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AAT - Final account preparation > Financial reporting and ethical principles > Flashcards

Financial reporting and ethical principles Flashcards

1
Q

What are the different types of business organisations?

A
  • For profit organisations
  • Not-for-profit organisations
  • Sole trader
  • Partnerships
  • Limited company
  • Limited liability partnership
  • Charity
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2
Q

What are For - profit organisations?

A

Primary goal = profit

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3
Q

What are not for profit oganisations?

A
  • No profit - owners/ stakeholders
  • Money = pursuing organization’s objectives
  • e.g. Financial ombusman, sports and social clubs
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4
Q

What is a sole trader?

A
  • Individual in business
  • exclusive owner - making profit
  • No legal distinction - owner is responsible
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5
Q

What is a limited company?

A
  • Incorporated business
  • separate legal entity - owned by shareholders
  • ‘limited by shares’
  • shareholders responsibility = shares they own
  • directors - not responsible for debts
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6
Q

What is a limited liability partnership?

A
  • partnership - incorporated form
  • separate legal entity - partner’s limit personal liability
  • @least 1 - limited liability
  • partners manage direct - not shareholders
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7
Q

What is a charity ?

A
  • charitable activities - public benefit
  • trustees
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8
Q

How would an organisation be classed as a charity?

A
  • charities act 2011
  • established charitable purposes only
  • general public benefit
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9
Q

Who would own and manage a sole trading business?

A

Sole traders

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10
Q

What are the accounting requirements for sole trading?

A
  • annual accounts - not legal
  • expenses and personal income required - tax returns
  • private financial statements
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11
Q

How are profits taxed for sole trader?

A
  • income tax on profit
  • tax not expense - not in profit/loss
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12
Q

How are distributions made in a sole trader?

A

Drawings

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13
Q

Who owns and manages a partnership?

A

Parnters

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14
Q

What are the accounting requirements for a partnership?

A
  • annual accounts / file account - not legally required
  • regulations - partnership act 1890
  • business expenses and personal income required - tax returns
  • partnership agreement
  • private financial statements
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15
Q

How are profits taxed in a partnership?

A
  • share of profit = income tax
  • tax not expense - not profit/ loss
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16
Q

How are distributions made in a partnership?

A

Drawings

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17
Q

Who would own and manage a limited liability partnership ?

A

partners - separate legal entity

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18
Q

What are the accounting requirements for a limited liability partnership ?

A
  • regualtions - limited liability partnership act 2000
  • llp agreement estbalished
  • financial statements - companies house
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19
Q

How are profits taxed in a limited partnership?

A
  • Income tax - share of profits
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20
Q

How are distributions made in a limited partnership?

A

partnerships - can take drawings

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21
Q

Who owns and manages a limited company?

A
  • separate legal entity
  • shareholder = owners and investors
  • directors = run business
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22
Q

What are the accounting requirements for the limited company ?

A
  • Annual ( statutory accounts) required - end of financial year
  • annual account notes - accounting policies , receivables breakdown , carrying amount
  • annual accounts - HMRC tax return , shareholders, companies house
  • accounts = accounting standards
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23
Q

How are profits taxed for limited companies?

A
  • Corporation tax - profits of the business
  • corporation tax = expense = statement of profit/loss
  • corporation tax liability - after year - end
  • closing liability = estimate = over-estimate/ under- estimate following year profit/loss
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24
Q

How are distributions made in a limited company?

