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ICAEW - CERTIFICATE LEVEL 1 - ACCOUNTING > Chapter 1 - Introduction to Accounting > Flashcards

Chapter 1 - Introduction to Accounting Flashcards

1
Q

‘CHAPTER 1 PART 1 - The purpose of accounting information

A

CHAPTER 1 PART 1 - The purpose of accounting information

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2
Q

Define Accounting (1)

A

Accounting is a way of recording, analysing and summarising the transactions of an entity (a term we shall use to describe any business organisation)

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3
Q

How many types of business entity are there? Name them all (3)

A

There are three main types of profit-focused business entity:
1) Sole traders
2) Partnerships
3) Limited liability companies (LTD)

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4
Q

Describe a Sole Trader business entity (4) + Example (1)

A
  • Work for themselves
  • Legally one and the same as their business
    -Unlimited liability
  • If they are sued they are personally responsible can potentially lose any personal and business assets (e.g their home)
  • Can have employees

Example: Plumber, Local Shopkeeper, Hairdresser

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5
Q

Describe a Partnerships business entity (4) + Example (1)

A

Partnership can take one of two forms:
1) a general partnership (like two or more sole traders) - joint and several liability
2) a Limited Liability Partnership LLP (more like a company). -

1) For general partnerships - Two or more people own the business (they share the risk and reward together)
- If they are sued they are personally responsible can potentially lose any personal and business assets (e.g their home) - doesn’t matter which owner gets sued

2) For Limited Liability Partnership LLP - owners can maximum lose only what they have invested into the business

  • Partnerships are not considered further in Accounting.

Example: Accountancy, medical or legal practic

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6
Q

Describe a Limited liability companies (LTD) business entity (4)

A
  • Known as incorporating
  • Managed and directed by shareholders/members/owners
  • If the company is sued any personal assets are safe
  • Owners can maximum lose only what they have invested into the business
  • Limit liability of owners
  • The owners (shareholders) of a limited liability company are only responsible for the amount to be paid for their shares
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7
Q

Is a Limited liability companies private or public? (1)

A

LTD can be private or public (PLC) - both limited companies

Ltd - only friends and family can buy shares
Plc - open to the public to open buy the shares

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8
Q

What is the business entity concept? Who does it affect? (1)

A

Business entity concept - accounts are always produced from POV of business separate from business owner for all 3

The business entity concept states that the business is separate from the owner(s) of the business. Therefore the accounting records for even the simplest business, the sole trader, must be kept separate from the personal affairs of the owner or owners

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9
Q

Why do businesses need to produce accounting information in the form of financial statements?

A

Simple answer = Needs to provide enough information to help people make economic decisions

According to the IFRS Foundation’s Conceptual Framework for Financial Reporting, the objective of financial reporting is to ‘provide information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity

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10
Q

What is a financial statement? (1) What is it comprised of? (6)

A
  • Prepared under IFRS Accounting Standards
    1. statement of financial position
    2. a statement of profit or loss and other comprehensive income
    3. a statement of changes in equity
    4. a statement of cash flows
    5. notes
    6. and in certain circumstances a revised statement of financial position from an earlier period.
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11
Q

Who would use a financial statement? (11)

A
  1. Managers/Directors
  2. Owners of the company (shareholders)
  3. Lenders
  4. Other creditors
  5. Trade contacts
  6. HMRC = HM Revenue and Customs
  7. Employees
  8. Financial analysts and advisors
  9. Government Agencies
  10. Public
  11. Regulatory bodies
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12
Q

What does IFRS stand for? (1) What is it? (1)

A

IFRS = international Financial Reporting Standards

Are a set of accounting rules for how information should be gathered and presented in financial reports

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13
Q

Who is the primary user group of financial statements? (1) What do they need to assess? (2)

A
  1. Existing and potential investors, lenders and other creditors

Accounting policies and principles are made around this group

When making decisions, the primary users need to assess:
* The economic resources of an entity (eg, its cash and other assets), claims against the entity (eg, its liabilities) and changes in those resources and claims.
* How efficiently and effectively the entity’s management have discharged their responsibilities relating to the management of the entity’s resources.

