Financial Stamens (6) Flashcards
Define Changes in equity?
Involves the movement in capital accounts (such as share capital), distributable reserves (such as retained earnings) and non-distributable reserves (such as revaluation reserves).
Define Economic substance?
The underlying commercial benefit or drawback of a transaction.
Define Finance lease?
Refers to a lease agreement which transfers substantially all the risks and rewards of an asset which are incidental to ownership.
Define Financial performance?
This is how well or poorly the entity performed financially. Financial performance is measured by calculating net profit.
Define Financial position?
Indicates the net asset position of the business. Note that owner’s equity is equal to net assets. This is shown by the accounting equation.
Define Financial statements?
A summary of results of business activities for an accounting period.
Define Legal form?
Refers to how a business transaction is interpreted in terms of the law.
Define Public interest score:
The sum of points allocated to a business based on specific attributes, such as average number of employees, sales and liabilities. The public interest score is used to determine whether a company must be audited externally, as well as the interest that the public has in a company.
Define Revenue?
Income generated by an entity from ordinary activities, including income from sales made.
The main aim of financial statements is to provide useful information that enables interested parties to make?
sound economic decisions.
What does ‘solvency’ mean?
Having enough assets to cover your liabilities
What is the main objective of financial statements?
To provide useful information about a business
Why would a business’s suppliers look at its financial statements?
To decide if they should grant the business credit
Which of the following groups is most likely to be interested in tax liability?
SARS
What information on the financial statements would potential investors likely be most interested in?
Return on investment for current shareholders
Calculate the percentage return on equity for the business for its first year of operations?
Percentage return on equity = Net profit / Equity × 100
Recommend to Mr Duma the investment option he should make if he bases his decision only on the expected percentage return on each investment.
The recommendation (based on return on investment only) to Mr Duma should be to purchase the business. This is because it is currently earning a return of 18.75 per cent, whereas the money market account only earns interest of 10 per cent per annum.
What non-monetary considerations should Mr Duma make before purchasing the business?
Non-monetary considerations:
- The number of hours he will have to work, and the effort involved to run the business.
- The value of the business’s good customer base, its brand name, a good location, good relations with existing suppliers etc.
- External risks that are beyond the business owner’s control
Explain Going concern?
- Going concern is the assumption that the business will continue to operate in the foreseeable future. (This means that the business has no intention to liquidate or materially cut back on operations in the foreseeable future.)
The accrual basis of accounting stipulates that income must be recognised when it is earned and not only when it is received, and expenses must be recognised?
- When they are incurred and not only when they are paid.
This means that the effects of transactions are recorded in the financial period to which they relate – they are not necessarily recorded when money is received or paid.
The consistency principle means?
that the same accounting methods and policies should be used from year to year
The matching concept states that the net profit for an accounting period must be measured by matching?
the income earned in that period against the expenses incurred in that period.
Substance over form refers tothe fact that the economic substance of a transaction?
must override its legal form. This means that the real economic effect of a transaction, as opposed to the applicable laws, must be considered when recording a transaction. The substance over form principle usually applies to lease agreements.
What assumption is being made when a lessee records a property as an asset in their books, even though the property legally belongs to the lessor?
Substance over form
Which assumption states that the same accounting policies and methods should be used each year?
Consistency
Which assumption states that a transaction’s effect is recorded in the financial period it relates to?
Accrual basis
What is the purpose of the matching concept?
To avoid overstating or understating profit
What does ‘going concern’ mean?
A business will continue to operate into the foreseeable future
The statement of profit or loss and other comprehensive income conveys the financial performance of the business during the financial year. The financial performance of a business is measured by the?
net profit made, or loss incurred, during a particular period, usually a year.
The IAS 1 format for the statement of profit or loss and other comprehensive income, consists of two sections?
- Profit or loss: This consists of all income and expenses, unless an IFRS requires or permits otherwise.
- Other comprehensive income: This consists of all income and expenses not disclosed in the profit and loss section. An example of this is income from the changes in revaluation surplus of land and buildings.
The format for entities not requiring external audits
Remember these entities include?
- sole proprietorships;
- partnerships;
- owner-managed private companies; and
- close corporations that do not meet the requirements for an external audit.
- The format for the statement of profit or loss and other comprehensive income for these entities is not prescribed by IAS 1.
The statement of financial position conveys the financial position of the business at the end of?
its financial year.
Capital accounts are used for capital contributions?
or withdrawals of capital.
Current accounts, on the other hand, are used for the yearly movement in equity, such as the share of profits and drawings.
What information does the statement of profit or loss and other comprehensive income convey?
Financial performance
Which account would be shown under owner’s equity in the statement of financial position?
Drawings
What information does the statement of financial position convey?
Solvency
Which financial statement depicts an entity’s financial position?
Statement of financial position
Which businesses have to be externally audited regardless of their public interest score?
Public companies
The statement of changes in equity conveys the movement in all the major equity accounts of the business during the?
financial year
The statement of changes in equity measures?
- movement in all the major equity accounts; and
- increase or decrease in net assets
For a close corporation, a change in equity will not be drawn up. The change in equity is usually shown by notes for each of the following items?
- Members’ contributions
- Loans to members
- Loans from members
- Transactions with members
- Retained income or undrawn profit
- Members’ contributions: This includes the opening balance, any change in contribution and closing balances for each member.
- Loans to members: This includes the opening balance, repayments during the year, any additional loans during the year, and the closing balance for each loan made by the close corporation to the member.
- Loans from members: This includes the opening balance, repayments during the year, any additional loans during the year, and the closing balance for each loan made by the member to the close corporation.
- Transactions with members: This details all the transactions with members and is included in the net profit before tax. It includes interest income on loans to members, interest expense on loans from members, and members remuneration. It also includes any rent income or expense where the member has rented property to or is renting property from the close corporation.
- Retained income or undrawn profit: This includes the opening balance, net profit after tax for the year, distributions to members and the closing balance.
The statement of cash flows conveys the movement of cash and cash equivalents of the business during?
the financial year.
The notes to financial statements are therefore meant to provide detailed information in order to?
support the amounts on the financial statements. They also provide information regarding the accounting policies and methods used by the entity.
What does the statement of changes in equity convey?
Change in net assets
Where would accounting policies and methods be found in the financial statements?
Notes to the financial statements
Where are changes in equity shown for a close corporation?
Notes to the financial statements
Under which category would ‘additions to non-current assets’ fall under in the cash flow statement?
Investing activities
What does the statement of cash flows measure?
Movement in cash and cash equivalents
Movement in cash and cash equivalents
The primary objective of financial statements is to provide useful information in order for interested parties to make sound economic decisions.
What is the primary objective of financial statements?
What is the primary objective of financial statements?
List the types of businesses that require audited financial statements?
The businesses that require audited financial statements are:
- all public companies;
- state-owned; and
- close corporations that meet the requirements for an external audit.
List the various users of financial statements?
The various users of financial statements are:
- owners/shareholders;
- potential investors;
- government/SARS;
- banks and other lenders;
- suppliers;
- customers/public; and
- employees
