Ch 2 Conceptual Framework & Ethical Principals Flashcards
What is the Conceptual Framework for Financial Reporting?
SPIRIT OF ACCOUNTING
The framework is not a standard in itself, objectives, rules & standards. Nature, function & limits.
Objectives of FS - Position & performance
Users of FS
AAT Code of Professional Ethics
Qualitative Characteristics
Elements of the FS
Where would you look for guidance on how to account for depreciation?
IAS16 PPE - Property, Plant & Equipment
What are the OBJECTIVES of Financial Statements?
Provides information on:
Financial position & performance of a company
That is useful to a range of users
Name 3 of the Primary Users of Financial Statements and what does it help them decide?
Primary users - to make decisions on:
Investors - Buying, selling or holding equity.
Lenders - Providing loans or other forms of credit.
Creditors - Supplying goods on credit & the terms of the credit.
Assesses the entities prospects for future net cashflow (inflow) & how effectively & efficiently the Managers have used the entities existing resources.
Name 4 other User Groups & what they would use the FS for?
Government - Calculate tax payable.
Employees - Assess position of the business with regards to job stability.
Customers - Stable supplier of goods & services.
Public - To obtain info about Companies of Interest.
What are the 2 x FUNDAMENTAL Qualitative characteristics & what are they used for?
Relevance - Influences the decision of users
Faithful Representation - Financial info must be
COMPLETE
NEUTRAL
FREE FROM ERROR
What are the 4 x ENHANCING Qualitative characteristics and what do they mean?
CUVT
Comparability - Compare over time & with similar information about other identities.
Understandability - Understandable to the user, appropriate classification, characterisation & presentation of information.
Verifiability - E.g. by Audit - provides assurance it is credible & reliable.
Timeliness - Within a timescale suitable for decision making purposes.
What is CUVT?
4 x Enhancing Qualitative characteristics
Comparability
Understandability
Verifiability
Timeliness
What are the 2 x Underlying Assumptions?
The business is a Going Concern Basis
It uses the Accruals Basis
What is a Going Concern Basis?
Underlying Assumption
Continue in operational existence for the foreseeable future.
E.g. >12 months
What is the Foreseeable Future?
Usually 12 months from the date the Director signs off the Financial Statements.
What is the Break up Basis?
Not a going concern
No Non Current Assets or Liabilities.
Asset measured at Realisable Value - ESTIMATE expected to receive.
What is the Accruals Basis?
Effect of transactions & other events are recognised when they occur not when the money is received or paid.
Cash basis if recognised when paid.
What is a Prepayment?
An EXPENSE that has been PAID in a financial year but SOME or all of it BELONGS to NEXT year.
What is an Accrual?
An EXPENSE that has not yet been PAID for in the CURRENT financial year but relates to THIS year.
What are the 5 ELEMENTS?
1) Asset
2) Liability
3) Expense
4) Income
5) Equity
What is an ASSET?
A PRESENT economic RESOURCE,
CONTROLLED by the ENTITY,
As a result of PAST EVENTS.
An economic resource is a right that has the potential to produce economic benefit.
What is a Liability?
A PRESENT OBLIGATION,
of the ENTITY,
to TRANSFER economic RESOURCE,
As a result of PAST EVENTS.
What is EQUITY?
The RESIDUAL INTEREST in the ASSETS,
of the ENTITY,
after DEDUCTING all of its LIABILITIES.
What is a INCOME?
The INCREASE in ECONOMIC benefit
DURING an accounting YEAR.
What is an EXPENSE?
The DECREASE in ECONOMIC benefit,
during and accounting PERIOD.
What is the ACCOUNTING EQUATION?
For SOFP
ASSETS = LIABILITIES + EQUITY
A=L+E (ALE)
SOFP proforma what are the types of Assets?
NON-CURRENT ASSETS Property, plant & equipment (CV=cost-acc depn) Intangible Assets (CV)
CURRENT ASSETS
Inventories (Clos inv @ y/e lower of cost or nrv)
Trade & other receivables (T receive - allow d.debts)
Cash & cash equivalent
TOTAL ASSETS
SOFP proforma which column should they be in:
1) Current Assets/Liabilities?
2) Non-current Assets/Liabilities?
3) Equity?
£(CA/CL) £(NCA/L)(E)
Non-Current Assets X
Current Assets X
Total Assets X
Equity X
Total Equity X
Non-Current Liabilities X
Current Liabilities X
Total Liabilities X
Total Equity & Liabilities X
SOFP proforma what are the types of Equity?
EQUITY (Amount due to shareholders) Share Capital (Nom Value of shares-when 1st invested) Share Premium (Excess > share Cap) Retained Earnings(P/L from p/y not yet distributed) Revaluation Surplus(Increase in asset from orig CV/MV)
SOFP proforma what are the types of Liabilities?
NON-CURRENT LIABILITIES
Long term loans or debentures (debts/loan stock/ corporate bonds).
