Financial Accounting Flashcards
Financial accounting
Accounting information and analysis prepared for people outside the organisation. Unlike management accounting this will be externally audited
Provides an overview of the company as a whole, required by law and highly regulated, based on historical data
Income statement
Shows revenue and expenses for a specific period of time. It sets out income, expenses, tax, profit and loss
Balance sheet
A statement of the financial position of business at a point in time. It is a snap shot of the company’s position and shows all assets and liabilities
Shareholder equity
Assets - liabilities
Cash flow statement
Shows the source and uses of cash and is a useful indicator of a company’s liquidity
Liquidity
Availability of resources to meet short-term cash requirements
Solvency
Availability of resources to meet long-term cash requirements
Management accounts
Management Accounting is used for many purposes. They include day-to-day transactions as well as other information for managers to use separated by department
Largely focused on the future
No regulatory constraints or audit requirements
Not required by law and do not need to be published
Users of Financial information
Owners
Directors & managers
Employees
The public
Tax authorities
Financial analysts
Creditors and lenders
Competitors
Brokers
Customers
Regulators (PRA, FCA)
Regulatory Capital
Sum of equity and long term debt
Non-current assets
Assets owned by the company for >1 year
Current assets
Cash and other assets expected to be exchanged for cash or consumed within a year
Current liabilities
Liabilities due within a short time, usually a year
Non-current liabilities
Long-term debts owned by the business
What do Financial statement show?
Cash flow: focus on businesses ability to generate cash
Income statement: indicates the businesses trading conditions
Balance sheet: demonstrates the financial strengths of the business
Accrual basis
The effect of transactions and other events are recognised when they occur, not as cash is received or paid
Going concern
Financial statements are prepared with the expectation that a business will remain in operation for the foreseeable future. If Management has significant concern, the uncertainty must be disclosed
Financial crisis advisory group
A group formed by the Financial accounting standards board and its US equivalent to consider Financial reporting issues arising from the global Financial crisis. Chief areas addressed:
•Effective financial reporting
•Limitations of financial reporting
•Convergence of accounting standards
•Standard-setter independence and accountability
Requirements of IFRS 4
•Insurers need to disclose insurance risk management policy, interest and credit risk information, policy T&Cs
•Insurance liabilities must be kept on balance sheet until they are discharged, cancelled or expire and must not be offset by reinsurance assets
•A test for adequacy for recognised insurance liabilities
•An impairment test for reinsurance assets
•Provision for possible claims under the contracts not existing at the reporting date, such as catastrophe, and equalisation provisions are not permitted
Claims development tables
CDTs convey valuable information about how accurate prior estimates of outstanding claims were, and the extent to which insurance liabilities are subject to variation
IFRS 102 for small and micro entities
A small entity satisfies any two of the following;
-Turnover less than £10.2M
-Total Assets less than £5.1M
-50 employees or less
A micro entity satisfies any two of the following;
-Turnover less than £632,000
-Total assets less than £316,000
-10 employees or less
UK GAAP and IFRS
• UK listed companies are required to produce their consolidated accounts in accordance with IFRS, but there is no obligation for the parent company and their subsidiaries to adopt it. These companies commonly adopt to UK GAAP
• a common reason to not adopt IFRS is the associated onerous disclosure requirements
