Financial reporting and ethical principles Flashcards
What are the different types of business organisations?
- For profit organisations
- Not-for-profit organisations
- Sole trader
- Partnerships
- Limited company
- Limited liability partnership
- Charity
What are For - profit organisations?
Primary goal = profit
What are not for profit oganisations?
- No profit - owners/ stakeholders
- Money = pursuing organization’s objectives
- e.g. Financial ombusman, sports and social clubs
What is a sole trader?
- Individual in business
- exclusive owner - making profit
- No legal distinction - owner is responsible
What is a limited company?
- Incorporated business
- separate legal entity - owned by shareholders
- ‘limited by shares’
- shareholders responsibility = shares they own
- directors - not responsible for debts
What is a limited liability partnership?
- partnership - incorporated form
- separate legal entity - partner’s limit personal liability
- @least 1 - limited liability
- partners manage direct - not shareholders
What is a charity ?
- charitable activities - public benefit
- trustees
How would an organisation be classed as a charity?
- charities act 2011
- established charitable purposes only
- general public benefit
Who would own and manage a sole trading business?
Sole traders
What are the accounting requirements for sole trading?
- annual accounts - not legal
- expenses and personal income required - tax returns
- private financial statements
How are profits taxed for sole trader?
- income tax on profit
- tax not expense - not in profit/loss
How are distributions made in a sole trader?
Drawings
Who owns and manages a partnership?
Parnters
What are the accounting requirements for a partnership?
- annual accounts / file account - not legally required
- regulations - partnership act 1890
- business expenses and personal income required - tax returns
- partnership agreement
- private financial statements
How are profits taxed in a partnership?
- share of profit = income tax
- tax not expense - not profit/ loss
How are distributions made in a partnership?
Drawings
Who would own and manage a limited liability partnership ?
partners - separate legal entity
What are the accounting requirements for a limited liability partnership ?
- regualtions - limited liability partnership act 2000
- llp agreement estbalished
- financial statements - companies house
How are profits taxed in a limited partnership?
- Income tax - share of profits
How are distributions made in a limited partnership?
partnerships - can take drawings
Who owns and manages a limited company?
- separate legal entity
- shareholder = owners and investors
- directors = run business
What are the accounting requirements for the limited company ?
- 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
How are profits taxed for limited companies?
- 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
How are distributions made in a limited company?
- Dividends = drawings for sole trader
- dividends - statement of changes in equity
Who owns and manages charities?
Trustees
What are the accounting requirements for charities?
- Regulations - charities act 2011
- financial statements - charity commission
How are the profits of a charity taxed?
exempt - income for charitable purposes
How are distributions in a charity made?
For charitable activities
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
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
Who are the primary users of financial statement?
- Investors/ owners
- managements and other internal users
- lenders
- employees
- customers
- government
Why would investors/ owners need to look at the financial statement?
- investment decisions
- existing and potential
- profitability
Why would management and other internal users need to view financial statements?
- performance of duties
Why would lenders need to view the financial statements ?
- ability - paying interests and repaying loans
- credit suppliers - goods on credit
Why would employees need to view financial statements ?
- ability to pay wages and pensions
- future prospects - jobs security and development opportunities
Why would customers need to view financial statements?
- entity ability - goods and/or services
Why would the government need to view financial statements?
- includes taxation authorities - calculate tax liabilities
- measure economic performance - employment rates
What does the regulatory framework for a UK company preparing financial statements consist of ?
- Companies act 2006 - all UK companies
- International Accounting standards - IFRS
What will an entity adopt an accounting policy based on ?
- truer and fair view
What are limited partnerships (LLP)?
- Hybrid - partnerships and limited companies
- Limited liability partnership act 2000
- Many Companies Act 2006 provisions apply
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
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
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
What are the international accounting standards?
- Created by - International Accounting Standards Commitee (IASC)
- IASB - adopted standards from IASC
- new standards - several IASs - superseded
What does the IAS1 - Presentation of the financial statements do?
- overall requirements - financial statements - adoption of IFRSs
- structure, content minimum requirement , overriding concepts
What would the overriding concepts in the IAS1 include?
- going concern
- accruals basis
- format and classification of financial statements
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
What does the IAS 2 Inventories include?
- type of inventory
- measurement - lower of cost and NRV
What does IAS 16 Property, plant , and equipment include?
- Outlines treatment - property, plant and equipment
- measured @ costs
- depreciated over useful economic life
What are the underlying assumptions of governing financial statementss?
- going concern
- accruals
What is going concern?
entity will continue operation - foreseeable future
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
What is the accrual basis?
- transaction in financial statements - period in
- income as earned
- expenses when incurred
- not cash received or paid
What characteristics do the conceptual framework of financial reporting identify?
- two fundamental qualitative characteristics
- Four enhancing qualitative characteristics
What are the two fundamental qualitative characteristics?
- Relevance
- Faithful representation
What are the four enhancing characteristics?
- Comparability
- Verifiability
- Timeliness
- Understandability
What are the definitions of the fundamental qualitative characteristics?
- Relevance - influencing decisions of users
- Faithful representation - complete, neutral , free from error
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
What should financial statements be free of ?
Material misstatements
What are material misstatements?
- incorrect info
- affect financial decisions - user relying
What would materiality relate to and what can it be defined as?
- Transactions, balances, and errors
- threshold - relevance to needs of user
What are examples of material misstatements?
- Overstatement / understatement of profits
- overvaluations/ undervaluation of assets and liabilities
What is the code of ethics of professional accountants published by?
- International Federation of Accountants
- ethical codes - AAT, ICAEW , ACCA. CIMA
What does the code adoppt
- Princplles based approach
- value system - fundamental professional and ethical principles
What are the five key principles?
COP I
C- confidentiality
Objectivity
Professional competence and due care
Integrity
What is the definition of integrity ?
Straightforward and honest- professional work
What is the definition of objectivity ?
- Bias, conflict of interest , undue influences others
- professional and business judgements
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
What is confidentiality ?
Respect info - from professional and business relationships
no disclosure - without proper specific authority - legal and professional right to do so
What can the threats to fundametnal principles include?
- General in nature
- relate to specific circumstances of an appointment
What do the threats include?
- Self interest
- self review
- advocacy
- familiarity and trust threat
- intimidation threat
What is self-interest threat?
- financial or other self interest conflict
- direct/indirect interest in client
- losing an engagement/ his or her employment terminated
What is a self-review threat?
product or judgement
revevaluated or challenge - same member or firm
What is the advocacy threat?
- Advocate for or against the client or employer - adversarial proceedings
What is the familiarty tor trust threa?
- influence by :
- knowledge of the issue
- relationship - client / employer
- quality judgement - you become too trusting
What is the intimidation threat ?
- dominating personality
- other pressures: actual or feared
