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Part 1 > Accounting for portfolio Managers > Flashcards

Accounting for portfolio Managers Flashcards

1
Q

What are the two commonest forms of unincorporated businesses?

A

Sole traders and partnerships.

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2
Q

In unincorporated businesses, how is the business related to its owners?

A

The business is not a separate legal person from its owners.

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3
Q

What is the primary effect of incorporation on a business?

A

It establishes a business as a separate legal person entitled to own assets, owe debts, sue, and be sued in its own capacity.

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4
Q

How does incorporation simplify ownership transfers?

A

It makes it easier for owners to sell portions of their ownership and simplifies the recording of these transfers by accountants.

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5
Q

What does limited liability mean for incorporated businesses?

A

The personal assets of the owners are generally protected from business debts.

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6
Q

What is a private company?

A

A private company is one whose shares may not be publicly traded.

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7
Q

What distinguishes a public company from a private company?

A

A public company’s shares are not subject to any trading restrictions.

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8
Q

What option does a public company have regarding its shares?

A

A public company may choose to list its shares on a stock exchange.

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9
Q

What are Public Interest Entities (PIEs)?

A

PIEs are usually defined to include all listed companies and other very large companies.

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10
Q

What accounting requirements are PIEs held to?

A

PIEs are held to the strictest accounting requirements and are generally required to produce financial statements in accordance with IFRS.

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11
Q

What is required for the financial statements of PIEs?

A

They must be subjected to an annual audit.

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12
Q

What option do other companies have regarding reporting standards?

A

They generally have the option to report using less demanding guidelines.

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13
Q

Can non-profit organisations register as companies?

A

Yes, entities like charities can often register as companies.

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14
Q

What is the primary aim of non-profit organisations?

A

They do not aim to make their shareholders wealthier.

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15
Q

What are the three broad categories of business activities?

A

Financing activities, investing activities, operating activities

The dividend decision is also a key aspect of these activities.

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16
Q

What is the capital structure of a business?

A

A mix of debt and equity used to finance a business

Debt increases potential returns but also risk.

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17
Q

What are the two main components of financing activities?

A

Debt and equity

Debt involves borrowing money, while equity comes from owner contributions.

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18
Q

What does the financing activities section of the statement of cash flows report?

A

Cash flows from transactions with owners and long-term lenders

Includes cash received from issuing shares and cash paid for buying back shares.

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19
Q

What are investing activities?

A

Activities involving the investment of raised funds into assets

Examples include procuring buildings, acquiring businesses, and developing services.

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20
Q

What are assets in the context of investing activities?

A

Items acquired for use in the value creation process

These assets are essential for the business’s operations.

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21
Q

What does the operating activities section of the statement of cash flows report?

A

Cash generated from operations

This includes revenue, expenses, and profit generated through daily business activities.

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22
Q

What are some examples of operating activities?

A
  • Manufacturing
  • Maintenance
  • Software development
  • Marketing
  • Administration

These activities occur daily to achieve sales.

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23
Q

What does the statement of comprehensive income focus on?

A

Financial performance during the reporting period

It reports revenue, expenses, and profit using accrual accounting.

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24
Q

What is the dividend decision?

A

The choice to retain earnings or pay them out as dividends

Retained earnings fund further growth.

