Financial Statements Flashcards
What is meant by the term entity?
An organisation such as a limited company whose activities and resources are kept separate from those of the owners
What does a limited companies financial statements comprise of
1) Statement of FP
2) Statement of P/L
3) Statement of changes in Equity
4) Statement of cash flows
What are the purposes of the conceptual framework?
1) Reduce alternative accounting treatments that are allowable
2) Assist in development of future standards and review current ones
3) Help interpret info in the financial statement
4) Deal with issues not yet covered in an accounting standard
What is the objective of general purpose financial reporting?
To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decision relating to providing resources to the entity.
Identify and explain the fundamental qualitative characteristics?
1) Relevance
- Makes a difference to decision made
- Helps predict future outcomes and confirm previous evaluations
2) Faithful Representation
- Complete, neutral and free from error
What are the enhancing characteristics?
1) Comparability
2) Verifiable
3) Timeliness
4) Understandability
Define asset
A resource controlled by an entity as a result of past events from which future economic benefits are expected to flow
Define Liability
A present obligation of the entity arising from past events from which settlement is expected to result in the outflow of resources
Define equity
The residual interest in assets after deducting all of its liabilities
Define expenses
Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims
Define income
Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims
When should an item be recognised?
1) If it is probable that future economic benefits will flow to or from the entity
2) If it’s costs can be reliably measured
Name 6 accounting concepts
1) Materiality
2) Going concern
3) Accruals
4) Business Entity
5) Consistency
6) No offsetting
What comprises the regulatory framework?
- accounting standards
- company law
- conceptual framework for financial reporting
What are the key features of a public limited company
It sells shares to public/investors via stock exchange.
It has to have:
- issued share capital over £50,000
- at least 2 directors and 2 shareholders
- a qualified company secretary
What are the key features of a private limited company
Sells shares to friends/family/venture capitalists. It must have at least 1 director and 1 shareholder. There is no minimum requirement for share capital
What are the governing documents for a limited company?
- Application form used to register a company
- Memorandum of association
- The articles of association
What are ordinary shares, and what are the risks/benefits and repayment terms?
- They are regular shares and most common
- Shareholders have voting rights
- Due to limited liability you will only lose your investment.
- Not guaranteed payment if a loss is made
- Not guaranteed to have investment repaid if company closes down
- Lose out if selling when share value is low
- Rewarded via dividends - variable amounts. High reward if profit is good
What are preference shares, and what are the risks/benefits and repayment terms?
- Preferential treatment
- Paid a fixed amount
- Paid to first from profit; before ordinary shares if low profits/company shuts down
- Lose out if selling when share value is low
- Miss out on higher rewards if profit is good
- Paid via dividends
- Shareholders do not have voting rights
What are debentures? What are the risks/benefits and repayment terms?
- Lends money in return for interest payments
- Payments are guaranteed regardless of profit
- low risk, as investment is usually secured against assets
- Never guaranteed the investment will be paid back
Name 2 profit and loss items specific to limited companies
- Debentures and Loans
- Directors remuneration
What are the key differences between capital and revenue reserves?
Capital reserves are generated from non-trading activities e.g. revaluation surplus or share premium and are non-distributable.
Revenue reserves include retained earnings and are distributable
What’s the difference between statutory and annual accounts?
Statutory are the minimal reports that are required by law to be submitted to Companies House and HMRC. Annual reports are those available to shareholders and include:
- The 4 financial statements
- Disclosure notes to the financial statements
- Directors report
- Auditors report
What are the requirements of The Companies Act?
1) Accounting records to give a true and fair view of the company’s financial position
2) Financial statements to be prepared using UK/International accounting standards
3) Directors to report on company performance to shareholders annually
4) Submitting accounts by 6 months after period end (PLC) or 9 months (LTD)
What does IAS1 state a complete set of financial statements include?
