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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
Q

Who owns and manages charities?

A

Trustees

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26
Q

What are the accounting requirements for charities?

A
  • Regulations - charities act 2011
  • financial statements - charity commission
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27
Q

How are the profits of a charity taxed?

A

exempt - income for charitable purposes

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28
Q

How are distributions in a charity made?

A

For charitable activities

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29
Q

What are the advantages of trading as a sole trader?

A
  • PAPI
  • P - profit to owner
  • A - accounts not legally required except income tax
  • P - personal service advantage
  • I - independence of decision making
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30
Q

What are the disadvantages of a sole trader?

A
  • RUB R
  • R - raise capital unlimited
  • U - unlimited liability for debts
  • B - business life is limited ( on owner)
  • R - Responsibility
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31
Q

Who are the primary users of financial statement?

A
  • Investors/ owners
  • managements and other internal users
  • lenders
  • employees
  • customers
  • government
32
Q

Why would investors/ owners need to look at the financial statement?

A
  • investment decisions
  • existing and potential
  • profitability
33
Q

Why would management and other internal users need to view financial statements?

A
  • performance of duties
34
Q

Why would lenders need to view the financial statements ?

A
  • ability - paying interests and repaying loans
  • credit suppliers - goods on credit
35
Q

Why would employees need to view financial statements ?

A
  • ability to pay wages and pensions
  • future prospects - jobs security and development opportunities
36
Q

Why would customers need to view financial statements?

A
  • entity ability - goods and/or services
37
Q

Why would the government need to view financial statements?

A
  • includes taxation authorities - calculate tax liabilities
  • measure economic performance - employment rates
38
Q

What does the regulatory framework for a UK company preparing financial statements consist of ?

A
  • Companies act 2006 - all UK companies
  • International Accounting standards - IFRS
39
Q

What will an entity adopt an accounting policy based on ?

A
  • truer and fair view
40
Q

What are limited partnerships (LLP)?

A
  • Hybrid - partnerships and limited companies
  • Limited liability partnership act 2000
  • Many Companies Act 2006 provisions apply
41
Q

How are the presentation of final accounts for sole traders and partnership businesses governed and presented?

A
  • no statues and accounting regulations - same extent LLPs
  • No definitive format
  • good practice - same as limited companies
42
Q

What do international standards on specific areas of accounting consist of ?

A
  • International Financial Reporting Standards (IFRSs)
  • International Accounting Standards (IAS)
  • IAS 1 - Presentation of financial statements
  • IAS 2 - Inventories
  • IAS 16 - Property, Plant Equipment
43
Q

What are the international financial reporting standards?

A
  • issued by - international accounting standard board
  • council of ministers - companies listed European stock exchange
  • consolidated accounts - IFRs
  • 1st January 2005
44
Q

What are the international accounting standards?

A
  • Created by - International Accounting Standards Commitee (IASC)
  • IASB - adopted standards from IASC
  • new standards - several IASs - superseded
45
Q

What does the IAS1 - Presentation of the financial statements do?

A
  • overall requirements - financial statements - adoption of IFRSs
  • structure, content minimum requirement , overriding concepts
46
Q

What would the overriding concepts in the IAS1 include?

A
  • going concern
  • accruals basis
  • format and classification of financial statements
47
Q

What does the presentation of financial statements standard require?

A
  • Complete set of financial statements:
  • SOFP
  • P/L
  • statement of changes in equity
  • statement of cash flows
48
Q

What does the IAS 2 Inventories include?

A
  • type of inventory
  • measurement - lower of cost and NRV
49
Q

What does IAS 16 Property, plant , and equipment include?

A
  • Outlines treatment - property, plant and equipment
  • measured @ costs
  • depreciated over useful economic life
50
Q

What are the underlying assumptions of governing financial statementss?

A
  • going concern
  • accruals
51
Q

What is going concern?

A

entity will continue operation - foreseeable future

52
Q

What if the business is no longer considered to be a going concern?

A
  • Assets to be recognised - amount expected from sale
  • Liabilities recognised - likely to be settled
53
Q

What is the accrual basis?

A
  • transaction in financial statements - period in
  • income as earned
  • expenses when incurred
  • not cash received or paid
54
Q

What characteristics do the conceptual framework of financial reporting identify?

A
  • two fundamental qualitative characteristics
  • Four enhancing qualitative characteristics
55
Q

What are the two fundamental qualitative characteristics?

A
  • Relevance
  • Faithful representation
56
Q

What are the four enhancing characteristics?

A
  • Comparability
  • Verifiability
  • Timeliness
  • Understandability
57
Q

What are the definitions of the fundamental qualitative characteristics?

A
  • Relevance - influencing decisions of users
  • Faithful representation - complete, neutral , free from error
58
Q

What are the definitions of enhancing qualitative characteristics?

A
  • 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
Q

What should financial statements be free of ?

A

Material misstatements

60
Q

What are material misstatements?

A
  • incorrect info
  • affect financial decisions - user relying
61
Q

What would materiality relate to and what can it be defined as?

A
  • Transactions, balances, and errors
  • threshold - relevance to needs of user
62
Q

What are examples of material misstatements?

A
  • Overstatement / understatement of profits
  • overvaluations/ undervaluation of assets and liabilities
63
Q

What is the code of ethics of professional accountants published by?

A
  • International Federation of Accountants
  • ethical codes - AAT, ICAEW , ACCA. CIMA
64
Q

What does the code adoppt

A
  • Princplles based approach
  • value system - fundamental professional and ethical principles
65
Q

What are the five key principles?

A

COP I

C- confidentiality

Objectivity

Professional competence and due care

Integrity

66
Q

What is the definition of integrity ?

A

Straightforward and honest- professional work

67
Q

What is the definition of objectivity ?

A
  • Bias, conflict of interest , undue influences others
  • professional and business judgements
68
Q

What are professional competence and due care

A
  • maintain professional knowledge and skill
  • competent professional service for client
  • in line - current developments - practice, legislations, and techniques
69
Q

What is confidentiality ?

A

Respect info - from professional and business relationships

no disclosure - without proper specific authority - legal and professional right to do so

70
Q

What can the threats to fundametnal principles include?

A
  • General in nature
  • relate to specific circumstances of an appointment
71
Q

What do the threats include?

A
  • Self interest
  • self review
  • advocacy
  • familiarity and trust threat
  • intimidation threat
72
Q

What is self-interest threat?

A
  • financial or other self interest conflict
  • direct/indirect interest in client
  • losing an engagement/ his or her employment terminated
73
Q

What is a self-review threat?

A

product or judgement

revevaluated or challenge - same member or firm

74
Q

What is the advocacy threat?

A
  • Advocate for or against the client or employer - adversarial proceedings
75
Q

What is the familiarty tor trust threa?

A
  • influence by :
  • knowledge of the issue
  • relationship - client / employer
  • quality judgement - you become too trusting
76
Q

What is the intimidation threat ?

A
  • dominating personality
  • other pressures: actual or feared

AAT - Final account preparation (4 decks)

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