Will they buy (invest) or sell (divest)

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14
Q

What does the timing and certainty of cash flows determine whether a business can do? (4)

A

Cash is important to businesses. An entity needs to be able to use its resources to generate cash and use that cash to settle its claims. The timing and certainty of cash flows determines whether the business can:
* pay its employees and suppliers
* meet interest payments
* repay loans
* pay something to its owners

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15
Q

Why would Managers/Directors find a financial statement useful? (5)

A
  • As they supervisor the day-to-day they need info about company’s present and future financial situation ables them mange the business and are decisions regarding pricing, output, employment and financing.
    -Might be responsible for meeting ESG (environmental, social and governance) targets, will need info on these measures and know how the company is performing against them
  • They do not rely on financial statements as they can have access to internal business info through the cost and management accounting system
  • Therefore, instead of being thought of as users of the financial statements, management are primarily responsible for the preparation and presentation of the financial statements
  • The CONCEPTUAL FRAMEWORK does not identify managers as primary users of a financial statute but instead as being responsible for the preparation and presentation
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16
Q

What does ESG stand for? (2)

A

Environmental, social and governance (ESG)

Frequently used terminology in corporate and investment communities. It approaches sustainability related issues through a corporate lens and considers the impact of these risks on business and enterprise value

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17
Q

Why would Owners/Shareholders find a financial statement useful? (5)

A
  • Want to assess management performance
  • Their capital is at risk as they have invested and they want to know what is the risk and what is the return
  • Should they buy, hold or sell shares. They want to know how profitable and sustainable the company’s operations are and how much profit is available for distribution to the shareholders through a dividend
  • May consider ESG (environmental, social and governance) issues - as can impact value. Dependencies could include, for example, climate risks, resource availability, worker health, diversity, regulatory risks and consumer expectations
  • Want to know how is the entity’s policies and practices impact to the environment and society e.g. policies on worker rights, human rights issues within its supply chains, greenhouse gas (GHG) emissions and water usage
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18
Q

How can ESG information in a financial statement affect Lenders? (1)

A
  • Lenders include financial and non-financial conditions that the business should meet, if not met the terms can be changed or withdrawn
  • More ESG (environmental, social and governance) conditions are now being included. For example emission levels, which directly link to the interest rate on the loan. The higher the emissions, the higher the interest rate
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19
Q

Why would Lenders find a financial statement useful? (3)

A
  • e.g. Banks
  • Banks allows entity to operate In overdrafts or provide longer term loan finance , they need top ensure they will keep up the loan payments
  • Lenders include financial and non-financial conditions that the business should meet, if not met the terms can be changed or withdrawn
  • More ESG (environmental, social and governance) conditions are now being included. For example emission levels, which directly link to the interest rate on the loan. The higher the emissions, the higher the interest rate
  • A bank may receive more information outside of the financial statement they might demand a cash flow forecast as a pre-condition of granting an overdraft
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20
Q

Why would Other Creditors/Suppliers find a financial statement useful? (3)

A
  • Other creditors/suppliers provide goods and services on credit and customers who purchase goods or services
  • They want to know can they pay the debts
  • They usually care more short term about entity compared to lenders unless they are dependent upon the continuation of the entity as a major customer
  • Suppliers are also interested in the company’s corporate values such as its fair trade policies, how it treats its employees and its environmental practices
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21
Q

Why would Trade Contacts find a financial statement useful? (1)

A

Trade contacts, which includes suppliers/creditors, and customers need to know that the company is a secure source of supply, so that repeat purchases and after-sales care will be available

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22
Q

Why would HMRC find a financial statement useful? (2)

A

HM Revenue and Customs (HMRC) want to know about business profits in order to assess the company’s tax liabilities

HMRC will receive information outside of the financial statement to make tax assessments

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23
Q

Why would an Employee find a financial statement useful? (4)

A
  • Assess job security
  • Assess career opportunities
  • Assess the entity’s ability to provide remuneration, retirement benefits and employment opportunities
  • Assess if they want to be part of the organisation and consider issues such as the ethical stance of the company and pay equality between genders
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24
Q

