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AAT Level 4 > Financial Statements > Flashcards

Financial Statements Flashcards

1
Q

Statement of Profit & Loss and Other Comprehensive Income - Description

A

Provides information on the performance of a business as well as the gains and losses that are not recognized in profit or loss

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2
Q

Statement of Financial Position - Description

A

Shows the assets and liabilities of the company

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3
Q

Statement of Changes in Equity - Description

A

Provides information about how the equity of a company has changed over a period

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4
Q

Statement of Cash Flow - Description

A

Shows the movement of cash into and out of the business

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5
Q

Users of Financial Statements

A

Bank - Lending, security, they want your custom
Suppliers - Credit terms, amount of supply
Shareholders - Return on their investment, whether to buy or sell their inventory
HMRC - VAT, corporation tax, PAYE, NI, imports & exports
Employees - Job security, room for growth
Directors - Decision making, performance related bonuses

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6
Q

Statement of Profit & Loss and Other Comprehensive Income - Layout

A

Revenue
(Cost of Sales)
= Gross Profit
(Distribution Costs)
(Admin Expenses)
= Profit From Operations
(Finance Costs)
= Profit Before Tax
(Income Tax Expense)
= Profit For The Period

Other Comprehensive Income
Revaluation Gain
= Total Comprehensive Income For Year

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7
Q

Statement of Financial Position - Layout

A

Non-Current Assets
Property, Plant & Equipment
Intangible Assets

Current Assets
Inventories
Trade & Other Receivables
Cash & Cash Equivalents

Total Assets

Equity
Share Capital
Share Premium Account
Retained Earnings
Revaluation Surplus
Total Equity

Non Current Liabilities
Long Term Loans or Debentures

Current Liabilities
Trade & Other Payables
Bank Overdrafts
Tax Payable

Total Liabilities

Total Equity & Liabilities

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8
Q

IAS 1

A

Requirements For Company Financial Statements
SPL + other comprehensive income
SFP
Statement of changes in equity
Statement of cashflows
Notes to the accounts

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9
Q

IAS 2

A

Inventories
Inventory is valued at the lower of cost or net realisable value
Cannot use LIFO

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10
Q

IAS 36

A

Impairment Of Assets
Compare carrying amount against the greater of
Fair selling value
Value in use

Dr - Impairment expense
Cr - Asset

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11
Q

IAS 16

A

Property, Plant & Equipment
Cost = purchase price + directly attributable costs
NOT TRAINING
Land is not depreciated

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12
Q

Revaluation

A

IAS 16 - Property, Plant & Equipment
Reverse accumulated depreciation
Correct asset
Complete double entry
Bottom of P&L For Info Only

IF INCREASED VALUE
Dr - accumulated depreciation
Dr - asset
Cr - revaluation

IF DECREASED VALUE
Dr - accumulated depreciation
Dr - revaluation (if there is anything in the reserve)
Dr - expense
Cr - asset

Must revalue entire class of assets, cannot pick and choose

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13
Q

Debt Financing

A

Loan, mortgage, overdraft

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14
Q

Equity Financing

A

Selling shares in the company

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15
Q

Debt Financing - Advantages

A

Can improve credit score

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16
Q

Debt Financing - Disadvantages

A

Interest, admin fees
Committed to a repayment
Application process / acceptance
Effects their ratio analysis

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17
Q

Equity Financing - Advantages

A

No credit checks
More people in the company - more knowledge

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18
Q

Equity Financing - Disadvantages

A

More people to agree on decisions
More people to pay dividends to
Dilution of control

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19
Q

Nominal Value Of Shares

A

The set price of a share, decided when the company is formed

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20
Q

Share Premium

A

Anything paid over the nominal value

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21
Q

Issuing Shares - Double Entry

A

Dr - Bank
Cr - Share Capital
Cr - Share Premium

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22
Q

Issuing Bonus Shares - Double Entry

A

Dr - Share Premium (IF AVAILABLE) / Retained Earnings
Cr - Share Capital

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23
Q

Dividends - Double Entry

A

Dr - Dividends
Cr - Bank

Dividends can only be accounted for when ACTUALLY PAID

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24
Q

IFRS 16

A

Leases
Long term rental, right to use asset but does not belong to us.

