Chapter 1

Question 1

Define Accounting

Answer 1

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

Question 2

What is the objective of financial reporting

Answer 2

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

Question 3

What do financial statements consist of?

Answer 3

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

Question 4

What is the Statement of Financial Position sometimes called

Answer 4

The Balance Sheet

Question 5

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

Answer 5

Income statement
or
Profit and Loss Account

Question 6

What are the seven main user groups of financial reporting

Answer 6

POEBELL

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

Question 7

What are other user groups

Answer 7

Pension funds
Pressure groups
Charities

Question 8

User group information need: Public

Answer 8

Any or all of the following

Question 9

User group information need: Owners/investors

Answer 9

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

Question 10

User group information need: Employees

Answer 10

Stability, profitability, likelihood of pay rise.

Question 11

User group information need: Business Contacts

Answer 11

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

Question 12

User group information need: Analysts and Advisors

Answer 12

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

Question 13

User group information need: Local and Central Government

Answer 13

Profit for tax purposes, employment information, carbon emissions etc

Question 14

User group information need: Lenders

Answer 14

Company’s ability to repay debts, assess security

Question 15

Types of Businesses comparison: Minimum Members

Answer 15

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

Question 16

Types of Businesses comparison: Formalities

Answer 16

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

Question 17

Types of Businesses comparison: Advantages

Answer 17

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.

Question 18

Types of Businesses comparison: Disadvantages

Answer 18

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.

Question 19

Types of Businesses comparison: Who manages the business

Answer 19

Sole Trader: Owner
Partnership: Owners
Company: Directors

Question 20

How are accounts prepared?

Answer 20

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

Question 21

Financial Accounts vs Management Accounts: Prepared for?

Answer 21

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

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

Question 22

Financial Accounts vs Management Accounts: Deadlines

Answer 22

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

Question 23

Financial Accounts vs Management Accounts: timespan

Answer 23

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

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

Question 23

Financial Accounts vs Management Accounts: Information level

Answer 23

FInancial Accounts: Summary Information

Management Accounts: Detailed information and analysis

Question 24

What are primary users of financial statements ( and who)

Answer 24

Accounting regulation views some users as more important than others, these are primary users Primary users: --Investors (owners) --Lenders and other creditors

Question 25

Why do primary users of financial statements need financial information?

Answer 25

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.

Question 26

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

Answer 26

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

Question 27

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

Answer 27

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

Question 28

What are the four main sources of accounting regulation

Answer 28

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

Question 29

Sources of regulation: Companies Legislation

Answer 29

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.

Question 30

Sources of regulation: IFRS

Answer 30

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.

Question 31

Sources of regulation: National accounting standards

Answer 31

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.

Question 32

Sources of regulations: Stock exchange regulations

Answer 32

Listed companies only

Question 33

do sole traders and partnerships have to use any accounting standards

Answer 33

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.

Question 34

International Financial Reporting Regulatory Framework: set up

Answer 34

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

Question 35

International Financial Reporting Regulatory Framework: role overview

Answer 35

IFRS foundation - appoint, oversee, raise funds IFRS Advisory Council - advises IASB IASB - issues standards and exposure drafts IFRS interpretations committee - guidance & interpretation

Question 36

IFRS Foundation: Roles and Responsibilities

Answer 36

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

Question 37

IASB: Roles and Responsibilities

Answer 37

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.

Question 38

IFRIC: Roles and Responsibilities

Answer 38

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.

Question 39

IFRS AC: Roles and Responsibilities

Answer 39

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.

Question 40

What is corporate goverance?

Answer 40

the system by which companies are directed and controlled

Question 41

What is "charged with governance"

Answer 41

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.

Question 42

What are the legal responsibilities of a director

Answer 42

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.