Why would a Financial Analyst/Advisor find a financial statement useful? (1)

A
  • Use the info for their clients to help advise investor, credit agencies or even journalists (who may need info for they reading public)
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25
Q

Why would Government agencies find a financial statement useful? (3)

A
  • Interested in the efficient allocation of resources and therefore in the activities of enterprises
  • May require info in order to provide a basis for national statistics
  • They may want to assess how entities are implementing mandatory reporting requirements to disclose information, for example the disclosure requirements of the Task Force on Climate- related Financial Disclosures (TCFD)
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26
Q

What is the TCFD? (2)

A

The Taskforce on Climate-related Financial Disclosures (TCFD)

requires most UK companies to disclose information on the climate-related risks and opportunities that they face.

You are not required to understand the requirements of the TCFD in Accounting but, should be aware that it is an important area of change.

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27
Q

Why would the Public find a financial statement useful? (2)

A
  • Public are having more influences on what is included in a financial statement
  • Review entities ethical and social disclosures
  • e.g. may be concerned with the levels of pollution generated by the entity
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28
Q

Why would the Regulatory Bodies find a financial statement useful? (2)

A

Regulatory bodies such as the Financial Conduct Authority (FCA) which regulates the financial services industry, require information to ensure compliance with regulations and the law

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29
Q

Who would prepare a financial statement? (2)

A

As managers do not rely on financial statements as they can have access to internal business info through the cost and management accounting system they are primarily responsible for the preparation and presentation of the financial statements

The CONCEPTUAL FRAMEWORK does not identify managers as primary users of a financial statute but instead as being responsible for the preparation and presentation

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30
Q

Who may require more information outside of a financial statement? (2)

A

In addition to the financial statements, additional accounting information is often prepared for the benefit of other stakeholders to satisfy their specific information needs:
* HMRC will receive information to make tax assessments
* A bank might demand a cash flow forecast as a pre-condition of granting an overdraft

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31
Q

Who needs to be prepare financial statement? (3)

A
  • Business entity’s
    1) Sole traders
    2) Partnerships
    3) Limited liability companies (LTD)
  • Charities and clubs
  • Government (public sector) organisations
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32
Q

What is the Conceptual Framework? (2) Who does it say is responsible for THE preparation of a financial statement? (1)

A

The Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements.

Conceptual Framework states that if financial information is to be useful, it must be relevant and faithfully represent what it purports to represent.

The CONCEPTUAL FRAMEWORK does not identify managers as primary users of a financial statement but instead as being responsible for the preparation and presentation

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33
Q

CHAPTER 1 PART 2 - The regulation of accounting

A

CHAPTER 1 PART 2 - The regulation of accounting

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34
Q

What must all UK companies comply with? (1)

A

In the UK, all companies must comply with the provisions of the Companies Act

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35
Q

What is the Companies Act? (2)

A
  • All UK companies use comply
  • 2006
  • Requires that the financial statements should give a true and fair view of the financial position of the entity at a particular point in time.
36
Q

What does true and fair mean in relation to Companies Act 2006? (3)

A
  • No set terms for true and fair, decided on a case by case basis in a court of law
  • True doesn’t mean matched to the penny it must be accurate not misleading, not biased, balanced fair view of transactions of period
  • True and fair override - if its more true and fair to not follow accounting standard to represent a transaction in a diff way this is more important. Very uncommon.
37
Q

What is the True and fair override? (1)

A
  • True and fair override - if its more true and fair to not follow accounting standard to represent a transaction in a diff way this is more important
  • Very uncommon
  • No set terms for true and fair, decided on a case by case basis in a court of law
38
Q

What rules must financial statements be prepared in accordance with? (2)

A

In the UK, financial statements must be prepared in accordance with either:
1. UK GAAP
2. IFRS Accounting Standards

They must also give a true and fair view of the performance and position of the company

39
Q

Name factors that have shaped the development of accounting (6)

A

A number of factors have shaped the development of accounting
1. Generally Accepted Accounting Practice (GAAP)
2. Legislation
3. Accounting standards
4. True and fair view/fair presentation
5. Accounting concepts and individual judgement
6. Sustainability disclosure standards

40
Q

What does GAAP stand for? (1) and what is it? (2) what does it encompass? (2)

A

Generally Accepted Accounting Practice (GAAP)

Note that in the UK, GAAP refers to generally accepted accounting practice. Internationally, the term GAAP refers to generally accepted accounting principles. In Accounting, we will adopt the UK terminology and use the term practice.