1) S of FP
2) S of P/L and other comprehensive income
3) S of cash flows
4) Statement of changes in equity
5) Comparitive info for preceding period
6) Explanatory notes and accounting policies
Outline the process of proposal, approval and payment of dividends
1) Proposed by Board of Directors
2) Approved by shareholders after reading annual report
3) Can be paid as interim/final
4) Those declared by not paid at reporting date are disclosed in the notes to financial accounts
What disclosures are required about share capital by IAS1
1) Number of shares authorised
2) Number of shares issued and fully paid, and issued but not fully paid
3) The par value per share, or that shares have no par value
What is other comprehensive income?
Relates to revenue, expenses, gains or losses that have not yet been realised and therefore cannot be distributed as dividends to shareholders
Who requires an auditors report and what does it contain?
Only large companies need one, and it will have 3 sections:
1) Responsibilities of directors and auditors
2) Basis of opinion
3) Opinion - can be unqualified (no issues) or qualified (issues that need to be raised with users of financial statements
What is a bonus issue of shares?
When a company issues free shares to existing shareholders using reserves that have built up (capital is used first). No cash flow involved. Used to acknowledge that reserves belong to shareholders.
What is a rights issue of shares?
When additional shares are sold to current shareholders at a reduced price. Used to raise further finance.
Define depreciation
The systematic allocation of the cost less residual value of an asset over its useful life
Define residual value
The net amount expected to be obtained for an asset at the end of its useful life after deducting the expected costs of disposal
Define lease
A contract that conveys the right to use an underlying asset for a period of time in exchange for consideration
Define lessor
The entity that obtains the right-of-use asset, in exchange, transfers consideration
Define Lessee
The entity that provides the right to use an underlying asset in exchange for consideration
Define right-of-use asset
A lessee’s right to use an underlying asset for the lease term
When can an asset be recognised?
1) it is probable that future economic benefits will flow to the entity
2) when the cost can be reliably measured
How is PPE measured?
At cost which includes:
1) Purchase price plus import duties/other tax
2) those directly attributable to bringing the asset to location in condition for intended use inc. testing
3) Estimated dismantling and removal costs at end of life
What is the difference between the cost and revaluation model?
Cost model - asset is carried at cost less depreciation and any impairment loss
Revaluation - asset is carried at fair value. Revaluation takes place either yearly or every 3-5 years
What must be considered when determining the useful life of an asset?
1) Expected usage
2) Expected wear and tear
3) Expected technical changes/changes in demand
4) Legal/other limits on it’s use
A revaluation surplus relating to PPE may be directly transferred to…
Retained Earnings
For each class of PPE the financial statements are to show:
1) Measurement basis
2) Depreciation method
3) useful lives/depreciation rates
4) Gross carrying amount and accumulated depreciation and impairment at beginning and end of period
5) Reconciliation of carrying amount
6) Any revaluation details
Define intangible asset
An identifiable non-monetary asset without physical substance
State and explain the 3 key elements of an intangible asset
1) Identifiable - Separate from the company or arising from contractual/other legal rights
2) Control - The entity has the power to obtain future economic benefits
3) Future economic benefits, includes revenue, cost savings etc
When can development costs be capitalised?
Meet all of the following:
S- Saleable/usable item created
E- Expenditure can be measure reliably
C- Completion of asset for use/sale
T- Technically feasible to complete
O- Outcome, how future economic benefits will be generated
R- Resources are available to compelte development
How are intangible assets to be measured?
1) Finite - Amortised over it’s useful life
2) Indefinite - tested for impairment annually and useful life checked annually to make sure it’s still indefinite
How do you calculate an asset’s recoverable amount?
It’s the higher of:
1) Fair value (price received in an orderly transaction between market participants at measurement date) less costs of disposal
2) Value in use - the present value of the future cash flows expected to be derived from the asset
How is a right-of-use asset recognised?
1) DR right-of-use asset in S of FP
2) CR Lease Liability
Define inventories
Assets held for sale in the ordinary course of business
Which costs can be included in the development of internally generated assets, and which can’t?
