Purpose of Financial Statements Flashcards
(24 cards)
What is a limited company?
Business entity in the private sector, generally owned by shareholders
What are some important notes about a limited company?
Which Act regulates limited companies?
Owners liable for the debts?
Who are limited companies managed by?
Accounts available to the public?
Principal Companies Act 2006 regulates the setting up and runnings of the business
A limited company is a separate legal entity from its owners - not liable for debts, only lose their investment
Companies are managed by directors, could also be shareholders
Must file their financial statements with Companies House - available to the public
What are the main financial statements of a limited company?
Statement of profit and loss and other comprehensive income - overheads under the headings of distribution, admin expenses and finance costs
Statement of changes in equity
SFP - shows issued share capital
Statement of cash flows
Whats the objective of financial reporting?
Provide financial info which is useful to investors, lenders and other creditors in making decisions relating to providing resources to the entity.
What must the financial statements provide details of in terms of financial position and financial performance?
Financial position - Provide info about economic resources used by the company. Provide details of liquidity, use of resources and financial performance of the company
Financial performance?
Assess stewardship of management
Allow comparison to be made with other periods statements
Assessment of the effectiveness of the use of the companies resources in achieving its objectives.
What is the accounting equation?
Assets - Liabilities = Capital/Equity
Capital/Equity + Liabilities = Assets
Assets - Capital/Equity = Liabilities
What is equity represented by in the financial statements?
Capital from shareholders
Retained earnings
Other reserves
What are the purposes of accounting standards? (5)
To provide a framework for preparing and presenting financial statements
To standardise financial statements so that the same accounting rules apply to everyone
Reduce variations of accounting treatments used in the financial statements
Ensure high quality financial statements
Enable compliance for audit requirements
What is the conceptual framework for financial reporting?
Not an official accounting standard, sets out concepts which underlie the prep and presentation of financial statements for external users.
What decisions may investors and other creditors make based off the financial statements?
Buy, hold or sell shares
Making loans or seek repayments of loans
Companies effectiveness of using resources to decide whether to invest
What are two underlying assumptions which are used when preparing financial statements?
Going concern - Business will continue for the foreseeable future
Accrual accounting - Transactions are recognised when they occur not when the cash is paid or recieved
What are the fundamental characteristics of financial statements?
Relevance - capable of making a difference in decision making, have predictive value helping users to predict future outcomes
Faithful representation - complete, free from error and neutral
What are the enhancing characteristics of financial statements?
Comparability - able to compare to other periods and other companies
Verifiability - assure information is faithfully represented
Timeliness - having information available to decision makers in time
Understandability - information is classified and characterised
What is meant by business entity?
Refers to the fact that financial statements record and report on the activities of one particular entry, do not include personal assets and liabilities of owners.
What is income classed as?
Increases in assets, or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims.
How are cost of sales worked out for the financial statements?
Opening inventories
+ Purchases
- Return out
- Closing inventories
How is retained earnings worked out for the financial statements?
Opening retained earnings
+/- Profit or loss figure from PnL
-dividends paid out
= Closing retained earnings
For three user groups, identify their purposes in using financial reporting information?
Existing and potential investors - assess how effectively management has fulfilled its stewardship role, consider info that is useful relating to their existing or potential investment
Lenders - Assess whether loans will be repaid and related interest will be paid; to help potential lenders decide whether to lend
Other payables/creditors - Decide whether to sell to the entity and to assess the likelihood that amounts owing will be paid when due.
Whats the definition of an asset?
Present economic resource controlled by the entity as a result of past events. (Economic resources are the rights that have the potential to produce economic benefits)
What is the definition of Equity?
Residual interest in the assets of the entity after deducting all its liabilities.
What is the definition of liabilities?
Present obligations of the entity to transfer economic resources as a result of past events. (Obligations are duties or responsibilities that the entity has no practical ability to avoid).
What is the statement of profit or loss and other comprehensive income?
Measures the financial performance of the company for a particular time period .
What is the statement of financial position?
Lists the assets, equity and liabilities of the company at the end of the accounting period.
What are expenses classed as?
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.