Trade & other payables (Payables/accruals/VAT)
Bank Overdraft
Tax Payable (Corp Tax Owed)
TOTAL LIABILITIES
SPL Format
£
Revenue X
Cost of Sales (X)
GROSS PROFIT = X
Distribution Costs (X) Administrative Expenses (X) PROFIT FROM OPERATIONS = X
Finance Costs (X) PROFIT BEFORE TAX = X
Income Tax Expense (X)
PROFIT FOR THE PERIOD = X
Other Comprehensive Income
Revaluation Gain X
TOTAL COMPREHENSIVE INCOME for year = X
What is Revenue?
Sales-Sales Returns
What is the calculation for COS?
COS £
Opening Inventory X
Purchases (-Purchase returns) X
Manufacturing Wages X
Depreciation X
Carriage Inwards (X)
Closing Inventory (X)
TOTAL COS = X
What is Gross Profit?
Revenue-COS
What makes up Profit from Operations?
Gross Profit
(Dist Costs)
(Admin Exp)
= PROFIT FROM OPERATIONS
Profit before financing & tax.
What is a revaluation gain?
Difference between previous CV of the asset & new revalued amount.
OTHER COMPREHENSIVE INCOME - Special gain not yet realised.
What is the Frameworks RECOGNITION Criteria?
1) It meets the definition of an element
e. g. Asset, liability, equity, income or expense.
2) It is probable economic benefit will flow to or from the entity (>50% chance).
3) The item can be measured reliably.
What are the 4 x ways of measuring the elements?
1) Historical Cost
2) Current Cost
3) Realisable Value
4) Present Value
What is a Historical Cost?
Measuring Elements
Assets - Recorded at the price that was actually paid to acquire them originally.
Liabilities - Recorded at the proceeds received in exchange for the obligation.
What is a Current Cost?
Measuring Elements
Assets - Carried at their current purchase price (e.g. their price now sometimes called replacement costs).
Liabilities - Carried at the amount currently required to settle them.
What is a Realisable Value?
Measuring Elements
Assets - Carried at the amount, which could currently be obtained by an orderly disposal.
Liabilities - Carried at their settlement values - E.g. like inventory.
What is Present Value?
Measuring Elements
Method - Looks at future cashflows an asset will generate or the amount of cash you have to pay to settle a liability in todays prices.
Assets - Carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business.
Liabilities - Carried at the present discounted value of the expected cash outflows necessary to settle them.
What are Ethics & where did they come from?
Moral principles.
To act in the interest of the public/society.
Came from (IFAC)
- International Federation of Accountants
- Global organisation.
What are the the 5 Fundamental Principles?
TOPIC Tech/Professional Competence & Due Care Objectivity Professional Behaviour Integrity Confidentiality
What is Tech Professional Competence & Due Care?
Maintaining knowledge & skills via CPD.
Undertaking professional development.
Never take on work without the correct knowledge.
What is Objectivity?
Not biased Avoid conflicts of interest Undue influences Must be seen to be independent Reporting intimidating behaviour.
Familiarity threat
What is Professional Behaviour?
Comply with laws & regulations.
Not criticising colleagues on social media.
What is Integrity?
Straight forward
Open & honest
Professional
What is Confidentiality?
Discretion if info is not in the public domain.
Lock files/secure computer.
Marked as confidential.
Disposed of properly.
What are the 5 ethical Threats?
1) Self interest threat
2) Advocacy threat
3) Familiarity threat
4) Intimidation threat
5) Self-review threat
What is a Self Interest Threat?
Acting in your own self interest instead of the interest of the share holders or society as a whole.
E.g A Auditor holding shares in a company they are auditing - They might not report errors because it could reduce profits in the shares.
What is a Intimidation Threat?
A Manager intimidating someone into doing something ethically wrong. HR policies in place.
What is a Self-Review Threat?
Reviewing your own work.
May not report an error out of embarrassment.
What is an Advocacy Threat?
Promoting the position of a client or representing them in some way.
Taking sides.
Remain Independent.
What is a Familiarity Threat?
Trust threat - know someone really well so fail to question their decision.
Lose judgment.
Become to sympathetic to their view.
6 x Safeguards created by the profession, legislation or regulation.
Inc but not restricted to
1) Educational, training & experience requirements for entry into the profession.
2) Continuing professional development requirements.
3) Corporate governance regulations.
4) Professional Standards
5) Professional or regulatory monitoring & disciplinary procedures.
6) External reviews of the reports, returns, communications or information produced by a member & carried out by a legally empowered 3rd party.
5 x Safeguards in the work environment.
1) The employing organisations systems of corporate oversight or the other oversight structures.
2) The employing organisations ethics & conduct programmes.
3) Recruitment procedures in the employing organisation emphasising the importance of employing high calibre competent staff.
4) Strong internal controls.
5) Appropriate disciplinary processes.
