1 - Intro to accounting

Question 1

What is accounting?

Answer 1

It is a way of recording, analysing and summarising transactions of an entity

Question 2

What are the types of business entities?

Answer 2

Sole trader - Jon has full liability and can lose his assets and money if something goes wrong

Partnership - Same as sole trader except there is more than just Jon taking liability if stuff goes left, Jen does too.

Limited company - Jon and Jen still owners (shareholders). Managed by directors (can also be the shareholders). However if sued, you sue only the company. Take all the assets of the company but their personal assets stay safe. Liability is limited of the owners.
However lots more paperwork and effort and need to upload accounts to companies house.m

Question 3

What is the difference between private limited (ltd) or public limited (plc)?

Answer 3

Private means shares don’t have to be available to purchase publicly and plc is the opposite

Question 4

What is the objective of the financial statements?

Answer 4

Make sure we are providing accounts that can give info which will help various users make their economic decision

Question 5

According to the conceptual framework, what user groups and what info is needed of the financial statements?

Answer 5

Investors (current and potential owners) (PRIMARY USERS):
Whether to buy or sell/invest or divest. Info needed would be profitability of entity, dividend payments and performance of management.

Employees:
Helps them assess job opportunities or career opportunities

Lenders:
Can they pay it back? Look at assets they have to use as security and also the level of debt already held by the entity.

Suppliers and other creditors:
See whether to supply to a certain entity and what credit terms to agree upon

Customers:
Assess whether to buy from the company, see if the company will still be running in a few years and how reliable supply is etc.

Government:
Obtain macro economic data and also tax revenue

Public:
Review the entities ethical and social disclosures

Question 6

What are the main financial statements?

Answer 6

SFP (Balance sheet):
This is a list of all the assets and liabilities a business has on a particular date. The difference between these two is known as equity or capital (what the business owes back to its owners)
Assets - liabilities = equity
Net assets = equity

SPL:
States all income and expenses that have occurred. Difference represents the profit OR loss the company has made

Question 7

What is UK GAAP and what does it stand for?

Answer 7

Generally accepted accounting practices derive from:
The companies act 2006, UK IFRS (accounting standards), statutory requirements in other countries and stock exchange listing requirements.

Question 8

What is a legal requirement of financial statements?

Answer 8

That a business must produce and publish FS annually and ensure they are true and fair.

Question 9

What is the IESBA code of ethics?

Answer 9

It applies to anyone training with ICAEW and qualified accountants and employees of member firms.

PIPCO:
Professional competence and due care
Integrity
Professional behaviour
Confidentiality
Objectivity

Question 10

What is sustainability?

Answer 10

As a business, fulfilling the needs of current generations without jeopardising ability of future generations. ESG decisions.

Need to report on it as shareholders need to be able to make decisions on sustainability of a business. How a company IMPACTS on the planet and also how factors influence a companies FS and its ability to sustain value (dependencies)

Question 11

Laws, regulations and guidance on sustainability

Answer 11

Lack of mandatory standards which has resulted in inconsistent reporting on what is disclosed and presented.

Bodies:
TCFD - Taskforce on climate related financial disclosures
ISSB
GRI - Global reporting initiative
UK listed companies (plc) are required to follow TCFD recommendations

Question 12

What are some fundamental qualitative characteristics according to the conceptual framework?

Answer 12

Relevance:
Info is relevant if it makes a difference to a users decision - Predictive or confirmatory value. Relevant is affected by nature and materiality.

Faithful representations:
Faithfully represents the transactions and other events. They will be:
Complete, neutral/unbiased and free from error

Question 13

What are the enhancing qualitative characteristics?

Answer 13

Comparability - from one period to the next and between firms in the same line of business
Verifiability - it can be proven
Timeliness
Understandability - disclosures

Question 14

What is fair presentation?

Answer 14

Are all transactions presented true and fair? This can be done by applying all relevant standards. Override is possible but very rare.

Question 15

What is going concern?

Answer 15

Entity is viewed as continuing in operation for the foreseeable future. Assumed that entity has neither the intention or the necessity of liquidation or ceasing to trade. When they are not a going concern, they are prepared on a break up basis

Question 16

What is accruals basis of accounting?

Answer 16

This is matching income and expenses to that 12 month period regardless of the cash position (whether it is paid or received).

Question 17

What is consistency of presentation?

Answer 17

To aid comparability over a period of time between companies.
Accounting treatment shouldn’t be changed unless:
There is a huge change in the nature of the operations or a change in presentation is required by an IAS

Question 18

What is materiality and aggregation?

Answer 18

Omissions or misstatements of items are material if they could influence the economic decisions of users of the financial statements. It depends on the size and nature.

Each material class of similar items should be aggregated and presented separately in the FS such as Revenue, Purchases, Trade receivables and Trade Payables

Question 19

What is the business entity concept?

Answer 19

Accountants regard a business as a separate entity, distinct from its owners or managers. Concept applies to companies, partnerships and sole traders

Question 20

What is the historical cost convention?

Answer 20

Items are normally measured in the FS at historical cost (the amount at which the business paid to acquire them). An advantage of this concept is that there is usually a source document to prove the amount paid to purchase an asset or pay an expense.

Question 21

What is capital expenditure?

Answer 21

Expenditure which results in the acquisition of long term assets, or an improvement or enhancement of their earning capacity. NCA in the SFP

Question 22

What is revenue expenditure?

Answer 22

Incurred either for trade purposes (raw materials, wages and salaries or administrative expenses. Or to maintain the existing earning capacity of long term assets (repairs and maintenance).
It is seen as an expense in the SPL account

Question 23

What is capital income?

Answer 23

From the sale of a NCA. The profit or loss on the sale of the asset is included in the SPL in the period it takes place.

Question 24

What is revenue income?

Answer 24

Income derived from the sale of trading assets or provision of service and interest or dividends received.
Sales revenue and included in SPL