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FA > Chapter 1 Intro to Financial reporting > Flashcards

Chapter 1 Intro to Financial reporting Flashcards

1
Q

Why is financial accounting important?

A

It is concerned with production of financial statements for external users.

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2
Q

The two generally accepted financial accounting standards?

A

IAS (old version)
IFRS(newer came to act in 2001)
To reduce the differences in the way companies draw up their financial statements in different countries.

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3
Q

IAS EXPAND?

A

International Accounting Standards

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4
Q

IFRS

A

International Financial Reporting Standards.

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5
Q

Financial statements are ____________ documents.

A

Public. (no individual product’s profitability displayed)

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6
Q

Two types of accounting given in this chapter?

A

Financial Accounting
Management Accounting

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7
Q

Uses of Management Accounting

A

Formulating Strategy
Planning and controlling Activities
Decision Making
Optimizing the use of resources

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8
Q

Necessity of Management Accounting?

A

Management of a company require up to date information to control the business and plan for the future.

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9
Q

Users of Financial Statements? (AKA STAKEHOLDERS)
and why it is important to them?

A

Investors: To make accurate decisions and ensure security of their investment

Employees: Get job security and possible pay rises, salaries and benefits of enjoyed by senior management. Divisonal profitability will be useful if a part of the business is threatened.

Lenders: The going forward assumption, they need to know they will be repaid. Solvency of entity. Assets given as security will be mentioned in financial statements.

Government: Taxation and how economy is performing

Suppliers: Ensure payment and assurance of financial health before supplying goods

Customers: Can continue to supply them. (medication and stuff)

The PUBLIC: social responsibility and employment to local community.

GET SLIM CC

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10
Q

Another name for users of FINANCIAL STATEMENTS?

A

STAKEHOLDERS and SHAREHOLDERS

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11
Q

Largest and most sophisticated groups of Investors?

A

Pension Funds and unit trusts (two examples of investors)

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12
Q

Limited liability companies features

A

These are good features of private limited companies.

Property Holding- Shares and property(of the company) belong to the company. Transferring between shareholders don’t change that.

Transferable shares- Shares can transferred without consent from other shareholders.

(NOTE: In the case of partnership new partner cannot be introduced without prior acknowledgement)

Suing and being sued- Limited labiality companies is a separate entity therefore the shareholders cannot be sued. (they have a separate legal board for that)

Security for loans - Lenders can use companies fluctuating assets as mortgage security to provide loans (also called a floating point).

Taxation - Because company is a legally separated from it’s shareholders, it is taxed separately from its shareholders.

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13
Q

What is floating point?

A

Lenders (Those who lend money mainly to LLCs) can use the (physical ) assets as mortgage security to provide loans.

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14
Q

Steps for incorporation/ disadvantages for registering private limited company?

A

Companies have to register and file formal constitution documents. Registration fees and legal costs have to be paid.

Annual financial statements must be submitted and must be audited (expensive)

A registered company accounts and certain documents are open to public inspection.

Strict rules are enforced in connection with introduction and withdrawal of capital and profits. (baisically you need permission to withdraw your own money)

Shareholders may/may not take part in management.

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15
Q

What is IASB

A

International Accounting Standards Board
The IFRS is issued by the International Accounting Standards Board (IASB).

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16
Q

What is Conceptual Framework?

A

Conceptual framework presents the main ideas, concepts and principles on which all International financial reporting standards and financial statements are based.

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17
Q

Purpose of Conceptual Framework?

A

Helps assist the IASB

It acts as a handbook providing additional information to assist preparers of financial statements to develop accounting policies when IFRSs do not give enough guidance.

Acts as a interpreter for reporting standards (IFRS).

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18
Q

Objective of financial reporting?

A

To provide users of financial statement necessary information for decision making and resource allocation.

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19
Q

Prudence ?

A

Exercise of caution when making decisions under conditions of uncertainty. Keeping up morality.

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20
Q

Qualitative characteristics of financial statements ? (under conceptual framework) Read Page 11 for further info.

A

Fundamental qualitative characteristics (requirements)

*Relevance (Priority to Priority)
*Faithful Representation (Truthful)

Enhancing qualitative Characteristics (additional Stuff)

VCUT

*Comparability
*Verifiability
*Timeliness
*Understandability

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21
Q

What is relevance?

A

relevant Information have predictive and confirmatory value therefore it influences economic decisions of users.

