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Finance part 2 Flashcards

1
Q

IAS 1 requires a complete set of FS to comprise (5)

A

Statement of Fin position
Statement of P/L and OCI
Statement of changes in equity
Statement of cash flows
Notes to the accounts/fin statatements

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2
Q

What is IAS 1?

A

Presentation of FS

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3
Q

What is the objective of FS?

A

Provide a report on the fin position and fin performance to show how an entity has performed
In doing so capturing the cycle that is raising equity and borrowing debt to make a profit

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4
Q

5 Overriding concepts of FS

A

Going concern
Accruals basis
Materiality and aggregation
Reporting period
Offsetting

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5
Q

What is going concern concept?

A

FS are prepared on assumption that entity is a going concern and will continue in operation for foreseeable future

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6
Q

What is accruals basis (concept of FS)?

A

FP reflected by accruals basis rather than cash-based info
It requires transactions to be accounted for in the period where income is earned or expenses are incurred, not when they are received or paid

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7
Q

What is materiality and aggregation (concept of FS)?

A

Each material class of similar items should be presented separately items dissimilar in nature should be presented separately

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8
Q

Reporting period (concept of FS)

A

When the reporting period is not one year, the entity should report the reason, and the fact that comparability is impacted

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9
Q

Offsetting (concept of FS)

A

Assets and liabilities shall not be offset unless required or permitted by a standard

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10
Q

Line items under assets in Statement of Fin Pos (10)

A

PPE - Investment Property
Intangible assets - Financial assets
Investments accounted for using equity method - Biological assets
Inventories - Trade and other receivables
Cash and cash equivalents - Assets held for sale

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11
Q

Line items under liabilities in Statement of Fin Pos (6)

A

Trade and other payables - Provisions
Financial liabilites - Current tax liabilities
Deferred tax liabilities - Liabilities included in disposal groups classified as held for sale

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12
Q

Three factors influencing whether an item should be presented separately

A

Nature and liquidity of assets - monetary/non-monetary, current/non-current, tangible/intangible
Function of assets within entity - operating/financial/inventories/receivables/cash
Amounts, nature and timing of liabilites - interest bearing/non-interest bearing/privisions, current/non-current

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13
Q

How to make current/non-current distinction?

A

Current = expected to be settled less than 12 months after the reporting period
Consider whether there is an unconditional right to defer settlement of a liability (becomes non-current)

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14
Q

Two options to present financial performance in statements

A

Statement of comprehensive income
Statement of profit or loss, and statement of other comprehensive income

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15
Q

Three general subcategories of cost of sales

A

Direct labour
Direct materials (consider inventories)
Overheads

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16
Q

Minimum items presented in p/l section (7)

A

Revenue
Finance costs
Share of profits and losses from associates and joint ventures
Single amount for total of discounted operations
Tax expense
Total profit/loss
Gains and losses from derecognition of financial assets

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17
Q

Items included in OCI figure (5)

A

Changes in revaluation surplus on NCAs
Actuarial gains and losses on remeasurement of defined benefit plans
Exchange differences re. foreign operations
Certain gains and losses relating to financial instruments
Correction of prior period errors

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18
Q

Two criteria for discontinued operations

A

Asset or component must be disposed of or reported as held for sale
Component must be a distinguishable separate area of business intentionally being removed from operation

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19
Q

Key components (columns) of Statement of changes in equity (3)

A

Share capital or funds contributed by shareholders
Retained earnings
Other components such as revaluation surplus
* and total equity

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20
Q

What might constitute movement in shareholders equity? (7)

A

Capital injections or withdrawals
Dividends
Prior period adjustments
Profit or loss
Revaluation gains and losses
Any other gains and losses
Transfer between components of equity

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21
Q

What constitutes cash or cash equivalent (4)

A

Cash in hand
Cash at bank
Highly liquid short term investments
Bank overdrafts

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22
Q

Cash flows are classified into (3)

A

Operating
Investing
Financing

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23
Q

Two methods of accounting for cash flow from operating activities

A

Direct method
Indirect method (reconciliation method) - easier and more commonly used

