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MM AAT 4 Financial Statements > Ch 2 Conceptual Framework & Ethical Principals > Flashcards

Ch 2 Conceptual Framework & Ethical Principals Flashcards

1
Q

What is the Conceptual Framework for Financial Reporting?

A

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

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2
Q

Where would you look for guidance on how to account for depreciation?

A

IAS16 PPE - Property, Plant & Equipment

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3
Q

What are the OBJECTIVES of Financial Statements?

A

Provides information on:

Financial position & performance of a company

That is useful to a range of users

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4
Q

Name 3 of the Primary Users of Financial Statements and what does it help them decide?

A

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.

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5
Q

Name 4 other User Groups & what they would use the FS for?

A

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.

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6
Q

What are the 2 x FUNDAMENTAL Qualitative characteristics & what are they used for?

A

Relevance - Influences the decision of users

Faithful Representation - Financial info must be
COMPLETE
NEUTRAL
FREE FROM ERROR

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7
Q

What are the 4 x ENHANCING Qualitative characteristics and what do they mean?

A

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.

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8
Q

What is CUVT?

A

4 x Enhancing Qualitative characteristics

Comparability
Understandability
Verifiability
Timeliness

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9
Q

What are the 2 x Underlying Assumptions?

A

The business is a Going Concern Basis

It uses the Accruals Basis

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10
Q

What is a Going Concern Basis?

A

Underlying Assumption

Continue in operational existence for the foreseeable future.

E.g. >12 months

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11
Q

What is the Foreseeable Future?

A

Usually 12 months from the date the Director signs off the Financial Statements.

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12
Q

What is the Break up Basis?

A

Not a going concern

No Non Current Assets or Liabilities.

Asset measured at Realisable Value - ESTIMATE expected to receive.

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13
Q

What is the Accruals Basis?

A

Effect of transactions & other events are recognised when they occur not when the money is received or paid.

Cash basis if recognised when paid.

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14
Q

What is a Prepayment?

A

An EXPENSE that has been PAID in a financial year but SOME or all of it BELONGS to NEXT year.

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15
Q

What is an Accrual?

A

An EXPENSE that has not yet been PAID for in the CURRENT financial year but relates to THIS year.

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16
Q

What are the 5 ELEMENTS?

A

1) Asset
2) Liability
3) Expense
4) Income
5) Equity

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17
Q

What is an ASSET?

A

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.

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18
Q

What is a Liability?

A

A PRESENT OBLIGATION,
of the ENTITY,
to TRANSFER economic RESOURCE,
As a result of PAST EVENTS.

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19
Q

What is EQUITY?

A

The RESIDUAL INTEREST in the ASSETS,
of the ENTITY,
after DEDUCTING all of its LIABILITIES.

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20
Q

What is a INCOME?

A

The INCREASE in ECONOMIC benefit

DURING an accounting YEAR.

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21
Q

What is an EXPENSE?

A

The DECREASE in ECONOMIC benefit,

during and accounting PERIOD.

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22
Q

What is the ACCOUNTING EQUATION?

For SOFP

A

ASSETS = LIABILITIES + EQUITY

A=L+E (ALE)

23
Q

SOFP proforma what are the types of Assets?

A 
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

24
Q

SOFP proforma which column should they be in:

1) Current Assets/Liabilities?
2) Non-current Assets/Liabilities?
3) Equity?

A

£(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

25
Q

SOFP proforma what are the types of Equity?

A 
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)
26
Q

SOFP proforma what are the types of Liabilities?

A

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

27
Q

SPL Format

A

£
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

28
Q

What is Revenue?

A

Sales-Sales Returns

29
Q

What is the calculation for COS?

A

COS £
Opening Inventory X
Purchases (-Purchase returns) X
Manufacturing Wages X
Depreciation X
Carriage Inwards (X)
Closing Inventory (X)
TOTAL COS = X

30
Q

What is Gross Profit?

A

Revenue-COS

31
Q

What makes up Profit from Operations?

A

Gross Profit
(Dist Costs)
(Admin Exp)
= PROFIT FROM OPERATIONS

Profit before financing & tax.

32
Q

What is a revaluation gain?

A

Difference between previous CV of the asset & new revalued amount.

OTHER COMPREHENSIVE INCOME - Special gain not yet realised.

33
Q

What is the Frameworks RECOGNITION Criteria?

A

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.

34
Q

What are the 4 x ways of measuring the elements?

A

1) Historical Cost
2) Current Cost
3) Realisable Value
4) Present Value

35
Q

What is a Historical Cost?

Measuring Elements

A

Assets - Recorded at the price that was actually paid to acquire them originally.

Liabilities - Recorded at the proceeds received in exchange for the obligation.

36
Q

What is a Current Cost?

Measuring Elements

A

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.

37
Q

What is a Realisable Value?

Measuring Elements

A

Assets - Carried at the amount, which could currently be obtained by an orderly disposal.

Liabilities - Carried at their settlement values - E.g. like inventory.

38
Q

What is Present Value?

Measuring Elements

A

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.

39
Q

What are Ethics & where did they come from?

A

Moral principles.

To act in the interest of the public/society.

Came from (IFAC)

  • International Federation of Accountants
  • Global organisation.
40
Q

What are the the 5 Fundamental Principles?

A 
TOPIC
Tech/Professional Competence & Due Care
Objectivity
Professional Behaviour
Integrity
Confidentiality
41
Q

What is Tech Professional Competence & Due Care?

A

Maintaining knowledge & skills via CPD.
Undertaking professional development.
Never take on work without the correct knowledge.

42
Q

What is Objectivity?

A 
Not biased
Avoid conflicts of interest
Undue influences
Must be seen to be independent
Reporting intimidating behaviour.

Familiarity threat

43
Q

What is Professional Behaviour?

A

Comply with laws & regulations.

Not criticising colleagues on social media.

44
Q

What is Integrity?

A

Straight forward
Open & honest
Professional

45
Q

What is Confidentiality?

A

Discretion if info is not in the public domain.
Lock files/secure computer.
Marked as confidential.
Disposed of properly.

46
Q

What are the 5 ethical Threats?

A

1) Self interest threat
2) Advocacy threat
3) Familiarity threat
4) Intimidation threat
5) Self-review threat

47
Q

What is a Self Interest Threat?

A

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.

48
Q

What is a Intimidation Threat?

A

A Manager intimidating someone into doing something ethically wrong. HR policies in place.

49
Q

What is a Self-Review Threat?

A

Reviewing your own work.

May not report an error out of embarrassment.

50
Q

What is an Advocacy Threat?

A

Promoting the position of a client or representing them in some way.
Taking sides.
Remain Independent.

51
Q

What is a Familiarity Threat?

A

Trust threat - know someone really well so fail to question their decision.
Lose judgment.
Become to sympathetic to their view.

52
Q

6 x Safeguards created by the profession, legislation or regulation.
Inc but not restricted to

A

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.

53
Q

5 x Safeguards in the work environment.

A

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.

MM AAT 4 Financial Statements (9 decks)

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