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CIMA BA3 > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

Define Accounting

A

The process of recording, analysing, summarising and communicating financial
information.

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2
Q

What is the objective of financial reporting

A

To provide information about the reporting entity that is useful to existing and potential investors, lenders and other creditors

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3
Q

What do financial statements consist of?

A

1) Statement of Financial Position
2) Statement of Profit or Loss and Other Comprehensive Income
3) Statement of Cash Flows

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4
Q

What is the Statement of Financial Position sometimes called

A

The Balance Sheet

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5
Q

What is the Statement of Profit or Loss and Other Comprehensive Income sometimes called?

A

Income statement
or
Profit and Loss Account

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6
Q

What are the seven main user groups of financial reporting

A

POEBELL

Public
Owners/investors (equity investors)
Employees
Business Constacts
Analysts and Advisors
Local and central government (incl. HMRC)
Lenders

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7
Q

What are other user groups

A

Pension funds
Pressure groups
Charities

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8
Q

User group information need: Public

A

Any or all of the following

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9
Q

User group information need: Owners/investors

A

How business is doing. What their income is likely to be. How well the managers perform, whether to buy or sell shares

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10
Q

User group information need: Employees

A

Stability, profitability, likelihood of pay rise.

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11
Q

User group information need: Business Contacts

A

Stability? Credit-worthiness? Profitability (e.g. scope to negotiate price cuts)

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12
Q

User group information need: Analysts and Advisors

A

Whether current strategies are working. Future plans. Key performance indicators.

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13
Q

User group information need: Local and Central Government

A

Profit for tax purposes, employment information, carbon emissions etc

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14
Q

User group information need: Lenders

A

Company’s ability to repay debts, assess security

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15
Q

Types of Businesses comparison: Minimum Members

A

Sole Trader: One
Partnership: Two (max 20 if not a recognised profession)
Company: One

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16
Q

Types of Businesses comparison: Formalities

A

Sole Trader: None
Partnership: None (but partnership agreement is normally in writing(
Company: Must register (e.g companies house). Plc and listed companies have more formalities

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17
Q

Types of Businesses comparison: Advantages

A

Sole Trader:
–Flexible.
–Trader keeps all of the profits.
–No disputes with fellow owners.
–Privacy.
Partnership:
–Flexible.
–Share risk and management responsibilities.
–More expertise.
–Duty of utmost good faith.
–Privacy.
Company:
–Members have limited liability
–Easier to raise capital.
–Perpetual succession.

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18
Q

Types of Businesses comparison: Disadvantages

A

Sole Trader:
–Unlimited liability for business obligations.
–Harder to raise finance.
–Lack of resources.
Partnership:
–Unlimited liability for business obligations.
–Harder to raise finance
Company:
–Regulatory burden, e.g. accounts in a statutory form, audit, file accounts and annual return etc. Lack of privacy.

19
Q

Types of Businesses comparison: Who manages the business

A

Sole Trader: Owner
Partnership: Owners
Company: Directors

20
Q

How are accounts prepared?

A

All accounts are prepared using an accounting system, from which accounting information is produced, typically financial accounts and management accounts

21
Q

Financial Accounts vs Management Accounts: Prepared for?

A

Financial accounts: Prepared for external users (eg. shareholders, tax authorities)

Management accounts: Prepared for internal purposes e.g. mangers

22
Q

Financial Accounts vs Management Accounts: Deadlines

A

Financial Accounts: Normally deadlines for “publishing” accounts
Management accounts: No deadline for production (other than as set by management)

23
Q

Financial Accounts vs Management Accounts: timespan

A

Financial Accounts: Summarise historical data (results and financial position)

Management accounts: Forward looking e.g. budgets, cash flow forecasts

23
Q

Financial Accounts vs Management Accounts: Information level

A

FInancial Accounts: Summary Information

Management Accounts: Detailed information and analysis

24
Q

What are primary users of financial statements ( and who)

A

Accounting regulation views some users as more important than others, these are primary users

Primary users:
–Investors (owners)
–Lenders and other creditors

25
Q

Why do primary users of financial statements need financial information?

A

Investors and lenders provide finance to a business, they need financial information for two main reasons:

1) To make decisions about providing resources to the business (e.g. whether to buy, hold or sell shares, whether to make a loan

2) To assess the stewardship of management.