1) Account for asset (deposit & liability)
Dr - Asset
Cr - Lease Liability / Bank (deposit)

2) Work out depreciation policy over the right of use period

3) Unwind the liability - account for payments & interest each year
Payment
Dr - Lease Liability
Cr - Bank
Interest
Dr - Finance Costs
Cr - Lease Liability

4) Split the liability into current and non current
Paying In Advance
CL = Payment
NCL = Difference

Paying In Arrears
CL = Difference
NCL = Next Years Balance

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25
Q

Excess Depreciation Journal

A

IAS 16 - Property, Plant & Equipment
To adjust retained earnings due to excess depreciation from revaluation - to keep shareholders happy with dividends
Dr - Revaluation Reserve (If funds allow)
Cr - Retained Earnings

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26
Q

Disposal Of Revalued Asset

A

If there is any money in the revaluation surplus, this will be moved to retained earnings
Dr - Revaluation Reserve
Cr - Retained Earnings

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27
Q

Gross Profit Margin

A

Gross Profit / Revenue X 100
= %

For every £1 of sales, the % converted to gross profit
ONLY SALES & COST OF SALES

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28
Q

Operating Profit Margin

A

Operating Profit / Revenue X 100
= %

For every £1 of sales, the % converted to operating profit
DISTRIBUTION & ADMIN EXPENSES

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29
Q

Net Profit Margin

A

Net Profit / Revenue X 100
= %

For every £1 of sales, the % converted to net profit
TAX

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30
Q

Specified Expense Ratio

A

Specified Expense / Revenue X 100
=%

For every £1 of sales, the % spent on a specific expense

31
Q

Return On Capital Employed

A

Profit From Operations / Capital Employed X 100
= %

Shows profit made from long term funding / investment

Capital Employed = Total Equity + NCL
OR
Total Assets - CL

32
Q

Return On Net Assets OR Shareholders Funds

A

Net Profit / Equity X 100
= %

Showing the profit made (goes to retained earnings) from equity only

33
Q

Asset Turnover

A

Revenue / Capital Employed
= no of times

The amount of times the long term funding is converted to revenue

Capital Employed = Total Equity + NCL
OR
Total Assets - CL

34
Q

Non Current Asset Turnover

A

Revenue / NBV of Non Current Assets

Shows how much revenue is generated from assets

35
Q

Total Asset Turnover

A

Revenue / Total Assets

Shows how much revenue is generated from assets

36
Q

Current Ratio

A

Current Assets / Current Liabilities
= X:1

How the many times the Current Assets would cover Current Liabilities
Ideal 2:1
Measure of liquidity

37
Q

Quick Ratio (Acid Test)

A

Current Assets - Inventory / Current Liabilities
= X:1

How the many times the Current Assets, without inventory, would cover Current Liabilities
Inventory is the least liquid / slowest moving asset
Ideal 1:1
Measure of liquidity

38
Q

Inventory Holding Period (Inventory Days)

A

Closing Inventory / Cost of Sales X 365
= X Days

Average days inventory is held in the stock room

39
Q

Inventory Turnover

A

Cost of Sales / Closing Inventory

How many times the stock room has been refilled

40
Q

Trade Receivables Collection Period (Receivable Days)

A

Trade Receivables / Credit Sales X 365
= X days

The average time to collect money from credit customers
Puts pressure on credit control

41
Q

Trade Payables Collection Period (Payable Days)

A

Trade Payables / Cost of Sales X 365
= X days

Average time to pay credit suppliers

42
Q

Working Capital Cycle

A

Inventory Days + Receivable Days - Payable Days

The days the company has to fund itself

43
Q

Interest Cover

A

Profit From Operations / Finance Costs

The amount of times the profit can cover the finance costs

44
Q

Gearing Ratio

A

Non Current Liabilities / Equity + Non Current Liabilities X 100
= %

The % of the company that is funded by debt
High gearing = High risk

45
Q

IAS 38

A

Intangible Assets

46
Q

What is an Intangible Asset?

A

An asset with no physical form
Must either:
Be capable of being separated or divided from entity
Arise from contractual or other legal rights
Cost can be measured reliably (have invoice for it)

Internally generated intangible assets cannot be recognized
Amortise - Not Depreciate

47
Q

When Does Research Become Development?

A

Research cannot be capitalised

Development can be capitalised if:
Probable future economic benefits
Intention to complete and use / sell
Resources adequate to complete and use / sell
Ability to use / sell
Technical feasibility
Expenditure can be readily measured

48
Q

Amortisation Double Entry

A

Dr - SPL - Amortisation Expense
Cr - SFP - Accumulated Amortisation

49
Q

Performance Indicator Written Question Model Answer

A

Introduction - repeat the question back
Write one sentence describing each ratio
State whether there has been an increase / decrease, use figures and percentages
State if there is an ideal and how they compare
State any possible reasons for the changes
Conclusion - State whether the performance has improved / declined, state areas of concern which require further investigation

50
Q

Underlying Assumption

A

Going Concern
Assumes that the entity will continue in operation
for the foreseeable future

51
Q

Fundamental Qualitative Characteristics

A

Relevance
Faithful representation

52
Q

Enhancing Qualitative Characteristics

A

Comparability
Verifiability
Timeliness
Understandability

53
Q

IAS 12

A

Income Taxes
Accrue for tax paid using accruals

54
Q

IFRS 15

A

Revenue From Contracts With Customers

COPAR
1. Contract
2. Obligations
3. Price
4. Allocate price into obligations
5. Recognise revenue when obligation is satisfied

55
Q

Indicators That Control Has Passed To The Customer (Satisfied Obligation)

A

Customer has physical possession of the asset
Customer has significant risks and rewards of ownership
Customer has the legal title
The seller has a right to payment

56
Q

IAS 37

A

Provisions, Contingent Liabilities & Contingent Assets

57
Q

Provision Definition

A

A liability where there is uncertainty regarding either the exact amount and/or the timing of the payment
Need to be estimated using a best estimate

58
Q

When To Recognise A Provision?

