F1 - Preparation of Financial Statements

Question 1

What is the accounting standard for the overall presentation of financial statements?

Answer 1

IAS 1

Question 2

What is the fair presentation concept?

Answer 2

Financial statements should present fairly the financial position, performance and results - presumed by applying the FRSs

Question 3

What is the going concern concept?

Answer 3

A going concern is a business that is assumed will meet its financial obligations when they fall due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the specified accounting period.

Question 4

What is the accruals basis of accounting?

Answer 4

Transactions are recorded when they occur and hence appear in the relevant period to which they relate

Question 5

What is the consistency of preparation concept?

Answer 5

Changes in the presentation and classification of items should only occur if there has been a significant change in the nature and operations which would results in a more faithful representation, or it is required by an IFRS

Question 6

What is the materiality and aggregation concept?

Answer 6

Each material class of items should be presented separately in the financial statements

Question 7

What is the offsetting concept?

Answer 7

Assets and liabilities cannot be offset against each other unless it is required or permitted by an IFRS

Question 8

What 2 main reasons do cash flows differ from profits?

Answer 8

1. Non cash items affect profit e.g. depreciation

2. Cash flows are not affected by choice of accounting policy

Question 9

What are the 3 main benefits of statements of cash flows?

Answer 9

1. Easier to understand than the P&L
2. Less easy to manipulate than the P&L
3. Explains changes in financial position during a period

Question 10

What is the IAS for the statement of cash flows?

Answer 10

IAS 7

Question 11

What is the definition for cash?

Answer 11

Cash on hand and demand deposits

Question 12

What is the definition of cash equivalents?

Answer 12

Short term, highly liquid investments, readily convertible to cash (maturity less than 3 months)

Question 13

What are defined as operating activities?

Answer 13

Principal revenue producing activities

Question 14

What are defined as investing activities?

Answer 14

Acquisition and disposal of non current assets and other investments not included in cash equivalents

Question 15

What are defined as financing activities?

Answer 15

Activities that result in changes in the size and composition of the equity capital and borrowings of the entity

Question 16

What is the indirect method of producing the statement of cash flows?

Answer 16

Net profit or loss (before tax) is adjusted for changes in working capital and non cash items

Question 17

What are the 7 items that appear before cash flows from operating activities?

Answer 17

1. • Depreciation
2. • Loss on disposal
3. • Investment Income
4. • Interest Expense
5. Adjust for changes in working capital
6. • Interest paid
7. • Income tax paid

Question 18

What are the 4 items that appear before cash flows from investing activities?

Answer 18

1. • Purchase of PPE
2. • Proceeds from sale of PPE
3. • Interest received
4. • Dividends received

Question 19

What are the 3 items that appear before cash flows from financing activities?

Answer 19

1. • Proceeds from share issue
2. • Proceeds from long term borrowings
3. • Dividends paid

Question 20

How do you adjust for increase (decrease) in receivables?

Answer 20

• (+) cash

Question 21

How do you adjust for increase (decrease) in payables?

Answer 21

+ (-) cash

Question 22

How do you adjust for increase (decrease) in inventory?

Answer 22

• (+) cash