question 23

What is bundling?

Answer 23

Grouping a series of construction contracts together to reflect their substance

Question 24

If a government grant takes the form of a non-cash asset, how would you recognise it?

Answer 24

The fair value of the donated asset

Question 25

When should revenue be recognised on the sale of goods?

Answer 25

When the risks and rewards of ownership have been passed and there’s no managerial control retained by the vendor.

Question 26

If a company makes sales of £100,000 in one year, and it can estimate that 12% of this could be returned how do we recognise it?

Answer 26

We recognise the full £100,000 as revenue as the sale has taken place.
As the company can reliably estimate the expected costs of the returns to be £12,000 we would place a provision for £12,000 in the returns

Question 27

What is a layaway sale?

Answer 27

A layaway sale is when an item is put on hold whilst the customer pays the full purchase price in instalments

Question 28

How are layaway sales recognised in accounts?

Answer 28

In general they should only be recognised upon delivery. But, if the client has a good history of completing sales then the revenue can be recognised when there’s been a significant deposit and the goods are ready to be delivered

Question 29

If the outcome of construction contract can’t be estimated reliably, what contract revenue and costs should be recognised?

Answer 29

You recognise revenue from rendering of services only to the extent of the recoverable costs incurred & recognise costs as an expense in the period that they are incurred. The overall effect is a no profit recognised approach.

Question 30

If progress on a construction contract can be reliably estimated, and it is not expected to overrun, how would you deal with it?

Answer 30

We would recognise the percentage completion for the revenue, less incurred expenses on the project

Question 31

What are the conditions for making reliable estimates of revenue arising from rendering of services? (there’s 4)

Answer 31

• Its probable any associated future economic benefit will flow to the company
  
  • Costs incurred and, the costs to complete can be measured reliably
  • Transaction has a value which can be measured reliably
  • Stage of completion of the transaction at the end of the period can be measured reliably

Question 32

How would you account for music concerts before they have happened? Including the double entry

Answer 32

You recognise the revenue when the event actually takes place. Once all the contractual obligations have been fulfilled

You would enter a deferred income creditor for the value, and then increase assets at the same value

Question 33

How do we recognise income on maintenance contracts?

Answer 33

Revenue needs to be deferred, and released to the P&L when services are provided. It tends to be on a straight line basis.

If the costs are expected to vary largely then you would release it in line with the expected costs. Similar to that of construction contracts, you apportion the reasonable and reliable estimate.

Question 34

When should non-returnable deposits be recognised?

Answer 34

They should be recognised when the seller has performed their obligations. Until then they should remain in the creditors column of deferred income, dr cash.

If the deposit is not refundable then recognise it as revenue when the cancellation happens, and subsequently the vendor has no obligations. Dr Deferred income Cr revenue

Question 35

What is the accrual method of recognising income?

Answer 35

Income is recognised by being matched against the related costs of the expense the grant is intended to compensate. If you get a grant to build a jungle gym, you match the grant as income to the cost of the jungle gym

Question 36

When are dividends recognised?

Answer 36

When the shareholder has the right to receive them.

Question 37

What is the discount formula?

Answer 37

1/(1+R)n
R is the rate of the return as a decimal
N is the number of periods until the cash is expected to come into the business

Question 38

What is the time value of money?

Answer 38

The amount of money received now is worth more than in the future. Time value measures the return required by the person for not having use of their money.

Question 39

When should a provision be recognised?

Answer 39

When there’s significant uncertainty over the amount or timing of the expected liability

Question 40

What is an accrual?

Answer 40

An accrual is a liability to pay for goods/services that have been received but not yet invoiced. Tends to be more certain

Question 41

What is an executory contract?

Answer 41

An executory contract is one where neither party has performed any of their obligations, or have performed their obligations equally

Question 42

If we recognise a provision, where does the matching debit entry go?

Answer 42

It will be shown as a debit expense in the PL

Question 43

What’s an onerous contract?

Answer 43

An onerous contract is one where there’s unavoidable costs arising from the contract which are higher than economic benefits expected to be received.

Question 44

What is a restructuring programme?

Answer 44

A restructuring programme is one planned by management which changes either the type of business undertaken or the way in which business is carried out

Question 45

What is a post balance sheet event?

Answer 45

An event which occurs between the balance sheet date, and the date the accounts are authorised for issue to shareholders.

Question 46

What is an adjusting post balance sheet event?

Answer 46

An event which provides additional evidence of conditions which existed at the balance sheet date.

Question 47

What is a contingent asset?

Answer 47

A contingent asset is a possible asset. It arises from past events. It’s existence will only be confirmed by future events which are not in control of the business