What is it?
- GAAP is a term used to cover all the rules, from whatever source, which govern accounting in various jurisdictions
- The requirement that financial information is relevant, reliable, comparable and understandable is common to both IFRS Accounting Standards and GAAP

What does it encompass?
- Companies Act 2006
- UK accounting standard

41
Q

What is a listed company? (1)

A

A listed company is one whose shares can be traded on a stock exchange, for example the London Stock exchange

42
Q

What is Legislation? (1)

A

Legislation is a set of rules put into place by governing bodies e.g. UK law is put into place by parliament

43
Q

What legislation applies for a listed company? (1)

A

A listed company is one whose shares can be traded on a stock exchange, for example the London Stock exchange.
Limited liability companies are required by the Companies Act 2006 to prepare and publish financial statements annually. Their form and content are regulated by legislation but must comply with accepted accounting and financial reporting standards.

!! For listed groups this means compliance with IFRS Accounting Standards.

Certain entities are exempt from preparing financial statements under s394 of the Companies Act.

44
Q

What legislation applies for a unlisted company? (1)

A

Unlisted companies tend to be smaller than listed companies and their shares cannot be traded on a stock exchange.
Limited liability companies are required by the Companies Act 2006 to prepare and publish financial statements annually. Their form and content are regulated by legislation but must comply with accepted accounting and financial reporting standards.

!! Non-listed companies generally follow UK accounting standards which are substantially converged with international ones.

Certain entities are exempt from preparing financial statements under s394 of the Companies Act.

45
Q

What is Professional judgement? (1) What has been put into place to help? (1)

A

Professional judgement is applied by accountants based on their interpretation of a scenario, which can lead to subjectivity in accounting

In order to deal with some of this subjectivity, and to achieve comparability between different organisations, accounting standards were developed. These were developed at an
- international level by the International Accounting Standards Board (IASB)
- UK level by the Financial Reporting Council (FRC)
The FRC sets UK and Ireland accounting standards via its Codes and Standards Committee. The Corporate Reporting Council supports and advises the Codes and Standards Committee in accounting and reporting. It is responsible for the development of UK standards and for considering and commenting on international proposals.

46
Q

What is the IASB? (2)

A

Type of accounting standard that was developed at an international level by the International Accounting Standards Board (IASB)

47
Q

What is the FRC? (2)

A

Type of accounting standard that was developed at a UK level by the Financial Reporting Council (FRC)

The FRC sets UK and Ireland accounting standards via its Codes and Standards Committee. The Corporate Reporting Council supports and advises the Codes and Standards Committee in accounting and reporting. It is responsible for the development of UK standards and for considering and commenting on international proposals.

48
Q

What is the IFRS? (1)

A

International Financial Reporting Standards (IFRS Accounting Standards)

The International Accounting Standards Board (IASB) is responsible for setting IFRS Accounting Standards

The standards that are issued by the IASB comprise:
* International Financial Reporting Standards (IFRS Accounting Standards)
* International Accounting Standards (IAS)
The interpretations that are issued by the IFRS Interpretations Committee are:
* IFRIC Interpretations
* SIC Interpretations
IAS and IFRS Accounting Standards have the same status, IASs are simply older standards; those published since 2001 are called IFRS Accounting Standards. IFRS Accounting Standards is the collective term used throughout this Workbook to refer to all IFRS Accounting Standards and IASs.

