Ch 2 Conceptual Framework & Ethical Principals

Question 1

What is the Conceptual Framework for Financial Reporting?

Answer 1

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

Question 2

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

Answer 2

IAS16 PPE - Property, Plant & Equipment

Question 3

What are the OBJECTIVES of Financial Statements?

Answer 3

Provides information on:

Financial position & performance of a company

That is useful to a range of users

Question 4

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

Answer 4

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.

Question 5

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

Answer 5

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.

Question 6

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

Answer 6

Relevance - Influences the decision of users

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

Question 7

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

Answer 7

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.

Question 8

What is CUVT?

Answer 8

4 x Enhancing Qualitative characteristics

Comparability
Understandability
Verifiability
Timeliness

Question 9

What are the 2 x Underlying Assumptions?

Answer 9

The business is a Going Concern Basis

It uses the Accruals Basis

Question 10

What is a Going Concern Basis?

Answer 10

Underlying Assumption

Continue in operational existence for the foreseeable future.

E.g. >12 months

Question 11

What is the Foreseeable Future?

Answer 11

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

Question 12

What is the Break up Basis?

Answer 12

Not a going concern

No Non Current Assets or Liabilities.

Asset measured at Realisable Value - ESTIMATE expected to receive.

Question 13

What is the Accruals Basis?

Answer 13

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

Cash basis if recognised when paid.

Question 14

What is a Prepayment?

Answer 14

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

Question 15

What is an Accrual?

Answer 15

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

Question 16

What are the 5 ELEMENTS?

Answer 16

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

Question 17

What is an ASSET?

Answer 17

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.

Question 18

What is a Liability?

Answer 18

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

Question 19

What is EQUITY?

Answer 19

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

Question 20

What is a INCOME?

Answer 20

The INCREASE in ECONOMIC benefit

DURING an accounting YEAR.

Question 21

What is an EXPENSE?

Answer 21

The DECREASE in ECONOMIC benefit,

during and accounting PERIOD.

Question 22

What is the ACCOUNTING EQUATION?

For SOFP

Answer 22

ASSETS = LIABILITIES + EQUITY

A=L+E (ALE)

Question 23

SOFP proforma what are the types of Assets?

Answer 23

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

Question 24

SOFP proforma which column should they be in:

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

Answer 24

£(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

Question 25

SOFP proforma what are the types of Equity?

Answer 25

``` 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) ```

Question 26

SOFP proforma what are the types of Liabilities?

Answer 26

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

Question 27

SPL Format

Answer 27

£ 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

Question 28

What is Revenue?

Answer 28

Sales-Sales Returns

Question 29

What is the calculation for COS?

Answer 29

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

Question 30

What is Gross Profit?

Answer 30

Revenue-COS

Question 31

What makes up Profit from Operations?

Answer 31

Gross Profit (Dist Costs) (Admin Exp) = PROFIT FROM OPERATIONS Profit before financing & tax.

Question 32

What is a revaluation gain?

Answer 32

Difference between previous CV of the asset & new revalued amount. OTHER COMPREHENSIVE INCOME - Special gain not yet realised.

Question 33

What is the Frameworks RECOGNITION Criteria?

Answer 33

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.

Question 34

What are the 4 x ways of measuring the elements?

Answer 34

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

Question 35

What is a Historical Cost? | Measuring Elements

Answer 35

Assets - Recorded at the price that was actually paid to acquire them originally. Liabilities - Recorded at the proceeds received in exchange for the obligation.

Question 36

What is a Current Cost? | Measuring Elements

Answer 36

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.

Question 37

What is a Realisable Value? | Measuring Elements

Answer 37

Assets - Carried at the amount, which could currently be obtained by an orderly disposal. Liabilities - Carried at their settlement values - E.g. like inventory.

Question 38

What is Present Value? | Measuring Elements

Answer 38

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.

Question 39

What are Ethics & where did they come from?

Answer 39

Moral principles. To act in the interest of the public/society. Came from (IFAC) - International Federation of Accountants - Global organisation.

Question 40

What are the the 5 Fundamental Principles?

Answer 40

``` TOPIC Tech/Professional Competence & Due Care Objectivity Professional Behaviour Integrity Confidentiality ```

Question 41

What is Tech Professional Competence & Due Care?

Answer 41

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

Question 42

What is Objectivity?

Answer 42

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

Question 43

What is Professional Behaviour?

Answer 43

Comply with laws & regulations. | Not criticising colleagues on social media.

Question 44

What is Integrity?

Answer 44

Straight forward Open & honest Professional

Question 45

What is Confidentiality?

Answer 45

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

Question 46

What are the 5 ethical Threats?

Answer 46

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

Question 47

What is a Self Interest Threat?

Answer 47

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.

Question 48

What is a Intimidation Threat?

Answer 48

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

Question 49

What is a Self-Review Threat?

Answer 49

Reviewing your own work. | May not report an error out of embarrassment.

Question 50

What is an Advocacy Threat?

Answer 50

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

Question 51

What is a Familiarity Threat?

Answer 51

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

Question 52

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

Answer 52

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.

Question 53

5 x Safeguards in the work environment.

Answer 53

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.