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FINANCIAL STATEMENTS > DEFINTIONS > Flashcards

DEFINTIONS Flashcards

1
Q

What is the objective of financial reporting?

A

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity

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2
Q

What are the five main elements of financial statements?

A
  • Assets
  • Liabilities
  • Equity
  • Income
  • Expenses
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3
Q

Assets

A
  • A resource controlled by the entity
  • As a result of past events
  • Future benefits are expected to flow
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4
Q

Liabilities

A
  • A present obligation of the entity
  • Arising from past events
  • The settlement is expected to result in an outflow of resources embodying economic benefits.
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5
Q

Equity

A
  • Equity is the residual interest in the assets of the entity after deducting all its liabilities.
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6
Q

Income

A
  • Income is increases in economic benefits in the form of inflows or enhancements in assets or decreases in liabilities.
  • Increases equity other than those relating to contributions.
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7
Q

Expenses

A
  • Expenses are decreases in economic benefits in the form of outflows or depletions of assets or incurrences of liabilities.
  • Decreases in equity other than those relating to distributions
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8
Q

Conceptual Framework for Financial Reporting.

Purposes

A
  • Assist in the development and review of international financial reporting standards
  • Assist in promoting harmonisation of standards by reducing the number of permissible alternative accounting treatments
  • Help preparers of accounting to deal with issues not yet covered by the standards
  • Help users of accounts to interpret the information in financial statements which have been prepared in accordance with the standards
  • Deals with the objective of financial reporting.
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9
Q

Going Concern

A

Financial statements are prepared on the assumption that the entity will continue in business for the foreseeable future. Thus no intentions to liquidate or reduce the size of the business.

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10
Q

Accrual Accounting

A

Accruals basis means that the effects of transactions are recognised when they occur (and not when the cash is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.

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11
Q

Relevance

A
  • Information that is capable of making a difference in the decisions of its users. It has a predictive value, confirmatory value or both.
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12
Q

Faithful representation

A
  • Information must be faithful in its presentation – ie complete, neutral and free from error.
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13
Q

Comparability

A

Enables users to identify and understand similarities in, and differences among, items for other years and other companies

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14
Q

Verifiability

A

Helps assure users that information is faithfully represented.

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15
Q

Timeliness

A

Having information available to decision-makers in time to be capable of influencing their decisions.

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16
Q

Understandability

A
  • Classifying, characterising and presenting information clearly and concisely.
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17
Q

Materiality

A

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.

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18
Q

Recognition

A

Recognition is the process of including an element (ie assets, liabilities, equity, income and expenses) An item should be recognised:

  • If it is probable that future economic benefits will flow to or from the entity, and
  • It has a cost or value that can be reliably measured.
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19
Q

Historical cost

A

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

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20
Q

Current cost

A

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

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21
Q

Realisable (Settlement) value

A

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

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22
Q

Present value

A

Assets and liabilities are valued at the present discounted values of their future cash inflows and outflows.

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23
Q

Inventories

A

Inventories are assets held for sale in the ordinary course of business.

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24
Q

Operating activities

A

• the main revenue producing activities of the business, together with the payment of interest and tax

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25
Q

Investing Activites

A

• The acquisition and disposal of non-current assets, and other investments, together with interest and dividends received

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26
Q

Financing Activities

A

receipts from the issue of new shares, payment to repay shares, changes in long term borrowings, payments of dividends.

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27
Q

CF - Depreciation

A

Add

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28
Q

CF - Loss on sale of NCA

A

Add

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29
Q

CF - Gain on sale of NCA

A

Deduct

30
Q

CF - Dividends recieved

A

Deduct

31
Q

CF - Decrease in Inv

A

Add

32
Q

CF - Decrease in TR

A

Add

33
Q

CF - Decrease in TP

A

Deduct

34
Q

CF - Increase in Inv

A

Deduct

35
Q

CF - Increase in TR

A

Deduct

36
Q

CF - Increase in TP

A

Add

37
Q

What goes in Investing?

A

Inflows, Outflows Interest and Dividends recieved

38
Q

What goes in Financing

A

Increase in SC, Repayment of SC or loans, finance lease liar, dividends paid

39
Q

Adjusting events?

