Ch 2 - Format of FS Flashcards
What principles does FRS 102 require acc’s to follow when preparing FS?
Fair presentation
Going concern
What does FRS 102 Secition 3 require the fair presentation of?
Financial position
Financial performance
Cash flows
What does the CA2006 require FS’s to show?
True and fair view
When should a company’s FS be prepared on the GC basis?
When the company is expected to continue in operation for the foreseeable future
When assessing GC status, what does FRS 102 require?
- Management should look into future for 12+ months from reporting date
- Uncertainties regarding GC should be disclosed
- If the GC assumption isn’t followed, must disclose
- That the GC assumption isn’t followed
- The basis of the acc used
i. e. everything becomes at market value and all current assets as expect to liquidate in next 12 months
- Reasons why GC assumptions aren’t followed
What kind of treatments are only used when GC basis is applied?
- Recording fixed assets at cost and writing down over UEL
- Distinction between CA and NCA
if a company is not GC, how should FS be prepared?
On a breakup basis where
- Assets would be recorded at recoverable amount
i. e. value at which they can be sold - All assets/liabilities are classified as current
What is the accruals concept also known as and why?
- Matching concept
- Because it matches action with time rather than cash movement
How does the accruals concept require transactions and events to be recorded?
When they occur, rather than when the cash is received/paid for them
What is the effect of the accruals concept on the FS?
expenses are recognised in the P&L account on the basis of direct association between the costs incurred and the earning of the related income
What is the alternative basis to accruals basis?
Cash basis - where you account for transactions when the money is received
How is consistent presentation ensured?
The general rule is that
- Accounting policies (therefore presentation) are normally kept the same from year to year to allow comparability of FS
- If they do change, must state why and the impact on the comparable figures
How are the FS indiv lines broken down?
- Each material class of item must be shown separately in FS
- Therefore, large specialised companies can end up with odd lines - Immaterial items can be aggregated with other items
Is off-setting allowed for A&L?
FRS 102 doesn’t allow offsetting against one another unless permitted by another FRS
E.g. of exception- doubtful debts are netted off against receivables and then a note is given
Is off-setting allowed for I&E?
Only allowed to be offset by FRS 102 if
Another FRS allows/permits it
Gains/losses/expenses on similar items are immaterial
What is the general rules for comparatives?
FRS 102 requires comparative info to be given on
- All numerical information
- For narrative info if necessary for understanding
What are the 2 formats for P&L given by FRS 102?
Classification by function (most common) tested as a whole in exam
Classification by nature - may be asked to complete extracts or for an explanation
What are the basic headings for P&L classification by function?
Turnover CoS Gross prof Distribution Costs Admin costs (sub-total) Other income Operating profit profit from operations Interest payable Interest receivable Profit before tax Income tax expense Net profit for the period
What is the basic layout for P&L classification by nature?
Turnover Other income Changes in finished goods and WIP Raw materials and consumables used Employee benefits expense Depreciation and amortisation expense Other expenses Profit from operations Interest payable Profit before tax Income tax expense Net profit for the period
What is total comprehensive income?
Realised P/L for period, plus other comprehensive income
What is other comprehensive income? And what will this be in the exam?
Income and exp not recognised in P&L
Will only ever be revaluation reserve of PPE
What is the basic layout for SOCI?
XYZ Ltd
SOCI for year ended X
Profit for year (P&L)
Other comprehensive income
Gain on property revaluation
Total comprehensive income for the yearWhat choice does FR 102 Section 17 PPE allow for companies?
For them to hold PPE/ tangible fixed assets at either
- Historic cost (cost model)
- FV (revaluation model)
What are the steps to perform revaluation
- Increase cost to market value
DR Cost [FV - original cost]
Note: this doesn’t hit the P&L as there isn’t a realised gain - Remove all accumulated depreciation recognised to date
DR Accumulated depr - Create revaluation reserve which sits in equity in the BS
CR Reval reserve [Dif i.e. FV - carrying amount]
Amount credited to reval reserve is the diff between NBV and FV
As this is an unrealised gain, we will see this in ‘other comprehensive income’
Why are revaluation gains only shown in the ‘other comprehensive income’ section?