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24
Q

How is operating cash flow calculated by indirect method

A

(Operating profit + non-cash expenses) +/- changes in working capital items

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25
Examples of cash flow from investing activities (4)
Cash payments to acquire PPE, intangibles and other NCAs Cash receipts from PPE, intangibles and other NCAs Cas acquisitions and disposals of shares or debentures in other entities Cash advances and loans made to other parties and repayments of such loans
26
Examples of cash flow from financing activities (5)
Cash proceeds from issuing shares Cash payments to owners to acquire or redeem shares Cash proceeds from issuing debentures, bonds, mortgages, etc. Principal payments of amounts borrowed under leases Dividend payments (usually considered financing)
27
Included in annual report (7)
Strategic report Directors' report Directors' remuneration report Corporate governance statement Auditors' report Audited FS Notes to the FS
28
What is the directors' report?
Financial document prepared by the directors to inform the members of the company of the financial state of the company, and its compliance
28
What is the strategic report?
A detailed report providing clear and coherent information about the company's activities
29
IAS 1 requires what to be disclosed in notes? (3)
Basis for the preparation of FS, including policies chosen Information required by IFRS but not presented elsewhere Any additional information which is relevant to understanding but not shown elsewhere
29
What is segment reporting?
Provision of information regarding fin performance and position of identifiable segments Particularly useful when dealing with large entities with diversified range of products
29
IFRS thresholds for reporting segments (one of) (3)
Reported revenue is more than 10% of gross revenue Absolute amount of profit or loss is 10% or more of combined profit or profitable segments or combined loss of non-prof segments Segment's assets are 10% more of the combined assets
29
Three criteria which can classify an operating segment of a business under IFRS 8
A component from which it may earn revenue and incur expenses A component whose results are regularly reviewed by the chief decision maker for purposes of resource allocation and performance assessment For which discrete financial information is available
29
What is meant by substance over form?
Transactions recorded must reflect economic substance rather than legal form - should reflect the underlying realities
29
Two examples of substance being different than form
Debt factoring/invoice discounting - If all the risks and rewards have been transferred, the asset is derecognised by the seller Sale and repurchase agreements - Considered a type of loan agreement
30
Limitations of published financial statements (8)
Historical cost basis - fails to account for the change in price levels Creative accounting (presentation in most flattering way) - Largely outlawed but requires auditors' expertise to be prevented Intra-group transactions - Such transactions may not have been agreed at reasonable prices Ignoring non-financial matters - Not monetary but are relevant (reputation of management, creditworthiness, eee skills) Not forward looking - Investors are more interested in knowing the future prospects Seasonality of trading - Results tend to be reported when company is most solvent (ie. after Christmas) Not always comparable - Different practices and policies reduce comparability Only covers specific period - position may be different day before or day after
31
3 subsections of inventories within IAS 2
Finished goods Work in progress Raw materials
31
3 categories of costs included in inventory calculation
Purchase (including taxes, transport, handling), net of discounts received Costs of conversion (including overheads) Other costs in bringing inv to present location and condition
32
4 methods of costing inventories
Standard costing Retail method First in, first out Weighted average cost
33
What is standard costing re. inventories
Practice of assigning an expected or standard cost for an actual cost and periodically analysing variances
34
What is retail method of inventory costing
Estimate value of ending inventory using cost-to-retail price ratio - must be a clear relationship (mark-up) between purchase price and sale price
35
Signifiance of net-realisable value
Assets cannot be carried in inventory at greater than the NRV (selling price - costs necessary to make sale)
36
Definition of PPE
Items held for use in production or supply of goods service, for rental basis or administrative purposes, to be used in more than one period
37
Cost of PPE includes (3)
Purchase price including duties and taxes Costs directly attributable to bringing the asset to the location and condition necessary to operate Estimated costs of dismantling and removing the tiem and restoring the site on which it is located
38
2 options for subsequent measurement of PPE
Cost model - carried at cost less accumulated depreciation/impairment losses Revaluation model - If fair value can be measured, should be carried at revalued amount, less accumulated depreciation/impairment losses
39
2 types of events after the reporting period
Adjusting events - an adjustment is made to the FS if the condition existed at the end of the reporting period Non-adjusting events - no adjustment is required to be made as the conditions arose after the end of the period
40
Process of non-adjusting event is material
Disclosure must be made regarding the nature of the event and an estimate of its financial effect
41
What does IFRS 15 say in revenue from contracts with customers
Recognition of revenue should reflect the consideration to which the entity expects to be entitled in exchange for those goods and services
42
Define provision
A liability of uncertain timing or amount
43
When should a provision be recognised? - all 3 conditions must be met
There is a present obligation as a result of a past event It is probably that an outflow of economic resources will be required to settle The amount of the obligation can be esitmated reliably
44
Define contingent liability
Possible obligation arising from past events, depending on occurrence of one or more future events, not in the entities control OR Present obligation unrecognised because it is unprobable that an outflow of economic benefits will be required, or which cannot be measured with sufficient reliability
45
Define contingent asset
Possible asset from past transaction whose existence depends upon the occurrence of one or more future events outside of entities control
46
What constitutes 'control' of another entity
Subsidiary - greater than 50% shareholding
47
What constitutes 'significant influence' over another entity
Associate or joint venture - 20%-50%
48
Significant influence is evidenced by (5)
Representation on BoD Participation in policy-making process Material transactions between investor and investee Interchange of management personnel Provision of essential technical information
49
What is equity method used to account for?
Joint ventures and associates
50
How is carrying amount of investment measured by equity method?
(Cost of investment + group percentage share in post-acquisition profits) - impairment losses
51
What constitutes 'joint control'
Joint arrangement - equal control
52
Meet 2 of 3 criteria as group to be exempt from consolidated accounts
50 ees, 10.2m net turnover/12.2m gross, 5.1m net turnover/6.1m gross
53
Factors to consider when consolidating FS (6)
Intra-group items must be eliminated Parent's investment in subsidiaries are also eliminated Accounting policies of all companies must be aligned Subsidiaries should have the same reporting date as the parent Any share of subsidiary's results belonging to any NCI must be disclosed Consolidation will cease from the date the parent loses control
54
Two main methods for NCI valuation
Fair value method - value paid for consideration Proportion of net asset method - proportion of equity x net assets
55
What is goodwill?
The difference between net assets and the price paid at acquisition
56
What constitutes goodwill?
Reputation of the business, experience of employees, brand
57
Significance of fair value measurement in NCAs of a group company
Consolidated FS must calculate value of net assets on fair value basis, while the subs FS will often have bene at historical cost Carrying amounts in subs FS' are largely irrelevant in consolidated FS
58
4 types of consideration given by parent entity
Cash Shares in parent company Deferred consideration Contingent consideration
59
How to calculate contingent consideration
Payment amount multiplied by likelihood of fulfilment

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