26
Q

In respect to primary users, what is stewardship of management?

A

Stewardship is managements responsibility to act in the best interests of the owners of the business, by safeguarding its assets and using them efficiently and effectively to generate profits and/or increase their value

27
Q

Why are financial statements particularly important if the primary users are external

A

If investors and lenders are external to the business, the published financial statements may be their only or main source of information.

Accounting regulation ensures that the financial statements give a fair presentation of the financial performance and financial position of a business and that they present the information that providers of finance need

28
Q

What are the four main sources of accounting regulation

A

1) Companies legislation
2) International Financial Reporting Standards (IFRS)
3) National accounting standards
4) Stock Exchange regulations

29
Q

Sources of regulation: Companies Legislation

A

This varies from country to country.

In the UK, the Companies Act 2006 applies to all companies.

It sets out prescriptive layouts for the financial statements and requires the preparers of accounts to present a true and fair view.

30
Q

Sources of regulation: IFRS

A

International Financial Reporting Standards are standards issued by the International Accounting Standards Board (IASB).

In many countries, including the UK, all listedcompanies are required to follow these.

31
Q

Sources of regulation: National accounting standards

A

In the UK, these are issued by the Financial Reporting Council (FRC).

Many countries have now either adopted IFRSs as their national standards, or (as in the UK) base their national standards very closely on IFRSs.

One important exception is the USA.

32
Q

Sources of regulations: Stock exchange regulations

A

Listed companies only

33
Q

do sole traders and partnerships have to use any accounting standards

A

only companies have to prepare financial statements using IFRSs or other accounting standards.

In theory, unincorporated businesses such as sole traders and partnerships can use whatever accounting regulations they wish.

34
Q

International Financial Reporting Regulatory Framework: set up

A

IFRS Foundation appoints:

1) IFRS Advisory Council (advises IASB)
2) IASB (International Accounting Standards Board)
3) IFRS Interpretations Committee

IASB reports to IFRS Foundation

IFRS Advisory Council and Interpretation committee both advise IASB

35
Q

International Financial Reporting Regulatory Framework: role overview

A

IFRS foundation - appoint, oversee, raise funds

IFRS Advisory Council - advises IASB

IASB - issues standards and exposure drafts

IFRS interpretations committee - guidance & interpretation

36
Q

IFRS Foundation: Roles and Responsibilities

A

Main objective is to develop a single set of high quality IFRSs through its standard-setting body, the IASB

A further objective: to bring about convergence of national and international standards.

-Monitor, fund, appoint members of IASB, IFRD AC and IFRIC
-Establishes and amends operating procedures, consultative arrangements and due processes of IASB, IFRS IC and IFRS Advisory Council

37
Q

IASB: Roles and Responsibilities

A

The IASB is an independent privately-funded body

It issues International Financial Reporting Standards (IFRS).

The Board has 16 members.

Before 2003, these were called International Accounting Standards, or IAS.

38
Q

IFRIC: Roles and Responsibilities

A

Provides timely guidance on the application and interpretation of IFRSs

Provides guidance on new financial reporting issues not specifically addressed by IFRSs.

Interpretations are approved by the IASB prior to being issued.

39
Q

IFRS AC: Roles and Responsibilities

A

The IFRS Advisory Council is the formal advisory body to the IASB and IFRS Foundation.

It takes recommendations from individuals, corporations and national standard setters

and then provides advice to the IASB on priority areas of accounting.

40
Q

What is corporate goverance?

A

the system by which companies are directed and controlled

41
Q

What is “charged with governance”

A

A company needs to be appropriately “governed” as the owners of a business do not necessarily work for or run the company and therefore need to ensure that the business is being run properly.

The Directors of a company are those “charged with governance”. Their responsibilities are laid down in law.

42
Q

What are the legal responsibilities of a director

A

These vary according to national companies legislation

1) The preparation of the financial statements in accordance with the applicable financial reporting framework (e.g. IFRSs)

2) The internal controls needed to prepare financial statements

3)The prevention and detection of fraud

4) Ensuring that the entity complies with all relevant laws and regulations

Directors should explain their responsibility for preparing accounts within the financial statements.

CIMA BA3 (17 decks)

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