49
Q

What are the IASB standards compromised of? (5)

A

The International Accounting Standards Board (IASB) is responsible for setting IFRS Accounting Standards

The standards that are issued by the IASB comprise:
* International Financial Reporting Standards (IFRS Accounting Standards)
* International Accounting Standards (IAS)
The interpretations that are issued by the IFRS Interpretations Committee are:
* IFRIC Interpretations
* SIC Interpretations
IAS and IFRS Accounting Standards have the same status, IASs are simply older standards; those published since 2001 are called IFRS Accounting Standards. IFRS Accounting Standards is the collective term used throughout this Workbook to refer to all IFRS Accounting Standards and IASs

50
Q

How are the IFRS Accounting Standards and the Conceptual Framework linked? (1)

A

IFRS Accounting Standards stem from the concepts set out in the Conceptual Framework (although some Standards were developed prior to the Conceptual Framework and there are some inconsistencies as a result)

51
Q

NEED CLARITY 2.5 WORKBOOK

2.5 UK position
Non-listed companies in the UK can choose to report under IFRS Accounting Standards or UK financial reporting standards (FRS). References to UK GAAP in this Workbook refer to the use of the UK Companies Act 2006 and UK FRS. Whilst IFRS Accounting Standards have different standards for different issues, there is one main accounting standard in the UK – FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland – covering all issues. FRS 102 also contains the underpinning concepts and principles, which are similar to those which guide IFRS Accounting Standards.

A

NEED CLARITY 2.5 WORKBOOK

2.5 UK position
Non-listed companies in the UK can choose to report under IFRS Accounting Standards or UK financial reporting standards (FRS). References to UK GAAP in this Workbook refer to the use of the UK Companies Act 2006 and UK FRS. Whilst IFRS Accounting Standards have different standards for different issues, there is one main accounting standard in the UK – FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland – covering all issues. FRS 102 also contains the underpinning concepts and principles, which are similar to those which guide IFRS Accounting Standards.

52
Q

CHAPTER 1 PART 3 - Sustainability and sustainability standards

A

CHAPTER 1 PART 3 - Sustainability and sustainability standards

53
Q

What is sustainability? (1)

A

Sustainability: Meeting the needs of the present without compromising the ability of future generations to meet their own needs

54
Q

Why is reporting on sustainability is important? (1)

A

Sustainability reporting is important to users of financial statements who, are increasingly interested in information relating to the sustainability of an entity’s operations when informing their decisions.

The users are interested in both the social aspects of sustainability such as the impact an entity has on its local environment, and how sustainability impacts company value.

55
Q

Who has issued guidance and reports? (2) and are these mandatory? (1)

A

There are a number of bodies who have issued guidance and reports on sustainability disclosures
- International Sustainability Standard Board (ISSB)
- Corporate Sustainability Reporting Directive (CSRD)

Some are best practice, some will become mandatory

56
Q

What is the CSRD? (2)

A

Corporate Sustainability Reporting Directive (CSRD)

One of the bodies who have issued guidance and reports on sustainability disclosures

57
Q

What is the ISSB? (3)

A
  • ISSB = International Sustainability Standard Board
  • IFRS Foundation formed ISSB in 2021
  • ISSB will develop and issue IFRS Sustainability Disclosure Standards - aim is to provide high quality, transparent and comparable info. So will be consistent info and presentation across entities. So entitys can be compared. The disclosure standards DO NOT replace IFRS Standards, they operate alongside them

ISSB will build on work done by other organisations e.g. Task force on climate related financial disclosures.

58
Q

What are IFRS Sustainability Disclosure Standards? (3)

A
  • ISSB will develop and issue IFRS Sustainability Disclosure Standards
  • Aim is to provide high quality, transparent and comparable info. So will be consistent info and presentation across entities. So entitys can be compared.
  • The disclosure standards DO NOT replace IFRS Standards, they operate alongside them
59
Q

There are two fundamental aspects to sustainability reporting? (2)

A
  1. Companies need to report how their business +vely or -vely ESG issues – ‘impacts’
    2, How these factors affect a company’s financial statements and their ability to maintain value – ‘dependencies’
60
Q

What are some examples of sustainability reporting? (1)

A

Examples of impacts include worker rights, human rights, health and safety policy, waste, greenhouse gas emissions, water usage, land usage and biodiversity

61
Q

What are some examples of dependancies? (2)

A

Examples of dependencies which may affect an organisation are worker health, workplace diversity, climatic conditions, resource availability, regulation, consumer expectations, other stakeholder expectations and risks to organisational reputation.