As it is an unrealised gain, and P&L only shows realised gains
If Phillips plc has a building which cost £1m and has a carrying amount of £700k int eh BS. The building is then revalued to £1.5m. profit for the year is £600k. Show the double entries to record the transaction and show SOCI
DR Cost £500k DR Accumulated depr £300k CR Revaluation reserve £800k Statement of comprehensive income £000 Profit for the year 600 Gain on revaluation 800 Total comprehensive income 1,400
What does the statement of changes in equity show?
It shows a summary of all movements in share capital and reserves during the year
Show the basic layout of a SOCIE
XYD Ltd SOCIE for the year ended X Along the top: - Share capital - Share premium - Revaluation surplus - P&L account - Total Down the side - Balance at X (start) - Total comprehensive income - Dividends - Issue of share capital - Balance at X end
What value is share capital?
Nominal value
What is the basic layout of the balance sheet?
Fixed assets - Tangible assets - Investments - Intangible assets Current assets - Stocks - Trade and other debtors - Cash and cash equivalents Creditors - amounts falling due within one year - Trades and other creditors - ST borrowings - Current tax creditor - Provisions Net current assets
Total assets less current liabilitie Creditors falling due after more than one year - Redeemable preference share capital - LT borrowings Net assets
Equity Capital and Reserves - Ordinary chare capital - Share premium account - Irredeemable preference share capital - P&L account reserve - Revaluation reserve Total equity
What is the difference for IFRS vs UK GAAP for balance sheets?
Called SFP in IFRS
And IFRS shows as assets = equity - liabilities
While UK GAAP shows it as assets- liabilities = equity
Give examples of intangible assets
- Licences
- Goodwill
- Brands purchased
- Patents
When should an asset be classified as current if it
Will be settled within 12 months of the reporting date
Is part of the entity’s normal operating cycle
When do you define a liability as being current?
When it is expected to be settled in the normal course of the enterprises operating cycle
It is held for primary trading purposes
Due to be settled within 12 months of the reporting date
What do ordinary share holders own?
A % of the share capital plus reserves in the company
What are attached to ordinary shares?
Voting rights
What don’t ordinary dividends create when they are proposed or declared?
A liability as the directors can revoke them before they are paid
When does a dividend become contractual obligation?
When it has been approved by the SH at the general meeting
When does a dividend become a contractual obligation generally?
At the year end
When are ordinary dividends accounted for? and what is the journal?
When they are paid
DR P&L Reserve
CR Cash
What do preference shareholders own?
A % of the preference share capital but NOT the rest of the reserves
Do preference SH have voting rights?
No
How are redeemable/irredeemable preference shares with mandatory cumulative dividends accounted for?
On an accruals basis as you’ll have to pay them out eventually
So they act like debt (as there is an obligation)
They hit the P&L like interest expense
What is the double entry redeemable/irredeemable preference shares with mandatory cumulative dividends?
Recognised as interest in the P&L acc
DR Interest expense (P&L)
Cr Dividend payable/cash
How are redeemable/irredeemable preference shares withOUT mandatory cumulative dividends accounted for?
They are accounted for on a cash basis
Recognised in the P&L reserve
Treated like ordinary dividends
What is the double entry redeemable/irredeemable preference shares withOUT mandatory cumulative dividends?
DR P&L reserve
CR Cash
What are the benefits to the statement of cash flows
They
- are factual
- i.e. not influenced by acc policies
- are easily understood by users who can see how cash is raised and spent
- Provide extra info on business activities
- Allow users of FS to assess the future prospects of a business
i. e. heavy inv in fixed asset should result in - Show how adaptable a company is to its circumstances
- Shows whether a company is in a position to pay amounts as they fall due
- Facilitates the comparison between companies by requiring the use of standard headings
In the exam, what are you likely to be asked to do with regards to Cash flow?
Adjust a draft statement rather than prepare one from scratch
But learn the layout just incase
What is the basic layout of a SCF?
XYZ Ltd SoCF for XYZ Ltd for period .. Cash flows from operating activities - Cash generated from operations - Interest paid - Income taxes paid Net cash from operating activities Cash flows from investing activities - Purchase of tangible fixed assets Proceeds of sale of tangible fixe assets - Interest received - Dividends received Net cash used in investing activities Cash flows from financing activities - Proceeds of issue of shares - Repayment of loans/issues of loans - Dividends paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period
Why is there some judgement in cash flows?
