1. Introduction to Financial Reporting

Question 1

1. Financial accounting is….
2. Management accounting is….
   b) It is thus used for? (4)

Answer 1

Financial accounting is concerned with the production of financial statements for external users.

2. Management accounting is concerned with the detailed control and planning of a business.
   b) It is used for…
   - decision-making
   - strategies
   - allocating resources
   - planning and controlling activities

Question 2

Describe the legal and capital structure of….

a) a sole trader
b) a partnership
c) a limited liability company

Answer 2

a) Legal: no separate legal identity: owner fully liable for business debts.
Capital: singular capital account where the owner can introduce and withdraw capital as and when.

b) Legal: no separate legal identity from the business: owners fully liable to business debts.
Capital: shared capital account, usually with a fixed amount for when a partner joins/leaves the business.
All have separate current accounts for each partners share of profits/losses that year minus any drawings.

c) Legal: separate legal identity (achieved through incorporation). The insolvency of one party does not affect the other.
Capital: shareholders invest capital in return for residual assets in the company. They receive returns on investment which are paid from accumulative profits.

Question 3

What are the main differences between being a company and being a sole trader? (4)

Answer 3

• ownership of property
• transferable shares
• loan security: floating charges
• suing and being sued

Question 4

1. Who prepared the Framework?
2. What is the formal name of the Framework?
3. What are the main features of the Framework? (6)
4. What is the purpose of the Framework?
5. What is the main objective of financial reporting?

Answer 4

1. International Accounts Setting Board (IASB)
2. Conceptual Framework for Financial Reporting
3. • purpose of the framework
     - objectives of financial reporting
     - qualitative characteristics
     - the definition, recognition and measurement of elements within the Framework
     - the accruals and going concern concepts
     - the concepts of capital and capital maintenance
4. The purpose of the Framework is to assist the IASB in the development of financial statements.
5. The objective of financial reporting is to ensure that the financial information included aids economic decision-making.

Question 5

1. What are the two main qualitative characteristics of financial reporting?
2. Enhancing qualitative characteristics include…

Answer 5

1. Relevance and faithful representation
2. Comparability
   Verifiability
   Timeliness
   Understandability

Question 6

Information is relevant if (3)

Answer 6

• It assists the economic decision of users
• Provided in time to influence those decisions
• Has predictive or confirmatory value

Question 7

To be a perfectly faithful representation, financial information should be (3)

Answer 7

• Complete
• Neutral
• Free from material error

Question 8

1. In terms of comparability, users must be able to (2)

2. For this to be achievable, the statements must be.(2)

Answer 8

1. Compare the financial statement of an entity over time
   Compare the financial statements of different entities
2. Statements must be consistent and disclosed.

Question 9

1. Understandability depends on (2)

2. It is assumed that (2)

Answer 9

1. A way in which information is presented
   The capability of users

2 Users have reasonable knowledge
Users are willing to study the information with reasonable diligence

Question 10

1. What are the five key elements to the financial statements? Define each one.

Answer 10

1. Assets: economic resource controlled by the entity as a result of past events.
2. Liabilities: a present obligation to transfer an economic resource as a result of past events.
3. Equity: residual interest in the business after deducting all liabilities
4. Income: increase in assets or decrease in liabilities
5. Expense: decrease in assets or increase in liabilities.

Question 11

1. Explain the two types of assets - give examples.

2. Explain the two types of liabilities - give examples.

Answer 11

1. Non-current assets: assets owned by the business for a long-period of time that do not generally directly generate income or are likely to be resold. I.e. Land and buildings, plant and machinery, motor vehicles.

Current assets: assets owned by the business that are likely to be converted into cash in one fiscal year. i.e. inventory.

2. Non-current liabilities: payable more than 12 months after the reporting date. i.e. long-term loan

Current liabilities: payable within the next 12 months. i.e. short-term loan

Question 12

What are the components of a set of financial statements? Explain them (5)

Answer 12

1. Statement of financial position: assesses assets over liabilities to determine equity balance.
2. Statement of profit or loss and other expenditure: assesses income and costs incurred.
3. Statement of cash flows: summarises cash paid and received (more relevant to companies)
4. Statement of equity: summarises movement in equity balances (i.e. share capital, share premium, retained earnings) only relevant to companies
5. Notes to the financial statements: any other disclosures required to enable shareholders to make informed decisions.

Question 13

What are the other importing accounting concepts? (7)

Answer 13

• Materiality
• Substance over form
• The going concern assumption
• Business entity concept
• Accruals concept
• Prudence
• Consistency