A
  • Dividends = drawings for sole trader
  • dividends - statement of changes in equity
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25
Who owns and manages charities?
Trustees
26
What are the accounting requirements for charities?
* Regulations - charities act 2011 * financial statements - charity commission
27
How are the profits of a charity taxed?
exempt - income for charitable purposes
28
How are distributions in a charity made?
For charitable activities
29
What are the advantages of trading as a sole trader?
* PAPI * P - profit to owner * A - accounts not legally required except income tax * P - personal service advantage * I - independence of decision making
30
What are the disadvantages of a sole trader?
* RUB R * R - raise capital unlimited * U - unlimited liability for debts * B - business life is limited ( on owner) * R - Responsibility
31
Who are the primary users of financial statement?
* Investors/ owners * managements and other internal users * lenders * employees * customers * government
32
Why would investors/ owners need to look at the financial statement?
* investment decisions * existing and potential * profitability
33
Why would management and other internal users need to view financial statements?
* performance of duties
34
Why would lenders need to view the financial statements ?
* ability - paying interests and repaying loans * credit suppliers - goods on credit
35
Why would employees need to view financial statements ?
* ability to pay wages and pensions * future prospects - jobs security and development opportunities
36
Why would customers need to view financial statements?
* entity ability - goods and/or services
37
Why would the government need to view financial statements?
* includes taxation authorities - calculate tax liabilities * measure economic performance - employment rates
38
What does the regulatory framework for a UK company preparing financial statements consist of ?
* Companies act 2006 - all UK companies * International Accounting standards - IFRS
39
What will an entity adopt an accounting policy based on ?
* truer and fair view
40
What are limited partnerships (LLP)?
* Hybrid - partnerships and limited companies * Limited liability partnership act 2000 * Many Companies Act 2006 provisions apply
41
How are the presentation of final accounts for sole traders and partnership businesses governed and presented?
* no statues and accounting regulations - same extent LLPs * No definitive format * good practice - same as limited companies
42
What do international standards on specific areas of accounting consist of ?
* International Financial Reporting Standards (IFRSs) * International Accounting Standards (IAS) * IAS 1 - Presentation of financial statements * IAS 2 - Inventories * IAS 16 - Property, Plant Equipment
43
What are the international financial reporting standards?
* issued by - international accounting standard board * council of ministers - companies listed European stock exchange * consolidated accounts - IFRs * 1st January 2005
44
What are the international accounting standards?
* Created by - International Accounting Standards Commitee (IASC) * IASB - adopted standards from IASC * new standards - several IASs - superseded
45
What does the IAS1 - Presentation of the financial statements do?
* overall requirements - financial statements - adoption of IFRSs * structure, content minimum requirement , overriding concepts
46
What would the overriding concepts in the IAS1 include?
* going concern * accruals basis * format and classification of financial statements
47
What does the presentation of financial statements standard require?
* Complete set of financial statements: * SOFP * P/L * statement of changes in equity * statement of cash flows
48
What does the IAS 2 Inventories include?
* type of inventory * measurement - lower of cost and NRV
49
What does IAS 16 Property, plant , and equipment include?
* Outlines treatment - property, plant and equipment * measured @ costs * depreciated over useful economic life
50
What are the underlying assumptions of governing financial statementss?
* going concern * accruals
51
What is going concern?
entity will continue operation - foreseeable future
52
What if the business is no longer considered to be a going concern?
* Assets to be recognised - amount expected from sale * Liabilities recognised - likely to be settled
53
What is the accrual basis?
* transaction in financial statements - period in * income as earned * expenses when incurred * not cash received or paid
54
What characteristics do the conceptual framework of financial reporting identify?
* two fundamental qualitative characteristics * Four enhancing qualitative characteristics
55
What are the two fundamental qualitative characteristics?
* Relevance * Faithful representation
56
What are the four enhancing characteristics?
* Comparability * Verifiability * Timeliness * Understandability
57
What are the definitions of the fundamental qualitative characteristics?
* Relevance - influencing decisions of users * Faithful representation - complete, neutral , free from error
58
What are the definitions of enhancing qualitative characteristics?
* Comparability - compare entity / similar info with other entities * Verifiability - users - credible and reliable * Timescale - info provided timescale suitable decision making * Understability - to user through classification , characterisation , presentation of info
59
What should financial statements be free of ?
Material misstatements
60
What are material misstatements?
* incorrect info * affect financial decisions - user relying
61
What would materiality relate to and what can it be defined as?
* Transactions, balances, and errors * threshold - relevance to needs of user
62
What are examples of material misstatements?
* Overstatement / understatement of profits * overvaluations/ undervaluation of assets and liabilities
63
What is the code of ethics of professional accountants published by?
* International Federation of Accountants * ethical codes - AAT, ICAEW , ACCA. CIMA
64
What does the code adoppt
* Princplles based approach * value system - fundamental professional and ethical principles
65
What are the five key principles?
COP I C- confidentiality Objectivity Professional competence and due care Integrity
66
What is the definition of integrity ?
Straightforward and honest- professional work
67
What is the definition of objectivity ?
* Bias, conflict of interest , undue influences others * professional and business judgements
68
What are professional competence and due care
* maintain professional knowledge and skill * competent professional service for client * in line - current developments - practice, legislations, and techniques
69
What is confidentiality ?
Respect info - from professional and business relationships no disclosure - without proper specific authority - legal and professional right to do so
70
What can the threats to fundametnal principles include?
* General in nature * relate to specific circumstances of an appointment
71
What do the threats include?
* Self interest * self review * advocacy * familiarity and trust threat * intimidation threat
72
What is self-interest threat?
* financial or other self interest conflict * direct/indirect interest in client * losing an engagement/ his or her employment terminated
73
What is a self-review threat?
product or judgement revevaluated or challenge - same member or firm
74
What is the advocacy threat?
* Advocate for or against the client or employer - adversarial proceedings
75
What is the familiarty tor trust threa?
* influence by : * knowledge of the issue * relationship - client / employer * quality judgement - you become too trusting
76
What is the intimidation threat ?
* dominating personality * other pressures: actual or feared

AAT - Final account preparation (4 decks)

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