Accounting Standards & Principles

Question 1

What two types of stakeholders benefit from financial statements?

Answer 1

Internal & External

Question 2

What internal stakeholders benefit from financial statements?

Answer 2

• Owners
• Employees

Question 3

What external stakeholders benefit from financial statements?

Answer 3

1. Prospective Investors
2. Financial Analysts
3. Banks & Financial Institutions
4. Government Agencies (e.g Tax agencies such as HMRC)

Question 4

Name the 11 accounting concepts.

Answer 4

Dual Aspect

Money Measurement

Accounting Entity

Going Concern

Accruals

Matching

Prudence

Consitency & Comparability

Economic Entity

Materiality

True & Fair

Question 5

What is the dual aspect concept?

Answer 5

Each transaction has two entries:

1) A debit (an increase in asset or decrease in liability)

2) A credit (an increase in a liability or shareholders fund or a decrease in an asset/income)

Question 6

Assets = ?+?

Answer 6

Liabilities + Capital

Question 7

What is the money measurement concept?

Answer 7

All recorded transactions / entries are measured in terms of money.

If it cannot be specified in terms of money, it is not a material event, and is instead included in statement notes.

Question 8

What is the Accounting Entity Concept?

Answer 8

Financial records are prepared for a distinct unit or entity regarded as separate from the individuals that own it.

Question 9

What is the going concern concept?

Answer 9

The principle that the business will be in existence for the forseeable future. (12 months from financial statements issued in the UK)

Assets are therefore recorded at the lower of: cost or book value.

If not going concern, director and auditor must issue an opinion making this clear.

Question 10

If a company is not a going concern, what basis is used and how are assets valued?

Answer 10

The “breakup” basis is used and assets are calculated at their net realizable value.

Question 11

For what reason do banks and financial institutions make use of financial statements?

Answer 11

In order to ascertain the terms, if any, that they will provide debt / financing arangements. They will be particuarly interested in gearing and liquidity ratios to see if the firm will be able to pay back the principal as well as interest payments.

Question 12

For what reason do owners, directors and management make use of financial statements?

Answer 12

To help make important business decisions. Analysis can be performed to provide a more detailed understanding of the figures and the overall business.

Question 13

For what reason do prospective investors make use of financial statements?

Answer 13

To assess the viability of the investment.

Question 14

For what reason do Government entities (eg, tax authorities) make use of financial statements?

Answer 14

to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company.

Question 15

What are the two primary sets of accounting standards?

Answer 15

GAAP - Generally Accepted Account Principles
IFRS - International Financial Reporting Standards

Question 16

Which countries use GAAP?

Answer 16

The USA.

Question 17

Which countries use IFRS?

Answer 17

140+ including the EU and UK

China have converged their standards with IFRS and are now substantially similar.
Japanese companies can voluntarily use IFRS.

Question 18

What is the major difference between how GAAP & IFRS are prescribed?

Answer 18

GAAP is rules based - must be followed

IFRS is principle based - Best guidance is given on certain topics / situations.

Question 19

What is the accruals concept?

Answer 19

The principle that income and expenses must be recorded in the period in which it occured, and not when the payment is received or made.

Question 20

What is the matching principle?

Answer 20

The principle that revenues must be matched with their expenses in the same period at the same time.

Question 21

What is the prudence concept?

Answer 21

The prudence concept is ensuring accounting statements are reported with prudence and conservatism. This means equity is not overvalued and liabilities are not understated.

Question 22

What is the consistency and comparability concept?

Answer 22

The concept that accounting standards and methods should be applied consistently by a firm in order to allow meaningful comparability of the statements and records.

Question 23

What is the economic entity principle?

Answer 23

The economic entity principle states that the recorded activities of a business entity should be kept separate from the recorded activities of its owner(s) and any other business entities.

This means that you must maintain separate accounting records and bank accounts for each entity, and not intermix with them the assets and liabilities of its owners or business partners.

Question 24

What is the materiality princple?

Answer 24

The materiality principle states that an accounting standard can be ignored if the net impact of doing so has such a small impact on the financial statements that a user of the statements would not be misled.

Question 25

What is the true and fair concept?

Answer 25

audited financial statements must give a true and fair view of the company’s assets, liabilities, financial position and profit/loss, in relation to each financial year.

Question 26

What are consolidated accounts and who do they apply to?

Answer 26

Consolidated accounts is the principle that when one company controls another (e.g own more than 50%). They must publish their accounts as a single entity.

This applies to large and medium groups in the UK.

Question 27

In the UK, under consolidated account rules, who qualifies as a small group?

Answer 27

Must satisfy 2 of 3:
1) Turnover <10.2M
2) Balance Sheet <5.1M
3) Employees <50

This is according to the “Companies Act 2006”

Question 28

How are subsidiary accounts treated?

Answer 28

Subsidiary companies prepare their own statements, but this will be combined with the group.

Question 29

What is the principal concern with overseas entities accounts?

Answer 29

The basis on which FX is recorded / converted.
1) Must be done consistently (e.g same conversion method, quarterly, annualy, at transaction)
2) Some opt to record all transactions in USD for sake of ease.