As FRS 102 Section 7 doesn’t stipulate what cash flows should be included under each of the 3 headings
Give an example of judgement required in cash flows
Dividends paid may sensibly be shown as a cash flow from operating activities or cash flow from financing activities
How do you get to ‘cash generated from operations’ for SCF?
Profit before tax Add interest payable Remove investment income Add back depr charge Add loss on disposal of fixed asset Remove profit on disposal of fixed assets (incr)/decr in stocks (incr)/decr in trade debtors Incr/(decr) in trade creditors Cash generated from operations
What are cash flows from investing activities?
The cash flows associated with the purchase and sale of fixed assets and income from investments held
What makes up cash flows from financing activities?
Cash flow associated with the LT financing of the company
i.e. share capital and loan stock
What is cash and cash equivalents?
Cash - cash in hand and deposits available on demand
Cash equivalents are ST highly liquid investments that are readily convertible to known amounts of cash that are subject to an insignia risk of changes in value
Taken to mean investments with a maturity date of 3 months or less
What does the statement of cash flows reconcile?
Diff between the bf and cf bal sheet figures for cash and cash equivs
How are bank overdrafts classified?
As repayable on demand and treated as -ve cash balance in SCF
Define cash flows from operations
Cash income from the day-to-day trading activities of the company
What are the 2 methods to calculate cash flows from operating activities?
Direct method
Indirect method
How do you use the direct method to calc operating cash flows?
Cash sales Add cash received from credit customers Less Cash purchases Cash paid to credit suppliers Cash expenses To get cash generated from operations
How does the indirect method work for calculating cash from operating activities?
Reconciles profit before tax (as reporting in P&L) to cash generated from operations Profit before tax Add back interest payable Less investment income Add depr charge Add/deduct loss/prof on disposal Add back decrease in stocks Deducted increases in trade debtors Deduct decrease in trade creditors
Explain why you add back the following in a cash flow
Interest payable
added back to profit because it isn’t part of cash from operations
Interest is dealt with later in SCF
Explain why you add back the following in a cash flow
Depreciation
added back because it is not a cash item
Explain why you add back the following in a cash flow
Loss/prof on disposal
added back/deducted because they are non-cash items
Explain why you deduct the following in a cash flow
Investment income
Deducted as it isn’t part of cash from operations
Explain why you add back the following in a cash flow
Decrease in stocks
dded back on because the decrease of stocks liberates extra cash
Explain why you deduct the following in a cash flow
Increase in stocks
And increase in stocks are deducted as purchases of stock represent cash expenditure
Explain why you add/deduct the following in a cash flow
Trade debtors
increase in debtors - Deducted because this is part of the profit not yet realised into cash but tied up in debtors
And decrease in debtors are added back since these represent cash receipts from customers
In ‘other cash from operating activities’ what may cash outflows include?
Interest paid
Income taxes paid
What may be useful for calculating an interest creditor or tax creditor?
A T account
DR side
Cash paid (bal figure)
Creditor C/f
on CR side
Creditor b.f
P&L expense
Why is calculating interest/income taxes paid not straightforward?
As you have to account for
The charge to profit for the item (Shown in the P&L)
Any opening or closing creditor balance shown on the balance sheet
Give some examples of cash inflows from investing activities
Interest received
Dividends received
Proceeds of sale equipment
Give some examples of cash outflows from investing activities
Purchase of tangible fixed assets
When calculating interest and dividends received, what is needed?
the calc should take into acc of both the income debtor shown on P&L and any relevant debtors balance from opening and closing bal sheet
So might want to use a T account
What is the T account for calculating interest debtor or dividend debtor?
On DR side
Debtor b/f
P&L income
on CR side
Cash received (bal fig)
Debtor c/f
Which is the most complex tangible fixed asset to calc?
So what is recommended to calc them?
Calc of purchase of tangible fixed assets and proceeds from sale of tangible fixed assets
T accounts for
Cost account
Accumulated depr account
Disposals account (where relevant)
What are some of the complications with calc of purchase of tangible fixed assets and proceeds from sale of tangible fixed assets
If there is evidence of a revaluation, remember to include the uplift value on the debit side of the cost-account
In some cases, insufficient detail is provided to produce separate cost and accumulated depr accounts
Instead, a NBV T-account should be used
What is the T account for fixed assets NBV?
On DR side
NBV b/f
Additions
Revaluation (movement on reval surplus)
On CR side
Disposal at NBV
Depreciation charge for year
NBV c/f
What may cash inflows from financing activities include?