62
Q

How do dependencies relate to financial materiality? (1)

A

Disclosure of information on dependencies is generally more useful for investors, who want to assess how well a company is managing its exposure to long-term ESG risks, and hence assess the value of the company to inform investment decisions. This directly relates to financial materiality

63
Q

CHAPTER 1 PART 4 - The main financial statements

A

CHAPTER 1 PART 4 - The main financial statements

64
Q

What rules does a financial statement follow? (1)

A
  • Prepared under IFRS Accounting Standards, the rule is called IAS 1
65
Q

What is the IAS 1? (1) What is it composed of? (6)

A
  • IAS 1 is Presentation of Financial Statements sets out the form and content of the financial statements.
  1. a statement of financial position (SOFP) as at the end of the reporting period. aka. balance sheet
  2. a statement of profit or loss and other comprehensive income for the reporting period, which can be in a two-part format including a separate statement of profit or loss (as we shall see in Chapter 14, under UK GAAP this is called a profit and loss account)
  3. a statement of changes in equity for the reporting period
  4. a statement of cash flows for the reporting period. aka. cash flow statement
  5. notes comprising a summary of significant accounting policies and other explanatory information; and
  6. a statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively, makes a restatement of items in its financial statements, or reclassifies items.
66
Q

What rules does a financial statement follow for companies reporting under UK GAAP? (2)

A

Companies reporting under UK GAAP will present their financial statements in accordance with:

  • Companies Act 2006
  • FRS 102

Generally the profit and loss account formats require less detail than IAS 1. The Companies Act balance sheet formats are less flexible than the IAS 1 formats. The Companies Act formats are enshrined in law.

67
Q

IAS 1 - 1) Statement of financial position (SOFP)/Balance Sheet
When does it happen? (1)
What does it include? (1)

A
  • As at the end of a reporting period - snapshot of a financial position of the business at a particular moment
  • Comprises of a list of all assets controlled (owned) and all liabilities (owed) - monetary amounts are assigned
  • The difference between assets and liabilities (assets - liabilities = equity) is equity aka capital = owed back to the owners of the company.
68
Q

Draw layout out of Statement of Finance Position

A

See Pg 18 FI Workbook

69
Q

Accounting Equation (1)

A
  • The difference between assess and liabilities (assets - liabilities = equity) is equity aka capital = owed back to the owners of the company.

assets = liabilities + equity

70
Q

What is the relationship between assets, liabilities and equity? (1)

A
  • The difference between assess and liabilities (assets - liabilities = equity) is equity aka capital = owed back to the owners of the company.

assets = liabilities + equity
assets - liabilities = equity
net assets = equity

71
Q

What is equity? (1)

A

Equity: The amount invested in a business by the owners (IAS 1 refers to ‘owners’ rather than ‘equity holders’ or ‘shareholders’).
The Conceptual Framework defines equity as ‘the residual interest in the assets of the entity after deducting all its liabilities’

72
Q

What factors affect a company’s financial position at any one time? (4)

A

(a) the economic resources it controls (cash, labour, materials, machinery, skills)
(b) its financial structure (whether it is funded by owners, lenders, suppliers, or by all three)
(c) its liquidity (short-term availability of cash) and solvency (long-term access to funds)
(d) its adaptability to changes in its operating environment

73
Q

NEED CLARITY 4.1 WORKBOOK

The Conceptual Framework focuses on how information about the nature and amounts of an entity’s economic resources and claims (liabilities) can help users to identify the reporting entity’s financial strengths and weaknesses.
In particular it points out that information about the nature and amounts of an entity’s economic resources and claims can help users to assess:
* the entity’s liquidity and solvency
* the entity’s need for additional financing
* how successful the entity is likely to be in obtaining that financing (Conceptual Framework: para. 1.13)

Additionally, by gaining knowledge of the economic resources a business controls, users will be in a better position to predict the entity’s ability to generate cash in the future.
Information about an entity’s financial structure and liquidity/solvency can also help financial statement users.

