C1 - Purpose Of FS

Question 1

2 Examples of unincorporated companies

Answer 1

Sole traders

Partnerships

Question 2

2 examples of incorporated companies

Answer 2

Private limited company

Public limited company

Question 3

Facts about sole traders..

Answer 3

• owner by the sole trader only
• unlimited liability for all debts of company
• owner makes all decisions
• FS are not made public

Question 4

Facts about partnerships..

Answer 4

• owned by 2-20 max partners
• partners are liable for entire debt of business
• partnership agreement done orally or written
• FS are not made public

Question 5

Facts about limited liability companies..

Answer 5

• owned by members
• legal status is separate legal entity from its members
• 2 or more members
• members can only lose their investment with liability
• FS are filed online and available for public domain

Question 6

Facts about limited companies..

Answer 6

• owner by shareholders
• separate legal entity from its owners
• minimum of one shareholder and no maximum
• shareholders can only lose their investment with liability
• FS are filed at Companies house and made for public domain

Question 7

3 Financial statements used by a limited company?

Answer 7

Statement of profit or loss and other comprehensive income - to measure performance for the accounting period

Statement of financial position - to show the assets, liabilities and equity(capital) at the end of the accounting period.

Statement of cash flow - to link profit with changes in assets and liabilities and the effect on the cash of the company

Question 8

Differences between limited companies and sole traders/partnerships.

Tax on FS

Answer 8

Limited company - shown on Statement P or L as corporation tax

Sole traders - shown as personal liability of the owner(s)

Question 9

What is the objective of financial reporting?

Answer 9

To provide financial info about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

Question 10

What is the full definition of an asset..

Answer 10

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Question 11

What is the full definition of equity?

Answer 11

Equity is the residual interest in the assets of the entity after deducting all its liabilities

Question 12

What is the full definition of a liability?

Answer 12

A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources.

Question 13

What is the full definition of income?

Answer 13

Increase in economic benefits in the form of inflows or enhancements in assets that increase equity.

Question 14

What is the full definition of expenses?

Answer 14

Expenses are decreases in economic benefits in the form of outflows or depletion’s of assets or the incurring liabilities that decrease equity.

Question 15

What is the accounting equation?

Answer 15

Assets = equity + liabilities

Question 16

How does equity increase?

Answer 16

Profits from the revenue activities

Other comprehensive income such as revaluation of assets

Contribution from shareholders such as an issue of shares

Question 17

How does equity decrease??

Answer 17

Losses from revenue activities

Losses from other activities such as devaluation of assets

Distribution to shareholders such as a payment of dividends

Question 18

What is the purpose of accounting standards?

Answer 18

To provide a framework for accounting and to reduce the variety of accounting treatments which companies may use in their FS

Question 19

What does going concern mean?

Answer 19

FS are prepared based on the assumption that the entity will continue to trade for the foreseeable future and there is no reason to liquidate or reduce the size of the business.

Question 20

What is accrual accounting?

Answer 20

All transactions are recognised when they occur and not when they are paid or received. All transactions must be recorded in the correct accounting period and the year the FS relate to.

Question 21

What are the two fundamental qualities characteristics?

Answer 21

Relevance - info that is capable of making a difference in the decisions made by users

Faithful representation - all information must be neutral and free from error

Question 22

What are the four enhancing qualities characteristics?

Answer 22

Comparability - enables users to identify and understand similarities for other years and companies

Verifiability - helps assure info in faithfully represented

Timeliness - having info available for decision makers on time

Understandability - classifying and presenting info clearly and concisely.

Question 23

What does recognition in FS mean?

Answer 23

The process of including a element (asset, liability, income, expense or equity) in the FS.

Item should be recognised as:

• probably that future economic benefits will flow
• has a cost of value that can be measured reliably

Question 24

Measurement bases..

What is a historical cost?

Answer 24

Assets are recorded at the amount paid, or fair value at the time of acquisition.

Liabilities are recorded as the amount expected to be paid.

Question 25

Measurement bases..

What are current costs?

Answer 25

What is would cost to replace an asset or liability at today’s prices.

Question 26

Measurement bases..

What is realisable (settlement) value??

Answer 26

What the assets could be sold for and the amount required to settle liabilities today.

Question 27

Measurement bases..

What is present value??

Answer 27

Assets and liabilities at the present discounted values of their future cash inflows and outflows.

Question 28

Accounting concepts..

Business entity??

Answer 28

This refers to all activities being based on one entity only that the FS are referring to and separating all personal assets and liabilities with business ones

Question 29

Integrity meaning

Answer 29

Being straight forward and honest in all professional and business relationships

Question 30

Objectivity meaning..

Answer 30

Not allowing bias, conflict or the undue influence or others to override professional or business judgements.

Question 31

Professional competence and due care meaning..

Answer 31

Maintaining a professional knowledge and skill at a required level in order to complete the jobs competently.

Question 32

Confidentiality meaning

Answer 32

Information should not be disclosed to third parties expect when proper and specific authority is given or there is a legal right to disclose.

Question 33

Professional behaviour meaning

Answer 33

Behaviour should comply with relevant laws and regulations and avoids bringing the accountancy profession into dispute.

Question 34

Familiarity threat

Answer 34

This may occur when the accountant is feeling sympathetic of the interests of someone they’re close with.

Question 35

Self interest threat

Answer 35

Where a financial or other interest will inappropriately influence the accountants judgement or behaviour.

(Bonuses or promotions)

Question 36

Intimidation threat

Answer 36

When an accountant may be deferred from acting objectivity because of a threat such as no bonus.

Question 37

Self review threat

Answer 37

When an accountancy has to re evaluate their own work and will therefore not spot any mistakes or errors

Question 38

Advocacy threat

Answer 38

When an accountant promotes a position or opinion to the point that their objectivity may be compromised in future.

(Speaking out on behalf of a client)