Definitions

Question 1

Assets

Answer 1

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity

Question 2

Liability

Answer 2

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources from the entity embodying economic benefits

Question 3

Equity

Answer 3

Equity is the residual interest in the assets of the entity after deducting all its liabilities

Question 4

Income

Answer 4

Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants

Question 5

Expenses

Answer 5

Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletion of assets or occurrences of liabilities that result in decreases in equity, rather than those relating to distributions to equity participants

Question 6

Profit / Loss

Answer 6

Profits are increases in equity not resulting from contributions from equity participants
Losses are decreases in equity not resulting from distributions to equity participants

Question 7

Relevance (fundamental characteristic)

Answer 7

Be able of making a difference in the decision made by users
Have predictive value, which helps users to predict outcome
Have confirmative value, which helps to confirm previous evaluations

Question 8

Faithful representation (fundamental characteristic)

Answer 8

As far as possible be complete, neutral and free from errors

Question 9

Verifiability (enhancing characteristic)

Answer 9

Helps assure users that information is faithfully represented

Question 10

Timeliness (enhancing characteristic)

Answer 10

Means having information available to decision-makers in time to be capable to influence their decisions

Question 11

Understandability (enhancing characteristic)

Answer 11

Means that information is classified, characterised and presented clearly and concisely

Question 12

Comparability (enhancing characteristic)

Answer 12

Enables users to identify & understand similarities in, and differences among, items for other years and other companies - a comparison relates to at least to items

Question 13

Materiality

Answer 13

Information is material if omitting it or misstating it could influence the decisions that users make on the basis of financial information about a specific reporting entity

Question 14

Business entity

Answer 14

This refers to the fact that financial statements record and report on the activities of one particular entity. They do not include the personal assets and liabilities of those who play part in owning or running the entity

Question 15

Going concern

Answer 15

Statements are prepared on assumption that the entity will continue in business for the foreseeable future. There is no intend to liquidate or reduce the size of the business

Question 16

Accrual Accounting

Answer 16

Using the accrual basis to recognise the effect of the transactions when they occur. Income & expenses are matched so they concern the same goods/services & the same time period

Question 17

Current cost

Answer 17

What it would cost to replace assets and liabilities at today’s prices

Question 18

Present value

Answer 18

Assets & liabilities are valued at the present discounted value of their future cash inflows and outflows

Question 19

Realisable (settlement) value

Answer 19

What the assets could be sold for, and the amount required to settle the liabilities today

Question 20

Historical cost

Answer 20

Assets are recorded at the amount paid, or the fair value at the time of acquisition. Liabilities are recorded at the amount expected to be paid

Question 21

Statement of profit or loss and other comprehensive income

Answer 21

Measures financial performance for a particular time period

Question 22

Statement of financial positions

Answer 22

Lists assets, liabilities and equity at the end of the accounting period

Question 23

Statement of cash flows

Answer 23

Links profit with changes in assets and liabilities, and the effect on the cash of the company

Question 24

Authorised share capital

Answer 24

Authorised share capital is the maximum share capital that the company is allowed to issue (only applies for the companies formed before the Companies Act 2006). The maximum amount can be increased by passing a resolution at a general meeting of stakeholders. Authorised share capital can be included in the equity section of the statement of financial position for information only but is not added to the total of the statement

Question 25

Issued share capital

Answer 25

Issued share capital shows the number & classes of shares that have been issued. It is included in the equity section of the statement of financial position & is added to the total of equity & liability

Question 26

Loans

Answer 26

Loans are monies borrowed by companies from lenders (such as banks) on medium to long term basis. Repayments are made throughout the term of the loan. Often loans are secured against company’s assets so that, if the loan is not repaid, the lender has an asset that can be sold. Loans are examples of long term liabilities. They are shown on the SOFP as non current liability. Loans carry fixed rates of interest that must be paid. The interest is shown in the SOPL as finance costs

Question 27

Debenture

Answer 27

Debentures are certificates issued by companies raising long term finance from lenders & investors. Debentures are usually repaid on a fixed date at the end of the agreement. They are secured against companies’ assets.

Question 28

Capital reserves

Answer 28

Capital reserves, i.e. revaluation or share premium account, arise as a result of non-trading activities are not distributable. As they represent an increase in the value of the of the stakeholders’ investment in the entity they cannot be used to fund dividends

Question 29

Revenue reserves

Answer 29

Revenue reserves are profits generated from trading activities. They include the balance of retained earnings from the statement of change in equity. Revenue reserves are distributable and, therefore, can be used to pay dividends

Question 30

Dividents

Answer 30

Dividends are distribution of profits to the shareholders as a return on their investment. A company may make interim and/or final dividends. The final dividends are proposed by the director and have to be agreed by shareholders at the annual general meeting

Question 31

Bonus issue

Answer 31

Bonus issue is a free issue of shares to the existing shareholders. It is done by using reserves. With the bonus issue no cash flows in or out of the company