3 Preparation and Regulation of Financial Statements

Question 1

Annual Report | Definition and Aim

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2.
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4.

Answer 1

• the means by which the directors are accountable for their stewardship of the assets and their handling of the companies affairs for the past year
• consists of narrative material (some regulated) and audited financial data
• communicates financial acc information
• contains more than just the stamenents, also interim information (semi annual reports)

Question 2

Narrative Material of the Annual report - what does it consist of?

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Answer 2

• highlights
• chairmans statement, chief executives review, strategy and board overview
• directors report *
• renumeration report *
• corporate governance report *
• auditors report *
• statement of directors responsibilities *
• content regulated

Question 3

Whats the purpose of the narrative material/ business review?

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2.

Answer 3

• explain what has been achieved in the current year and
• assist exsiting and potential investors to make their own predictions of cash flows of future years

Question 4

What so forward looking statements of the narrative material contain?

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2.

Answer 4

• prognosis eg directors expect sales to increase in current financiak year, provided no unforeseen events occur
• corporate strategy, eg how to deal with any low profitability segments or possible divestemnts or acquisitions

Question 5

What are some required items in the directors report?

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Answer 5

• principal activities
• business review
• furutre developments
• R&D activities
• post balance sheet events
• value of land and building
• nr of employees with disabilities
• info about idrectors
• donations to charities

Question 6

What are criteria for information in published accounts?

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Answer 6

• compliance in forma with IAS 1 and statue
• fin. statements should present a fair view of profits and assets and liabiliies
• accounting policies comply with IFRSs/statue
• IAS 1: compliance with accruals, materiality, aggregation, going concern, consistentcy
• IAS 1 requires to disclose accounting policies adopted in determining the amounts shown in financial statements and apply them consistently

Question 7

What does IAS 1 NOT prescribe?

Answer 7

• the order and presentation of the balance sheet
• only suggested: splitting assets and liabilities into current and non current
• present assets and liabilities broadly in order of liquidity

Question 8

IAS 1 gived the requirements for the way in which….

Here, the purpose is to….

What are the choices of presentations?

1.
2.

Answer 8

…. performance (and last years comparatives) are reported.

1. single statements or
2. double statement that splits information into (1) profit and loss and (2) statement that starts with profit or loss and then adds other comprehensive income

Question 9

Comprehensive income….
1.
2.

Answer 9

1. recognises the gains and losses (realized and unrealized)
2. that have increased or decreased the owners equity in the business

Question 10

The gains and losses from the comprehensive income arise from…

Answer 10

… the revaluation of non current assets and from other items (eg financial instruments, employee benefits) -> OTHER COMPREHENSIVE INCOME

Question 11

IAS 1 allows a choice of (?) formats for detailling income and expenditure.

Answer 11

1. two

Format 1: vertical costs analyzed according to FUNCTION, eg cost of sales, distribution costs and administrative expenses

Format 2: vertical costs analyzed according to NATURE, eg raw materials, employee benefits expenses, operating expenses and depreciation

(we do format 1)

-> basically so we have sufficient detail for users without having a huge number of seperate expenses

Question 12

SoCI Format 1: FUNCTION

In oder to arrive at its operating profit, a company needs to classify all operating expenses into (?) categories.

Answer 12

1. cost of sales
2. distribution and selling costs
3. administrative expenses
4. other operating expenses (or income)
5. finance costs

Question 13

SoCI Format 1: Operating Expenses | category Cost of Sales

What does it include?

Answer 13

• Direct costs: direct materials purchased; direct labour; subcontracting costs.
• Overheads: variable and fixed production overheads
• Depreciation and amortisation:
  (depreciation of non-current assets used in production
  depreciation of own work that has been capitalised
  impairment expense)
• Exceptional amounts written off inventory

Question 14

Why might cost of sales not be comparable?

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4.

Answer 14

• between companies or between the same company over years
• potential of different treatment of choice of depreciation method, carrying values, how inventory is valued (FIFO LIFO weighted average)
• management attitude to estimates
• capabiliy of system to produce information

Question 15

IAS 7 reuires….

Answer 15

• the provision of information about the historical changes
  in cash and cash equivalents
  by means of a cash flow statement which classifies cash flow during the period from operating, investing and financing activities

(SoCF tha shows historical changes in cash (equivalents). it should classify the cash flow in the period in O, I and F activities)

Cash: in hand and available on demand from eg a bank
Cash Equivalents: short term highly liquid investments readily convertible to cash

Question 16

Cash Equivalent | Definiton

Answer 16

– short term highly liquid investments
readily convertible to known amounts of cash and
subject to an insignificant risk of changes in value

Question 17

What can be said about the Notes to the Financial Statements; What does it entail?

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Answer 17

• notes about srtting out accounting policies
• gives greater detail of the make up of B/S items (eg inventory, non current asset make up)
• gives additional information to assist the prediction of future cash flows (eg capital commitments, future commitments, contingent liabilities)
• related party transactions (direct or indreict)
• other information interesting for shareholders (eg staff costs and nr)

Question 18

What are the IAS 24 requirements?

Answer 18

disclosure of the relationship and of the nature of any transactions

Question 19

What is the progressive step-wise approach to the preparation of published accounts?

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4.

Answer 19

• Step 1: Internal Income Statement from the trial balance data
• Step 2: Statement of Comprehensive Income (with
  costs analysed by function – Format 1)
• Step 3 (if required): Statement of changes in Equity
• Step 4: Statement of Financial Position

Question 20

What does IAS 5 reuire?

Answer 20

• a layered treatment, aka the results of continuing and discontinued operations have to be disclosed seperately

Question 21

What can be said about unusual activities and IAS 1?

Answer 21

• it requires separate disclosure of nature and amount when items of income and expense are material
• These items may include losses on termination of operations and profits or losses on the sale of noncurrent assets