A

IAS 37

If there is an obligation
If it is probable that there will be an outflow of economic benefits (money)
If the outflow of economic benefits can be reliably measured (best guess)

A provision cannot be made for future operating losses

59
Q

Provisions - Double Entry

A

IAS 37

DR - Expense (SPL)
CR - Provisions (SFP) - Payables

When paid:
DR - Provision (SFP)
CR - Bank (SFP)

At year end, re estimate the provision and adjust if required

60
Q

Contingent Liability

A

IAS 37

A possible obligation, the outcome will be determined by future events outside of their control
An obligation which cannot be reliably measured will also be treated as a contingent liability

61
Q

Contingent Asset

A

IAS 37

A possible asset, the outcome will be determined by future events out of their control

62
Q

How To Account For Contingent Assets / Liabilities?

A

IAS 37

It is not recognised in the financial statements (No double entry)
Should be disclosed in the notes - brief description and estimated financial effect

63
Q

IAS 10

A

Events After The Reporting Period

Events which occur between the SFP date and the date accounts are sent to companies house (9 months + 1 day)

64
Q

Examples of Adjusting Events

A

IAS 10

Post year end court case
Bankruptcy of a credit customer
Sale of inventory at less than cost
Discovery of fraud / error in statements

65
Q

Examples of Non-Adjusting Events

A

Mergers and acquisitions
Reconstructions
The issue of shares or debentures
Purchase / sale of NCA or investments
Loss of assets as a result of catastrophe
Dividends (only accounted for when paid)

66
Q

Cash Flow From Operating Activities Layout (Profit Before Tax)

A

Profit before tax
Adjust for:
Depreciation
(Gain)/Loss on disposal of PPE
Finance Costs
(Investment Income)

(Increase)/decrease in inventory
(Increase)/decrease in receivables
Increase/(decrease) in payables

= Cash generated from operations
(Tax Paid)
(Interest Paid)

= Net Cash From Operating Activities

67
Q

Cash Flow From Operating Activities Layout (Profit From Operations)

A

Profit from operations
Adjust for:
(Gain)/Loss on disposal of PPE
(Investment Income)

(Increase)/decrease in inventory
(Increase)/decrease in receivables
Increase/(decrease) in payables

= Cash generated from operations
(Tax Paid)
(Interest Paid)

= Net Cash From Operating Activities

68
Q

Statement of Cash Flows Layout

A

Net Cash From Operating Activities

Cash Flows From Investing Activities
(Purchase of PPE)
Proceeds from sale of PPE
Interest Received
Dividends Received

= Net cash from investing activities

Cash Flows From Financing Activities
Proceeds from issue of shares
Proceeds from long term borrowing
(Dividends paid)

= Net cash from financing activities

Net increase / (decrease) in cash
Cash at beginning of the year
= Cash at end of the year

69
Q

Consolidation Workings (SFP)

A

W1 - Group structure - who owns who?

W2 - Goodwill - Difference between what was paid and what we physically get - Compare cost of investment + NCI against Equity

W3 - Consolidated retained earnings

W4 - Value of NCI - W2 + W3

70
Q

How To Calculate Consolidated Retained Earnings

A

R/E as per question
(R/E at purchase)
= After purchase R/E
Transfer % To Parent From Sub
(Impairment)
(PURP Adjustment For Seller)
= Group Retained Earnings

71
Q

Provision For Unrealised Profit Adjustment (PURP)

A
  1. Who was the seller?
  2. How much profit is in the sale?
  3. How much is still in inventory? (%)

Reduce inventory and profit by 2 x 3

72
Q

Consolidation Workings (SPL)

A
  1. Look for inter company transactions (sales, dividends)
  2. PURP Adjustment - reduce profit & inventory
  3. Group Structure (% of ownership)
  4. Profit share working
    Profit for Sub From Question
    (PURP)
    X NCI %
    = Sub Profit
    Parent Profit = balancing figure
73
Q

Measurement - Conceptual Framework

A

Measurement - Determining the monetary amounts items are recognised in the financial statements

Historical cost - Assets are recorded at the value of the cost incurred to acquire them plus any transaction costs
Current value:
- Current cost - the amount it would cost to currently replace the asset
- Fair Value - the amount you would get for selling the asset
- Value in use - the amount the asset will generate for the business

74
Q

The Elements of Financial Statements

A

Assets - present economic resource controlled by the entity, as a result of past events
Liabilities - present obligation to transfer economic resource, as a result of past events
Equity interest - what is left after all liabilities
Income - consists of revenue and gains
Expense - expenditure and losses

AAT Level 4 (5 decks)

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