C1 - Purpose Of FS Flashcards
2 Examples of unincorporated companies
Sole traders
Partnerships
2 examples of incorporated companies
Private limited company
Public limited company
Facts about sole traders..
- owner by the sole trader only
- unlimited liability for all debts of company
- owner makes all decisions
- FS are not made public
Facts about partnerships..
- 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
Facts about limited liability companies..
- 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
Facts about limited companies..
- 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
3 Financial statements used by a limited company?
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
Differences between limited companies and sole traders/partnerships.
Tax on FS
Limited company - shown on Statement P or L as corporation tax
Sole traders - shown as personal liability of the owner(s)
What is the objective of financial reporting?
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.
What is the full definition of an asset..
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.
What is the full definition of equity?
Equity is the residual interest in the assets of the entity after deducting all its liabilities
What is the full definition of a liability?
A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources.
What is the full definition of income?
Increase in economic benefits in the form of inflows or enhancements in assets that increase equity.
What is the full definition of expenses?
Expenses are decreases in economic benefits in the form of outflows or depletion’s of assets or the incurring liabilities that decrease equity.
What is the accounting equation?
Assets = equity + liabilities
How does equity increase?
Profits from the revenue activities
Other comprehensive income such as revaluation of assets
Contribution from shareholders such as an issue of shares
How does equity decrease??
Losses from revenue activities
Losses from other activities such as devaluation of assets
Distribution to shareholders such as a payment of dividends
What is the purpose of accounting standards?
To provide a framework for accounting and to reduce the variety of accounting treatments which companies may use in their FS
What does going concern mean?
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.
What is accrual accounting?
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.
What are the two fundamental qualities characteristics?
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
What are the four enhancing qualities characteristics?
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.
What does recognition in FS mean?
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
Measurement bases..
What is a historical cost?
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.
Measurement bases..
What are current costs?
What is would cost to replace an asset or liability at today’s prices.
Measurement bases..
What is realisable (settlement) value??
What the assets could be sold for and the amount required to settle liabilities today.
Measurement bases..
What is present value??
Assets and liabilities at the present discounted values of their future cash inflows and outflows.
Accounting concepts..
Business entity??
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
Integrity meaning
Being straight forward and honest in all professional and business relationships
Objectivity meaning..
Not allowing bias, conflict or the undue influence or others to override professional or business judgements.
Professional competence and due care meaning..
Maintaining a professional knowledge and skill at a required level in order to complete the jobs competently.
Confidentiality meaning
Information should not be disclosed to third parties expect when proper and specific authority is given or there is a legal right to disclose.
Professional behaviour meaning
Behaviour should comply with relevant laws and regulations and avoids bringing the accountancy profession into dispute.
Familiarity threat
This may occur when the accountant is feeling sympathetic of the interests of someone they’re close with.
Self interest threat
Where a financial or other interest will inappropriately influence the accountants judgement or behaviour.
(Bonuses or promotions)
Intimidation threat
When an accountant may be deferred from acting objectivity because of a threat such as no bonus.
Self review threat
When an accountancy has to re evaluate their own work and will therefore not spot any mistakes or errors
Advocacy threat
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)
