Financial Statements Flashcards
What are the two main duties of directors regarding financial reporting?
- Solvency
- Statutory financial reporting
Directors must ensure the organization is solvent and comply with reporting standards.
What are the three main financial statements?
- Income statement
- Balance sheet
- Cash flow statement
These statements provide insights into an organization’s financial performance and position.
What is the definition of solvency?
A person is solvent when they are able to pay all the person’s debts when they are due and payable
Solvency is crucial for assessing an organization’s financial health.
What does Section 588G of the Corporations Act 2001 (Cth) relate to?
Liability for debts incurred by the company if the director has reasonable grounds to suspect insolvency
Directors must act responsibly to avoid personal liability.
Under what conditions do Safe Harbour Provisions apply?
If directors develop actions likely to improve the company’s outcome instead of immediate liquidation
This provision protects directors from liability during financial distress.
What are the duties related to keeping financial records?
- Correctly record transactions
- Explain financial position and performance
- Enable preparation of true and fair financial statements
Proper record-keeping is essential for transparency and accountability.
What is the purpose of an audit committee?
To assist the board in fulfilling obligations regarding external financial reports and communication with auditors
The committee enhances governance and financial integrity.
What must be included in the financial report for a financial year according to the Corporations Act 2001 (Cth)?
- Financial statements
- Notes to the accounts
- Directors’ declaration
These components ensure comprehensive financial disclosure.
What is the purpose of the director’s declaration?
To confirm compliance with Accounting Standards and that the financial statements present a true and fair view
This declaration is a key accountability measure for directors.
What is the role of the auditor’s report?
To provide an independent opinion on the financial statements and assure compliance with laws and Accounting Standards
The auditor’s report adds credibility to financial disclosures.
What does the income statement measure?
The activity of an organization over a period of time, focusing on revenues and expenses
It reflects the performance in delivering goods and services.
What are the key components of a balance sheet?
- Assets
- Liabilities
- Equity
The balance sheet provides a snapshot of financial position at a specific point in time.
What is the significance of materiality in financial statements?
Information is material if its omission or misstatement could influence decisions of users
Materiality guides what information must be disclosed.
Fill in the blank: The __________ statement provides insight into the cash inflows and outflows of an organization.
[cash flow]
The cash flow statement is vital for assessing liquidity.
What factors should directors consider when evaluating the income statement?
- Timing of revenues and expenses
- Accrual accounting policies
- Significant variances from budget
Directors must ensure accuracy and accountability in financial reporting.
What are the key responsibilities of the audit committee?
- Reviewing financial statements
- Ensuring independent audits
- Overseeing internal control systems
- Liaising with internal auditors
- Reviewing compliance obligations
These responsibilities ensure effective governance and risk management.
What is the definition of ‘going concern’ in accounting?
The assumption that an organization will continue to operate for the foreseeable future
This concept is critical for financial statement preparation.
What must be disclosed in the director’s report for a public company?
- Review of operations
- Significant changes in state of affairs
- Principal activities
- Matters affecting future operations
These disclosures provide transparency to stakeholders.
What is the primary purpose of assessing an organisation’s financial position?
To determine if the assets, liabilities, and equity are increasing or decreasing in value over time.
What should directors consider regarding the existence of assets?
Directors need to ensure that the organisation is in physical control of the assets on the books.
What is meant by control in the context of assets?
Directors should be cautious about including assets in the balance sheet if there is a dispute over their control.
How can asset valuation change over time?
An asset might be restated to reflect a more current valuation than its original or historical cost.
What is fair value in asset valuation?
Fair value reflects a current market value less any costs to sell the asset.
What is the recoverable amount of an asset?
The higher of its fair value and its value-in-use, discounted to determine the recoverable amount.
What happens if an asset’s carrying value exceeds its recoverable amount?
The asset value must be reduced to the recoverable amount.
What should directors look for regarding liabilities?
Directors should assess the value, classification, discount, and contingent nature of liabilities.
What is the difference between current liabilities and non-current liabilities?
Current liabilities are due within the next 12 months, while non-current liabilities are due after that period.
What represents equity in an organisation?
Equity is the safety margin between the assets and liabilities.
What are the three main ways to generate equity?
- Contributed equity
- Reserves
- Retained profits or accumulated losses
What is contributed equity?
Capital contributed by the owners of the organisation, typically through share sales.
What is an asset revaluation reserve?
Created by the revaluation of an asset that has increased in value.
What are retained profits?
Accumulated profits over time minus any payments made to shareholders.
What is the purpose of the statement of changes in equity?
To show movements in all components of equity for the period.
What does a cash flow statement summarize?
The flow of cash through the organisation’s bank accounts for the financial reporting period.
What are cash equivalents?
Very liquid financial instruments, such as short-term money market facilities.
What should directors ensure regarding cash flow?
They should understand how the organisation generates its cash.
What is a positive net operating cash flow?
Surplus cash generated from the operations of the business.
What indicates insufficient generation of operating cash flow?
- Negative operating cash flows
- Cash receipts less than cash payments
- Net cash from operating activities lower than profit after tax
What is a self-generating business?
A business where net cash inflow from operating activities is sufficient to cover required payments.
What are the three common types of budgets or forecasts?
- Projected income statement
- Projected balance sheet
- Cash flow forecast
What characterizes a budget?
It is a planning document usually updated once a year and compared to actual results to determine variances.
What is a forecast?
An estimate of what is expected to happen, updated regularly based on current circumstances.
What is the purpose of a cash flow forecast?
To estimate when receipts will be collected, payments made, and cash left on hand.
What does the cash inflow section of a cash flow forecast include?
All anticipated cash receipts including major asset sales, borrowings, and share issues.
