Regulatory Framework/Role of professional judgement

Question 1

What is the income statement?

Answer 1

Entity’s ability to earn a profit

Question 2

What is the balance sheet?

Answer 2

About the financial position of an entity at a given time

Question 3

What is the equation of the income statement to calculate profit/loss?

Answer 3

Income - expenses = profit/loss

Question 4

What is profit also known as?

Answer 4

Earnings

Question 5

What does the balance sheet show?(3)

Answer 5

Assets
Liabilities
Equity

Question 6

How are the assets funded?

Answer 6

Using equity and liabilities

Question 7

What is equity?
What is it made up of and how do these effect equity?

Answer 7

The owner’s stake within the company.
Made up of:
- Capital from owner/share capital (increase equity)
- Drawings/dividends (decrease equity)
- Retained earnings/reserves (increases equity)

Question 8

What does equity equal in terms or assets and liabilities?

Answer 8

E = A - L

Question 9

What is profit measured on ad what does this mean?

Answer 9

Measured on the accrual basis.

Income and expenses are recognised as they occur, not when the cash is received or paid.

Question 10

What is net cash position?

Answer 10

Cash position = Cash receipts - Cash payments

Question 11

What do you exclude when calculating net cash payments?

Answer 11

Accruals

Question 12

What is cash?

Answer 12

Cash is a resource of the business and is seen as an asset

Question 13

What are the advantages of measuring profit in an accrual basis rather than cash basis?(1)

Answer 13

• Recognising revenue and expenses when they are earned or incurred is more accurate

Question 14

What are the disadvantages of measuring profit on an accrual basis rather than a cash basis?(2)

Answer 14

• The accrual process is more complex
• More judgement involved when determining the timing of things

Question 15

What sort of company might prefer measuring profit through cash?

Answer 15

Small companies

Question 16

What is a conceptual framework?

Answer 16

A set of ideas and principles that can be used to establish specific guidelines and/or guide specific decisions

Question 17

What is the name of the conceptual framework in Financial Reporting?

Answer 17

IASB = International Accounting Standards Board

Question 18

What are accounting standards?

What is the difference between this and the conceptual framework?

Answer 18

Specific principles and/or rules on particular areas.

Conceptual framework are broad principles and sets boundaries.

Question 19

What are the benefits of having a conceptual framework? (2)

Answer 19

Provides some protection from political interference in accounting standard setup.

Guides financial statement preparers in accounting for difficult issues not yet covered by existing accounting standards.

Question 20

Who is the regulator for accountants, auditors and actuaries?

Answer 20

The Financial Reporting Council (FRC)

Question 21

What does GAAP stand for?
Summarise what it means?

Answer 21

Generally Accepted Accounting Principles

The frameworks of different regions and nations

Question 22

Since 2005, what has been mandatory for companies listed in the EU?

Answer 22

To prepare their accounts using International Financial Reporting Standards (IFRS)

Question 23

What standards do the US use?

What is different about this?

Answer 23

GAAP

Very different to IFRS, unlike the UK GAAP

Question 24

What was the IFR formally known as?

Answer 24

International Accounting Standards (IAS)

Question 25

What are the pros of international standards?

Answer 25

- Improve comparability across companies - One common business language - Opens up more investment and trade opportunities- firms raise funds across the border

Question 26

What are the cons of international standards?

Answer 26

- Costly to convert from local GAAP to IRFS - Reliance on IFRS expertise from developed nations at the expense of local accounting talent - May not be well suited to country/culture specific transactions

Question 27

What is IFRS based on?

Answer 27

The broad principles outlined in the Conceptual Framework- not based on rules, but principles

Question 28

What do principles rather than rules allow for?

Answer 28

Professional judgement

Question 29

What is the Net realisable value (NRV)?

Answer 29

The estimated selling price in the ordinary course of the business less the estimated costs of completion and the estimated costs necessary

Question 30

What is an example in accounting when professional judgment is necessary? Why is it important that this is done professionally?

Answer 30

Inventories Effects the year-end profit and assets

Question 31

What can create a distortion of economic reality of the entity?

Answer 31

The judgments and choices made in the accounts can serve the interest of the preparers rather than the users

Question 32

What is an example of an area of professional judgement within accounting?

Answer 32

Provisions- represent liabilities of uncertain timing or amount

Question 33

According to IAS 37, when should a provision be recognised ?

Answer 33

- There's a present obligation as a result of past events - it is probable that a transfer of economic benefits will be required - a reliable estimate can be made of the amount of the obligation

Question 34

If a provision does not follow meet the recognition criteria, what happens?

Answer 34

Obligations are disclosed as contingent liabilities off the balance sheet - Not part of the company's financial position

Question 35

How is professional judgement used when determining provisions?

Answer 35

- How probable an obligation is? - Estimating the amount of the obligation - Whether and how much to recognise as provision on balance sheet

Question 36

What is the impact of provisions on the financial statements?

Answer 36

To create/increase a provision: - Dr relevant expense (e.g bad and doubtful debt) - Cr provision liability

Question 37

What is another example of where professional judgement is required? What is this an example of?

Answer 37

Accounting for research and development expenditure An intangible asset

Question 38

Under IAS 38, what is an intangible asset? More specifically, what is said about accounting for research and devolvement expenditure?

Answer 38

Non-monetary assets which are without physical substance and identifiable. Expenditure on research which may or may not lead to a marketable product or service should be expensed in the Income Statement in the period in which it was incurred.

Question 39

Development expenditure for which a viable profitable market is envisaged may be...

Answer 39

Capitalised - recognised as an asset on the balance sheet

Question 40

When an intangible asset is recognised, what happens?

Answer 40

The recognised intangible has to be amortised on a systematic basis over its estimated useful life

Question 41

Where is professional judgment involved within accounting for research and development expenditure?

Answer 41

- Judgment in determining the research vs development phase of a project - Judgment involved in determining the method of amortisation and estimating the useful life of the intangible

Question 42

How does an intangible asset effect financial statements?

Answer 42

The ability to capitalise on development expenditure arising from a given R&D project: * Increases the company’s financial position in the development phase * Protects the profits in the development phase and defers recognition of the expenditure into the future

Question 43

What are 4 other examples of professional judgement?

Answer 43

- Bringing forward or deferring the recognition of revenue and/or expenses - Depreciation of Property Plant and - Equipment: method, estimated useful life - Inventory valuation: whether to write down to NRV depends on judgment on condition and saleability - Impairment of non-current assets

Question 44

Where can you see what judgements have been made?

Answer 44

The annual report