Direct not admin overheads
Where will a previous year’s under/over provision of tax show in the FS?
In the statement of P/L only
Define provision, and when can it be included in FS?
1) Provision is a liability of uncertain timing and amount
2) It can be included when there is actual liability, it is probable payment will be made and a reliable estimate can be made of the amount
Define obligating event
An event that creates a legal or constructive obligation resulting in an entity having no realistic alternative to settling the obligation
What is the difference between a legal and constructive obligation?
The legal derives from a contract, legistlation or other operation of law. The constructive derives from an entity’s actions such as an established pattern of past practice
What should be diclosed in the notes regarding provision?
- Description of provision and expected timings of payments
- Any uncertainties
- Reconciliation of provision movements
What is a contingent liability?
- A possible obligation depending on an uncertain future event, or;
- A present obligation but payment is not probable or the amount cannot be measured reliably
Are contingent liabilities included in the FS, the notes, or not at all?
What about contingent assets?
They are not included in the FS, and only included in the notes if possible. If remote, they are not disclosed at all.
Contingent assets are only disclosed if they are probable, and not at all if possible/remote.
In what instances can changes be made to the FS after the reporting period?
Only before the FS are authorised for issue, and they can only be made in the period after the end of the financial year
What are the steps to recognising revenue?
1) Identify the contract with a customer
2) Identify the performance obligations in the contract
3) Determine the transaction price
4) Allocate the transaction price to the performance obligations
5) Recognise revenue when a performance obligation is satisfied
What are the IFRS15 requirements for a contract?
1) Approved by parties
2) Each party’s rights in relation to goods/services can be identified
3) Payment terms can be identified
4) Probable that consideration will be collected
5) It has commercial substance
When can revenue be recognised over time?
- If the customer simultaneously received and consumes the benefits from the entity’s performance
- If the entity is creating or enhancing an asset controlled by the customer
- If the entity cannot use the asset ‘for alternative use’ and the entity can demand payment for its performance to date
What is the difference between an adjusting and non-adjusting event?
Adjusting - provides evidence that the condition existed at the reporting date
Non-adjusting - indicates the condition arose after the reporting date
Define revenue
Income arising in the course of an entity’s ordinary activities
What is the formula for calculating ROCE?
operating profit/(total equity + non-current liabilities) x 100
What is the formula for calculating return on shareholder funds?
Profit after tax/Total equity x 100
How is the current/working capital ratio calculated?
Current assets/current liabilities = x:1
What is the formula for asset turnover?
Revenue/non-current assets OR Total assets-current liabilities
What is the formula for interest cover?
Operating profit/finance costs = x times
What is the formula for gearing?
Non-current liabilities/total equity + non-current liabilities
Define Acquiree
The business that the acquirer obtains control of in a business combination
Define acquirer
The entity that obtains control of the acquiree
What is a business combination
A transaction or other event in which an acquirer obtains control of one or more businesses
What is goodwill?
An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised
What is non-controlling interest
The equity in a subsidiary not attributable, directly or indirectly, to a parent
What accounting standard is Business Combinations?
IFRS 3
What accounting standard is Consolidated Financial Statements?
IFRS 10
What accounting standard is Revenue from Contracts with Customers
IFRS 15
What accounting standard is Leases
IFRS 16
What accounting standard is Presentation of Financial Statements
IAS 1
What accounting standard is Inventories
IAS 2
What accounting standard is Statement of Cash Flows
IAS 7
What accounting standard is Events after the Reporting Period
IAS 10
What accounting standard is Income Taxes
IAS 12
What accounting standard is PPE
IAS 16
What accounting standard is Impairment of Assets
IAS 36
What accounting standard is Provisions, Contingent Liabilities and Contingent Assets
IAS 37
What accounting standard is Intangible Assets
IAS 38
What is the formula for inventory turnover?
Cost of Sales / Inventory
What is the formula for inventory holding period?
Inv / Cost of Sales x 365
