Financial Accounting

Question 1

Financial accounting

Answer 1

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

Question 2

Income statement

Answer 2

Shows revenue and expenses for a specific period of time. It sets out income, expenses, tax, profit and loss

Question 3

Balance sheet

Answer 3

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

Question 4

Shareholder equity

Answer 4

Assets - liabilities

Question 5

Cash flow statement

Answer 5

Shows the source and uses of cash and is a useful indicator of a company’s liquidity

Question 6

Liquidity

Answer 6

Availability of resources to meet short-term cash requirements

Question 7

Solvency

Answer 7

Availability of resources to meet long-term cash requirements

Question 8

Management accounts

Answer 8

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

Question 9

Users of Financial information

Answer 9

Owners
Directors & managers
Employees
The public
Tax authorities
Financial analysts
Creditors and lenders
Competitors
Brokers
Customers
Regulators (PRA, FCA)

Question 10

Regulatory Capital

Answer 10

Sum of equity and long term debt

Question 11

Non-current assets

Answer 11

Assets owned by the company for >1 year

Question 12

Current assets

Answer 12

Cash and other assets expected to be exchanged for cash or consumed within a year

Question 13

Current liabilities

Answer 13

Liabilities due within a short time, usually a year

Question 14

Non-current liabilities

Answer 14

Long-term debts owned by the business

Question 15

What do Financial statement show?

Answer 15

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

Question 16

Accrual basis

Answer 16

The effect of transactions and other events are recognised when they occur, not as cash is received or paid

Question 17

Going concern

Answer 17

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

Question 18

Financial crisis advisory group

Answer 18

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

Question 19

Requirements of IFRS 4

Answer 19

•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

Question 20

Claims development tables

Answer 20

CDTs convey valuable information about how accurate prior estimates of outstanding claims were, and the extent to which insurance liabilities are subject to variation

Question 21

IFRS 102 for small and micro entities

Answer 21

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

Question 22

UK GAAP and IFRS

Answer 22

• 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