When choosing between two options which are equally important, The priority should be given to the one which would have most use in taking economic decision.

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22
Q

What is threshold quality?

A

A cut of point for relevant information.
If the information is material.

23
Q

What is materiality?

A

Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of that financial statements.

24
Q

SUBSTANCE OVER FORM? Faithful representation?

A

All financial transactions and accounting information must have economic reality and substance at their core rather than simply following procedure/ legal form.

It is important because IRS may reject your accounting info.
It falls under faithful representation (conceptual framework)

25
Q

Completeness? Enhancing qualitative characteristic?

A

Info must contain all necessary descriptions and explanation even the estimates.

They should be:
it must be neutral (no bias)
Free from error

26
Q

Comparability?

A

Info must be comparable i.e. they must comparable with the over time with itself and other entities (competitor).

They should be:
consistent
Full disclosure

27
Q

Verifiability?

A

Info should be verifiable

They can be
Direct: Counting cash
Indirect: applying formulae/math/methodology to it

28
Q

Timeliness?

A

Info should be on time.

29
Q

Understandability?

A

Users must be able to understand the significance of info.

30
Q

Asset OG definition?

A

A present economic resource controlled by an the entity as a result of past events.

31
Q

Liability OG Definition?

A

A present obligation of the entity to transfer an economic resource as a result of past events.

32
Q

Equity ?

A

The “residual interest” in the assets of the entity after deducting all liabilities. Effectively what is paid back to the owners (Shareholders) after paying off liabilities/debt and business cease to trade.

Equity or capital of a business is represented by the net assets of that business.

33
Q

Income

A

Consist of the increase in asset, or decrease in liabilities, that result in increase in equity

34
Q

Expense

A

Consist of decrease in asset, or increase in liabilities, that result in decreased equity.

35
Q

Assets division?

A

NCA (Non current asset)
CA (Current asset)

36
Q

Non-Current Asset?

A

Long term basis, Not expected used in 12 months after reporting, Not held for resale.

Example - land, building, Machinery and plant

37
Q

Current Asset?

A

Realized, sold with normal operating cycle or within 12 months after reporting.

EG- inventory , receivables cash.

38
Q

Liabilities Division? (same as assets)

A

Non-Current and Current.

39
Q

Non- Current liabilities and current?

A

When payment can be deferred for more than 12 months it is non-current asset.
E.g. Loan.

*Liabilities expected to settled with normal operating cycle
or settled within 12 months of reporting.
*No right to defer payment for 12 months
E.g. short term loan, bank overdraft, loan

40
Q

Financial statements Components? (important)

A

Statement of financial position.
Statement of profit and loss and other comprehensive income(often called P/L)
Statement for changes in equity
Statement of cash flows
Notes to financial statements.

41
Q

The statement of financial position?

A

This summarizes the assets liabilities and equity balances of the business at the end of the reporting period.

42
Q

Statement of P/L and other comprehensive income?

A

Also called (used to) as profit and loss account.
It refers to the expenses incurred and revenue earned and other comprehensive income (for limited companies for unrealized gains and losses).

43
Q

Statement of changes in equity?

A

Movement of equity balances. ( only for limited liabilities companies)

44
Q

Statement of cash flow?

A

Movement of cash, paid and received, throughout the reporting period.

45
Q

Notes of financial statements?

A

Statement of accounting policies for the illiterate shareholders to make informed judgements.

46
Q

The going concern assumption?

A

The statements are prepared on the assumption that the entity will continue to operate for the foreseeable future.(at least for twelve months)

47
Q

The business entity concept? ( Business is a separate entity from the owners)

A

The financial statement relates only to activities of the business and not the owners.

48
Q

The accrual basis of accounting? Read page 21

A

Transactions are recorded when revenues are earned and expenses are incurred. The sale is recorded the moment contractual duty is satisfied.

49
Q

prudence?

A

Read page 21

50
Q

What are sole traders?

A

A sole proprietorship, also known as a sole tradership, individual entrepreneurship or proprietorship, is a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity.

51
Q

Limited liability companies?

A

A limited liability company (LLC) is a business entity that prevents individuals from being liable for the company’s financial losses and debt liabilities. In the event of legal action or business failure, liability is assumed by the company rather than its constituent partners or shareholders.

52
Q

What are share capital?

A

the part of the capital of a company that comes from the issue of shares.

53
Q
A

FA (6 decks)

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