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25
True or False: Dividends are considered an expense of the business.
False ## Footnote Dividends are not reported in the statement of comprehensive income.
26
Where do dividends appear in financial statements?
As a direct deduction from retained earnings ## Footnote They are reported in the statement of changes in equity.
27
What is the signalling effect of the dividend decision?
A deviation from expectations indicates the business’s prospects ## Footnote This can influence investor perceptions in financial markets.
28
What is the primary goal of operating activities?
To generate revenue and convert it into net operating cash inflows ## Footnote This is essential for creating value.
29
Fill in the blank: The statement of financial position reports the business's situation on the reporting date in respect of its _______.
financing activities
30
What is the relationship between retained earnings and business growth?
Retained earnings fund further growth ## Footnote This reinvestment is crucial for long-term sustainability.
31
What is financial accounting also referred to as?
Financial reporting ## Footnote Financial accounting is one of the two main types of reporting within the broader field of accounting.
32
How is accounting defined?
The recording and reporting of financial information about an entity ## Footnote An entity can be a business, government institution, club, society, or individual.
33
What is the primary objective of financial accounting?
To report the effects of a business's financing, investing, and operating activities, as well as the dividend decision.
34
What are the financial statements generated by financial accounting?
* Statement of financial position * Statement of comprehensive income * Statement of cash flows * Statement of changes in equity * Detailed notes (disclosures)
35
What does the statement of financial position report?
The business’s situation on the reporting date regarding its financing and investing activities.
36
What does the statement of comprehensive income show?
The business’s financial performance during the reporting period, focusing on revenue, expenses, and profit.
37
What is included in other comprehensive income (OCI)?
Certain gains and losses that are not reported in profit or loss.
38
What does the statement of cash flows report?
Cash flows for the reporting period, categorized according to financing, investing, and operating activities.
39
What does the statement of changes in equity report?
Movements in the categories of equity reported on the statement of financial position.
40
What is the standard financial reporting period?
A year, known as a financial year or fiscal year.
41
What is the difference between the statement of comprehensive income and the statement of financial position?
The former shows what happened in each financial year, while the latter includes cumulative effects of all transactions from inception.
42
What are financial reporting standards designed to ensure?
Comparability and user understanding of financial statements.
43
What is GAAP?
Generally accepted accounting practice developed by national standard-setters.
44
What are International Financial Reporting Standards (IFRS)?
Standards developed by the IASB for global financial reporting.
45
What is the IASB's objective?
To develop a single set of high-quality, understandable, enforceable, and globally accepted financial reporting standards.
46
How many countries require the use of IFRS?
More than 140 countries.
47
What is the difference between IFRS and US GAAP?
IFRS is principles-based, while US GAAP is rules-based.
48
What do financing activities involve?
How a business raises capital through a mix of debt and equity.
49
What are investing activities?
Acquiring assets for use in the value creation process.
50
What are operating activities?
Day-to-day activities undertaken by a business to generate revenue and profit.
51
What is the dividend decision?
The choice to retain earnings for growth or pay them out as dividends.
52
What is double-entry bookkeeping?
A system where every transaction has two distinct effects, recorded as debits and credits.
53
What is accrual accounting?
Recognizing the effects of transactions when they occur, regardless of cash flow.
54
What does the going concern assumption state?
The business will continue operating in the foreseeable future.
55
What is the primary objective of financial accounting?
To report the effects of a business's financing, investing, and operating activities, as well as the dividend decision, in a way that stakeholders can understand.
56
What are financial reporting standards essential for?
Ensuring that businesses prepare comparable financial statements using familiar principles and practices.
57
Who is responsible for developing 'generally accepted accounting practice' (GAAP) historically?
National standard-setters within their own jurisdictions.
58
What is the purpose of the International Accounting Standards Board (IASB)?
To create a single set of high-quality, understandable, enforceable, and globally accepted financial reporting standards based on clearly articulated principles.
59
How many countries require listed companies and other public interest entities (PIEs) to use IFRS?
More than 140 countries.
60
What types of entities are typically defined as public interest entities (PIEs)?
* All listed companies * Other very large companies
61
What is required of the financial statements of PIEs?
They must be subjected to an annual audit.
62
What is the main difference between US GAAP and IFRS?
US GAAP is rules-based, whereas IFRS is principles-based.
63
What significant change regarding IFRS did the US implement in 2007?
Scrapped the requirement for non-US companies to reconcile IFRS to US GAAP.
64
What is IFRS for SMEs intended for?
Small and medium-sized businesses.
65
How does IFRS for SMEs differ from full IFRS?
* Uses less technical language * Significantly shorter * Requires simpler accounting techniques * Fewer disclosures * Omits topics not generally relevant to SMEs
66
What are the roles of national standard-setting bodies despite the adoption of IFRS?
* Sending feedback to the IASB on exposure drafts * Supporting implementation of new IFRS by providing technical advice * Setting national standards when neither full IFRS nor IFRS for SMEs is applicable
67
What are some critiques of IFRS?
* Seen as complicated * Guidance for applying them can be lengthy * Not always consistent in treatment of similar items * Perceived too much choice in measuring assets
68
True or False: The IASB has acknowledged criticisms of IFRS and aims to make the standards more understandable and comparable.
True

Part 1 (6 decks)

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