A
  • The settlement after the end of the reporting period of a court case which confirms that a present obligation existed at the year end.
  • Non-current assets, the determination after the reporting period of the purchase price, or sale price, of assets bought or sold before the year end.
  • Assets, where a valuation shows impairment.
  • Inventories, where net realisable value falls below cost price.
  • Trade receivables, where a customer has become insolvent.
  • The determination after the reporting period of the amounts of profit sharing or bonus payments.
  • The discovery of fraud or errors that show that the financial statements are incorrect.
40
Q

Non Adjusting events

A
  • Business combinations
  • Discontinuing a significant part of the business
  • Major purchase of assets
  • Losses of production capacity
  • Announcing or commencing a major restructuring
  • Major share transactions
  • Large changes in asset prices or foreign exchange rates
  • Changes in tax rates
  • Entering into significant commitments or contingent liabilities
  • Commencing litigation based on events arising after the reporting period.
41
Q

Property, plant and equipment

A

Tangiable assets held for use in the production or supply of goods and services, which are expected to be used for more than one period.

42
Q

Depreciation

A

The systematic allocation of the depreciable amount of an asset over its useful life.

43
Q

When to recognise PPE

A

An item of PPE is to be recognised as an asset when; it is probable that future economic benefits will flow to the entity and the cost of the asset can be measured reliably.

44
Q

Cost model

A

the asset is carried at cost less accumulated depreciation and impairment losses

45
Q

Revaluation model

A

the asset is carried on the FP at a revalued amount, being its fair value less any subsequent depreciation and impairment losses. Revaluations are to be made regularly to ensure that the carrying amount does not differ materially from its fair value. Revaluations can be made every three to five years.

46
Q

Finance Lease

A

usually a longer term lease, under which substantially all the risks and rewards of ownership are transferred to the lessee

47
Q

Operating Lease

A

usually a shorter term lease, where there is no substantial transfer of the risks and rewards of ownership to the lessee

48
Q

Finance lease conditions?

A
  • the lease transfers ownership of the asset to the lessee by the end of the lease term
  • the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised
  • the lease term is for the major part of the economic life of the asset, even if the title is not transferred
  • at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset
  • the leased assets are of such a specialised nature that only the lessee can use them without major modifications
49
Q

Finance Lease - How to recognise?

A

the lower of the fair value of the asset and the present value of the minimum lease payments

50
Q

Associate

A

An entity over which the investor has significant influence.

51
Q

Significant influence

A

Where the investor has the power to participate in the financial and operating policy decisions – such as the expansion or contraction of the business, changes in products, markets, activities – of the investee but is not in control of those policies.

52
Q

Equity method of accounting

A
  • Initially the investment in the associate company is recognised at cost
  • The investor’s share of subsequent profit or losses of the investee is added to, or deducted from, the carrying amount of the investment
  • The investor’s share of the investee’s profit or loss is recognised in the investor’s statement of profit or loss
  • Distributions received from the investee reduce the carrying amount of the investment
  • The investor’s share of other comprehensive income of the investee is recognised in the investor’s other comprehensive income and adjusted to be carrying amount of the investment.
53
Q

Carrying amount

A

amount at which an asset is recognised after deducting accumulated depreciation and accumulated impairment losses.

54
Q

Impairment loss

A

amount by which the carrying amount of an asset exceeds its recoverable amount

55
Q

Fair Value

A

Is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

56
Q

Recoverable amount

A

An asset is the higher of its fair value, less costs of disposal and its value in use.

57
Q

Value in use

A

Present value of the future cash flows expected to be derived from an asset.

58
Q

Provision

A

liability of uncertain timing or amount.

59
Q

contingent liability

A

possible obligation ie less than 50% likelihood of its occurrence.

60
Q

contingent asset

A

possible asset arising from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity’s control.

61
Q

Identifiability

A

• the asset is either separable from the entity and is capable of being sold or transferred, or it arises from contractual or other legal rights.

62
Q

Control

A

the entity has the power to obtain future economic benefits from the asset.

63
Q

Research

A

Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

64
Q

Development

A

The application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products before the start of commercial production or use.

65
Q

Examples of research

A

activities to obtain new knowledge, searches for alternatives for materials ect and formulation/design/evaluation of possible alternatives for materials

66
Q

Examples of development

A

design/construction of pre-production prototypes, design of new technology production equipment, design/construction/testing of chosen alternative for materials, products/processes ect.

67
Q

acquirer

A

the entity that obtains control of the acquiree’

68
Q

acquiree

A

the business or businesses that the acquirer obtains control of in
a business combination

69
Q

Control

A

when it (the investor) is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee’

70
Q

parent

A

• an entity that controls one or more entities

71
Q

subsidary

A

an entity that is controlled by another entity

72
Q

parent

A

a parent and its subsidiaries

FINANCIAL STATEMENTS (1 decks)

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