2 Financial Accounting

Question 1

What can companies be registered as?

Answer 1

A private limited company (Ltd)

A public limited company (plc)

Question 2

What are the key difference between an ltd and a plc?

Answer 2

• A plc can offer its shares for sale to the general public but a Ltd company cannot.
• A plc may issue shares for sale on the Stock Exchange. These shares can then be re-traded on the stock exchange so the ownership of a plc may be constantly changing. Individuals may hold shares but it is pension funds, insurance companies and other financial institutions which hold large blocks of shares.

Question 3

What is an annual report?

Answer 3

accounts = financial statements
- refers to the annual financial information that is published by a company under regulations and which is subject to an audit

Question 4

What does an annual report contain?

Answer 4

four main financial statements together with notes explaining those statements:
	The income statement
	The statement of financial position
	The statement of changes in equity
	The statement of cash flow

Question 5

How can information in the annual reports be used as a marketing tool?

Answer 5

• highlight a company’s objectives which may be profit focused but as the importance of corporate social responsibility has become more widely recognised there will be other objectives

Question 6

What are regulations associated with financial accounting?

Answer 6

1. Statutory regulation - Companies Acts and European Union Directives
   The 2006 Companies Act contains detailed regulation to protect shareholders and creditors; Requirement to keep proper accounting records
    Requirement to prepare annual accounts that must give a true and fair view and be prepared in accordance with either international accounting standards or national accounting standards.
    Details when an audit is required and
    Outlines the company’s duty to file and circulate the annual report
2. Accounting standards
   UK Accounting Standards Board and the International Accounting Standards Board
3. Stock exchange regulation
   More frequent and more detailed reporting

Question 7

What is an audit?

Answer 7

independent examination of the financial statements to establish that they show a true and fair view of the financial performance (profit) and position (value/worth) of the company

Question 8

What is separate entity?

Answer 8

In company law the company is a person in its own right. It has a separate legal identity from its owners, the shareholder and the management and directors of the company.
It is the company that will sue and can be sued.

Question 9

What is double entry?

Answer 9

Every transaction that a company enters into affects two accounts.

Question 10

What is materiality?

Answer 10

Items will be reported if they make a difference to users. There are no material omissions or mis-statements in the accounts.(It is not claimed the information in the accounts are correct just materially correct)

Question 11

What are accruals/matching?

Answer 11

Expenses are matched to the revenues that they help generate.
Expenses, costs , income and revenue are accounted for when they are earned or incurred not when cash flows in or out of the company

Question 12

What is the importance of regulation and concepts?

Answer 12

Stakeholders (shareholders, employees, providers of goods and finance) can understand a set of annual reports, compare with other companies anywhere in the world and establish how a company is performing over time.
This will allow investors to make rational decisions ensure the capital markets operate efficiently and increase the wealth and hopefully well being of a nation.

Question 13

What is an income statement?

Answer 13

details the profit that a company has made over the year. It provides information on the financial performance of the company

Question 14

What is revenue?

Answer 14

only include income from the main business (lines of operation) that the company is involved in. Income from other investments or one off sources should be included elsewhere

Question 15

What is the cost of sales?

Answer 15

includes all the expenses/costs that are involved in manufacturing and producing the product that the company sells.

Question 16

What is gross profit?

Answer 16

basic guide of how successful the core business of a company is. It compares the revenue from selling the product a company produces directly with the costs of that production

Question 17

What is distribution expenses?

Answer 17

includes all the selling, marketing and distribution costs incurred by a company.

Question 18

What is administration expenses?

Answer 18

includes all the office based costs of a company. These might include accountant and lawyer fees, debt collection services, invoicing and some director costs.

Question 19

What is the operating profit?

Answer 19

highlights the profit the business has generated from its operation. The figure is likely to be more volatile than the gross profit figure because one off costs can be included in administration and distribution expenses. A successful business will try and keep a tight control of the administration and distribution costs. In a competitive market place this is very important.

Question 20

What are finance charges?

Answer 20

Payments of interest on loans, leases and overdrafts. A business would be in trouble if the finance charges were more than the operating profit. Consider the case of football clubs.

Question 21

What is the statement of changes in equity?

Answer 21

provides the owners (shareholders) with information as to what has happened to their equity in the last year.
This is the statement on which dividends are shown, dividends are the annual payments to shareholders

Question 22

What is the statement of financial position?

Answer 22

shows the worth of a company. It provides information on the financial position of the company.

Question 23

What are assets?

Answer 23

are resources that are controlled by an entity that are expected to bring economic benefits, (generate profits)

Question 24

What are the two categories ‘assets’ can be split into?

Answer 24

1) non-current assets

2) currents assets

Question 25

What are non-current assets?

Answer 25

are to be owned for longer than 12 months
 Buildings , furniture, machinery and motor vehicles. These are tangible assets.
 Brands, patents and goodwill. These are intangible assets.

Question 26

What are current assets?

Answer 26

owned at the reporting date but are to be used by the business to make profits in the next 12 months

• Inventory=stock
• Trade receivables= Debtors
• Prepayment - bills paid in advance

Question 27

What is a liablility?

Answer 27

an obligation of an entity arising from a past event the settlement of which involves the transfer of resources, (an amount owing by the business)

Question 28

What categories can liability be split into?

Answer 28

1) non-current

2) current

Question 29

What are non-current liabilities?

Answer 29

the payment of liability is due after 12 months

Bank loan repayable in 2/3/4…5 years, debentures, loan notes, sometimes preference shares

Question 30

What are current liabilities?

Answer 30

– the payment of the liability is due within the next 12 months

• Trade payables = creditors
• Accruals

Question 31

What are accruals?

Answer 31

Amounts the business owes in respect of bills not yet received, but where the business has used the service or products. Outstanding amounts owed on gas/electricity bills

Question 32

What are trade payables?

Answer 32

Amounts the business owes to suppliers of raw materials etc

Question 33

What is equity?

Answer 33

represents ”the residual interest in the assets of the entity after deducting all the liabilities”
- belongs to the owners of the company (stakeholders)

Question 34

How can assets be calculated?

Answer 34

assets = liabilities + equity

Question 35

What are the three types of equity

Answer 35

• issue share capital
• share premium
• reserves