Regulation, presentation and preparation

Question 1

Managing a limited company

Executive directors vs non-executive directors (4 each)

Answer 1

Executive Directors

• Employees
• Salary, bonus, perks
• Day to day running of the business
• Owner/manager or elected by owners

Non-executive Directors

• Not employees
• Independent
• Relatively small remuneration
• Oversee the running of the business on behalf of the shareholders

Question 2

Why is financial information required?

Shareholders require information for: (3)
Managers require information to?

Answer 2

Shareholders require information for:

• Stewardship (company is being managed in their best interests)
• Management performance evaluation;
• Prediction for investment decisions.

Managers require information to control the business.

Question 3

How does audit fit in?

Jobs of external auditors (3)

Jobs of audit committee (2)

Jobs of internal auditors (3)

Answer 3

External auditors

• Independent opinion - ‘true and fair view’
• Past financial performance and current financial position
• Responsibility to shareholders

Audit committee

• Protect shareholder interests in relation to financial reporting / internal control
• Review internal control effectiveness

Internal auditors

• Independent and objective evaluation of an organisation’s internal controls
• Responsibility to management
• Employees of the organisation or outsourced from a firm

Question 4

The need for regulation of financial reporting (5)

Answer 4

• Separation of managers and owners (ensures that managers provide accurate and honest reports)
• Accounts are publicly available
• Relied upon by many different users
• Comparability (allowing users to compare financial performance and position across different entities)
• Directors have a responsibility to provide information that gives a fair presentation of the financial position, performance and cash flows of an enterprise

Question 5

Financial Reporting Standards

What is their purpose? (3)
2 examples

Answer 5

• Define contractual terms e.g. directors’ bonuses
• Reduce subjectivity
• Helps to avoid accounting scandals

e.g.
Patisserie Valerie - inflated cash balances and hidden debts of £10 million
Wirecard - €1.9 billion missing from its balance sheet

Question 6

IASB Conceptual Framework for Financial Reporting

Not an accounting standard itself
Purpose is to assist: (5)

Answer 6

Not an accounting standard itself
Purpose is to assist:

• IASB
• National standard setters
• Preparers of accounts
• Auditors
• Users of accounts

Provides help when a transaction is not covered by existing standard(s)

Question 7

Qualitative characteristics of financial information (6)

2 Fundamental
4 Enhancing

Answer 7

Fundamental:

• Relevance: Information must be capable of influencing decisions by being predictive or confirmatory.
• Faithful Representation: It should be complete, neutral, and free from error to reflect reality accurately.

Enhancing:

• Verifiability: Independent parties should be able to reach consensus on the information’s accuracy.
• Comparability: Enables users to compare financial data across time and between companies.
• Understandability: Financial data should be clear and comprehensible to users.
• Timeliness: Information should be available in time to influence decisions.

RF VCUT

Question 8

Statement of Financial Position

IAS 1 specifies items to be included such as: (5)
Disclosures / notes to the statement include: (4)

Answer 8

IAS 1 specifies items to be included such as:

  - Property, Plant and Equipment
  - Inventory
  - Trade and Other Payables
  - Trade and Other Receivables
  - Split between Current and Non-current
  - Presentation and order of items is not prescribed

Disclosures / notes to the statement include:

• Accounting policies
• Greater detail of items
• Information to assist prediction of future cash flows
• Information for other stakeholders

Question 9

What replaces the income statement and what section does it include?

Answer 9

• Replaces Income Statement / Statement of Profit and Loss
• New section ‘Other Comprehensive Income’

   - Unrealised gains and losses e.g. from changes in the fair value of assets

• Other comprehensive income can be shown as extension to statement of income or as a separate statement

Question 10

IAS 1 Presentation of Financial Statements (2 formats)

Answer 10

Format 1: costs analysed by function
e.g. cost of sales, distribution costs and administration expenses; or

Format 2: costs analysed according to nature,
e.g. raw materials, employee benefits expenses, operating expenses and depreciation.

Question 11

Cost of sales

Equation?
Includes (3 +3)

Answer 11

Opening inventory + purchases - closing inventory (O+P-C)

• Salaries of production staff
• Substantial inventory losses
• Charges relating to production of non-current assets

      - Maintenance
      - Depreciation
      - Loss on disposal

Question 12

Distribution costs (6)

Answer 12

Includes:

• salaries etc. of marketing/distribution staff
• Sales commission
• (Distribution) vehicle running costs & carriage outwards
• Depreciation of Non-current assets (NCA) used by distribution operations
• Losses on the disposal of NCA used by distribution operations
• Advertising & selling activities

Question 13

Administrative expenses (6)

Answer 13

Includes:

• Salaries etc. of admin staff
• Depreciation of NCA used by non-production operations
• Losses on the disposal of NCA used by non-production operations
• Amortisation of intangible assets
• Cash discounts to customers
• Irrecoverable debts

Question 14

Statement of Changes in Equity (4)

Other items may include (3)

Answer 14

• Shows the movement in each component of equity in the year
• Effects of changes in accounting policies
• Correction of errors recognised – IAS 8
• Contributions by and distributions to equity holders

Other items may include:

• Prior period adjustments
• Share issues
• Transfers from revaluation reserve.

Question 15

Disclosures / notes to the accounts (2)

Examples (3)

Answer 15

• Accounting policies
• Details of certain items that have been charged in arriving at operating profit

For example:

• Exceptional items
• The makeup of individual liabilities and assets
• Sensitive items such as auditors’ remuneration
• Will vary between companies depending on requirements

Question 16

Has prescribing the formats meant that identical transactions are reported identically?

Differences on (4)

Answer 16

1. How inventory is valued: Different companies use different methods to calculate inventory costs, like FIFO (First-In, First-Out) or LIFO (Last-In, First-Out), leading to variations in financial reports.
2. The choice of depreciation policy: Assets lose value over time, but companies choose different ways to record this—straight-line depreciation spreads costs evenly, while declining balance records higher expenses earlier.
3. Management attitudes: Decisions made by leadership affect financial reporting, as managers may take conservative or aggressive approaches when interpreting transactions.
4. The capability of the accounting system: The technology a company uses can impact the accuracy and consistency of financial reports. A more advanced system may produce more uniform results