Proceeds from issue of shares
Proceeds from issue of loans/debentures
What may cash outflows from financing activities include?
Repayment of loans/debentures
Dividends paid
What are the T accounts for disposals of FA?
DR Side
Cost
Profit
CR side
Acc dean
Cash received (bal figure)
NBV cf
What is the calculation of proceeds from issue of shares?
- This cash inflow is generally derived by comparison of the sum bf and sum cf balances ont eh Share Capital and Share Premium amounts together
- You may need to consider any non-cash share issues such as bonus issues taken from the P&L account reserve
What is the Calculation of proceeds from issue of loans/repayment of loans ?
Derived by comparison of the bf and cf balances
What is the calc of dividends paid?
The dividend paid is derived through the P&L account reserve T account
In FAR, there are a number of complications you may see going through P&L reserve
DR side Bonus issue Irredeemable preference share Dividends creditor Dividends paid (bal figure)
CR side
b/f
Profit for year
Transfer from reval reserve
What is the P&L reserve T account used to calc?
Dividends paid for cash flows from financing activities
What is the T account for P&L reserve like?
DR side Bonus issue Irredeemable preference share Dividends creditor Dividends paid (bal figure)
CR side
b/f
Profit for year
Transfer from reval reserve
What is cash and cash equivalents made up of?
Cash in hand
cash at bank
Short term investments in money market instruments
What are the disclosures required for Cash and cash equivalents?
The following:
Cash and cash equivalents include cash in hand and at bank together with ST investments in money market instruments. Cash and cash equivalents in the SCF include the following BS amounts
cash in hand and at bank x
ST investments x
Cash and cash equivalents (total x)
The accounting policy stating what balance cash and cash equips include
Other relevant info such as any unused overdraft facility
Significant non-cash transactions such as issue of bonus shares or inception of a finance lease
What are the terminology differences for IFRS for each of these BS Income statement/ prof and loss acc Turnover Debtors Creditors Fixed assets Tangible fixed assets Creditors falling due after more than one year Creditors falling due within one year Prof and loss account (reserve)
SFP Statement of prof or loss Revenue Receivables Payables NCA PPE NCL CL Retained earnings
What are the presentational differences for IFRS vs UK GAAP
The IFRS Standards SFP is usually prepared with total assets at the top and equity and liabilities at the bottom
What does the FRS 105 offer?
Offers simplified recognition nd measurement of requirements for the smallest of entities
What are the criteria to meet a micro entity
Must meet at least 2 of the following criteria set out in Companies Act (2006)
- Turnover not in excess of £632,000
- Balance sheet total not in excess of £316,000
- No more than 10 employees
Are Public limited company is eligible to be classified as a micro-entity?
Public limited company is ineligible to be classified as a micro-entity
Are Companies producing consolidated financial statements are eligible to apply FRS 105?
Companies producing consolidated financial statements are ineligible to apply FRS 105
What might you be asked to do in an exam re micro entities?
May be asked to prepare an extract from the FS of a micro-entity or explain the acc treatment under FRS 105 of a particular issue
What is a complete set of FS for a micro-entity?
Statement of Financial position with notes at the foot of the statement
An Income Statement (P&L Account)
What is not required to be included in FS for a micro entity?
Statement in changes in equity
Statement of Cash Flows
What are the 2 formats of SFP available under FRS 105?
Format 1 - Net assets basis
Format 2 - Vertical presentation
Describe the Format 1 Net assets Basis for FRS 105
Fixed assets
Current assets
Creditors amounts falling due within 1 year
Total assets less current liabilities
Creditors- amounts falling due after more than 1 year
Net current assets/(liabilities)
Capital and reserves
Describe the Format 2 vertical presentation Basis for FRS 105
Assets
- Fixed assets
- Current assets
Total
Capital, Reserves ad liabilities
- Capital and reserves
- Creditors
Amounts falling due within 1 year
Amounts falling due after more than 1 year
What is required of FRS 105 in terms of the income statement?
FRS 105 requires that the Income Statement classifies expenses by nature rather than function
It is a simplified version of the FRS 102 format
What is required for the notes of FS under FRS 105?
Shown at the foot of the SFP
Advances, credit and guarantees granted to the directors
Financial commitments, guarantees granted to directors
Off-balance sheet arrangements
Average employee numbers