A

NEED CLARITY 4.1 WORKBOOK

The Conceptual Framework focuses on how information about the nature and amounts of an entity’s economic resources and claims (liabilities) can help users to identify the reporting entity’s financial strengths and weaknesses.
In particular it points out that information about the nature and amounts of an entity’s economic resources and claims can help users to assess:
* the entity’s liquidity and solvency
* the entity’s need for additional financing
* how successful the entity is likely to be in obtaining that financing (Conceptual Framework: para. 1.13)

Additionally, by gaining knowledge of the economic resources a business controls, users will be in a better position to predict the entity’s ability to generate cash in the future.
Information about an entity’s financial structure and liquidity/solvency can also help financial statement users.

74
Q

How does financial structure affect a company’s financial position? (3)

A
  • to predict future borrowing needs
  • to predict how future profits and cash flows will be distributed among owners and lenders
  • to predict how successfully it will be able to raise future finance
75
Q

How does liquidity/solvency affect a company’s financial position? (1)

A
  • to predict its ability to meet financial commitments as they fall due
76
Q

Define Statement of profit or loss (1)

A

Statement of profit or loss: A statement displaying items of income and expense in a reporting period as components of profit or loss for the period. The statement shows whether the business has had more income than expense (a profit for the period) or vice versa (a loss for the period).

77
Q

How is the profit and loss statement useful for users? (3)

A
  • to understand the return that the entity has produced on its economic resources
  • to assess management’s stewardship of the entity’s economic resources
  • to help predict the business’s future returns on its economic resources
78
Q

Draw layout out of Statement of Profit and Loss

A

See Pg 18 FI Workbook

79
Q
A

Revenue = Sales = Turnover = X
Cost of Sales = Purchases = Expenses = (x)
Gross profit (total of the above) = x

Distribution costs = Expenses associated with selling and delivering goods to customers = (x)

Admin costs = Expenses of providing management and administration for the business = (x)

Finance costs = These include expenses (on loans or overdraft) = (x)

Income from other sources = X
This includes:
1. Profit on disposals (selling) of NCA
2. Dividends (on shares) or interest (lent) received from investments (but shares/lend)
3. Rental Income from property owned but not otherwise used by the business

80
Q

What is the link between the statement of financial position and the statement of profit or loss and other comprehensive income? (2)

A

The link between the statement of financial position and the statement of profit or loss and other comprehensive income is provided by the statement of cash flows and the statement of changes in equity.

The statement of cash flows shows the actual cash flowing into and paid out of the business.
The statement of changes in equity reconciles the opening and closing equity of the company.

81
Q

CHAPTER 1 PART 5 - Capital and revenue items

A

CHAPTER 1 PART 5 - Capital and revenue items

82
Q

Define Capital expenditure (CAPEX) (1)

A

Capital expenditure (CAPEX): Expenditure which results in the acquisition of non-current assets or an improvement or enhancement of their earning capacity

ASSET

83
Q

What is a non-current asset? (1)

A

Non-current assets are those which will be kept in the entity for more than one year

84
Q

How will a capital expenditure be shown in a statement of profit or loss? (1)

A

Capital expenditure is not charged as an expense in the statement of profit or loss (although a depreciation charge will usually be made to match the capital expenditure against the income that it generates over the useful life of the asset; depreciation expense is shown in the statement of profit or loss

85
Q

Where will a capital expenditure on non-current assets be shown? (1)

A

Capital expenditure on non-current assets is presented in the statement of financial position

86
Q

Define Revenue expenditure (1)

A

Expenditure for trade purposes or to maintain existing earning capacity of long term assets (repairs and maintenance)

Revenue expenditure: Expenditure which is incurred either:
* for trade purposes. This includes purchases of raw materials or items for resale, expenditure on wages and salaries, selling and distribution expenses, administrative expenses and finance costs; or
* to maintain the existing earning capacity of non-current assets.

ICAEW - CERTIFICATE LEVEL 1 - ACCOUNTING (16 decks)

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