What should directors review regarding cash flow management?
Levels of cash on hand, collection of receivables, payment arrangements, and access to facilities.
What is the reporting period requirement for public companies?
Financial statements must be presented to shareholders within four months of the end of the year.
What is the maximum time frame for public companies to present financial statements to shareholders after the end of the year?
Four months for public companies, three months for listed companies.
What is a challenge in benchmarking an organization’s financial statements?
Different accounting methods used may hinder accurate benchmarking.
What does the Corporations Act 2001 (Cth) require regarding general purpose financial statements?
They must be prepared in accordance with Accounting Standards issued by the AASB.
What are the three requirements outlined in s 245T of the Corporations Act 2001 (Cth) for declaring a dividend?
- Company’s assets must exceed liabilities before declaring dividend
- Payment must be fair and reasonable to shareholders
- Payment must not materially prejudice ability to pay creditors.
How is goodwill defined in accounting?
Goodwill is the purchase price less the fair value of net assets acquired.
What must be done to goodwill according to Accounting Standards?
Goodwill must be impairment-tested annually.
What is the going concern assumption?
It assesses whether an entity will continue to function as a legal entity for the next 12 months.
What should be done regarding estimates and judgments in financial reporting?
They should be reliable under current economic conditions.
What are the two tiers of accounting standards for Not-for-Profit entities in Australia?
- Tier 1: IFRS as adopted in Australia
- Tier 2: Simplified Disclosures for For-Profit and Not-for-Profit Entities.
What is required from small charities under the Australian Charities and NFPs Commission?
Annual information statement for charities with income less than 500K.
What financial statement must medium-sized charities provide?
General purpose statements that comply with AAS.
What is the accounting treatment for revenue from donations under AASB 1058?
Recognized once control of funds is established.
When should pledges be recorded as revenue?
Pledges should not be recorded until funds are received.
What must be done with volunteer services in government NFP sectors?
Valued at fair value and recorded in financial statements if reliably measurable.
What breaches apply regarding insolvent trading?
Breaches apply only to directors, not management (officers).
What should directors ensure regarding staff and audit processes?
- Employ highest calibre staff
- Define and accurate audit processes.
What key financial performance indicators should directors monitor?
- Budget usage
- Expense control
- Financial strengths and weaknesses.
What are the components of an income statement?
- Sales and other revenue
- Profit before and after tax
- Cost structures.
What is the significance of the cash flow statement?
It should compare current year to previous year and be positive.
What defines working capital?
Current assets less current liabilities.
What does the current ratio assess?
The organization’s ability to pay debts as they fall due.
What does the days’ receivables ratio measure?
Average length of days from invoice date to receiving payment.
What is the average length of days it takes to sell entire inventory called?
Days inventory.
What are financing ratios used to measure?
Sufficiency of profit to meet interest payments and relationship between liabilities and equity.
What is the purpose of calculating and analyzing key ratios?
To assess and monitor the organization’s financial performance.
What is the relationship between gross profit margin and profitability?
Gross profit margin must be adequate to cover overheads and deliver profit.
What does the term ‘negative cash conversion cycle’ imply?
Receives cash faster than payments are made to suppliers.
What are interest cover and debt to equity ratios used to measure?
The sufficiency of profit to meet interest payments and the relationship between liabilities and equity.
What should gross profit and EBIT margins do over time?
Be maintained and, if possible, improved.
What is the total profit generated a combination of?
- The profit margin per sale
- The volume of sales made
What is a volume business example?
Supermarkets.
What does EBIT stand for?
Earnings Before Interest and Tax.
What is the primary difference in profit margins between NFPS and commercial organizations?
NFPS will have a lower margin than commercial organizations.
What does Return on Equity (ROE) use to measure profit?
Profit after interest and tax, termed ‘net profit’.
What is the best report to indicate early cash flow concerns?
12-month rolling cash flow.
What are the three basic options for using specialists in insolvency?
- Voluntary administration
- Receivership
- Liquidation
What is the order of payment during the winding-up of an organization?
- Liquidator and their costs
- Secured creditors
- Priority unsecured creditors
- Unsecured creditors
- Shareholders
What are the four key financial warning signals?
- Negative net operating cash flow
- Payments to suppliers and staff exceed receipts from customers
- Positive operating cash flows insufficient to cover new asset purchases
- Net cash from operating activities lower than profit after income tax
True or False: Delaying payments to creditors is a warning sign of financial distress.
True.
What should management accounts be for each board meeting?
Current and produced promptly at each month-end.
What should directors do if they are concerned about the organization’s solvency?
- Not incur further debts
- Cease trading
- Obtain immediate financial support
- Use voluntary administration
- Appoint a liquidator
What are key elements of a successful performance indicator program?
- What is being reported
- Obtain senior management support
- Plan systematically
- Form a working group
- Open communications
- Involve employees
- Measure and analyse
How is labour performance measured?
By dividing output by hours worked, number of employees, or labour.
What should directors consider in risk management?
- Compliance/statutory
- Legal/commercial
- Political/economic
- Financial/funding
- Management
- Operational
- Service delivery
- Health and safety
- Human resources
- Stakeholders
- IT/information management
- Security
What are the primary roles of directors in relation to the budget?
- Setting budget parameters
- Reviewing and proposing changes to the budget
- Monitoring actual expenditure compared to the budget
- Using performance against budget figures as early warning
What should be assessed regarding the business’s financial health?
- Growth status
- Trends causing changes
- Solvency
- Liquidity of assets
- Due dates for debts
- Equity levels on the balance sheet
- Alignment with financial risk appetite
What considerations should be made for financial reporting to the board?
- Policy outlining board requirements
- Consistency of presentation
- Level of detail required
- Best way to present information
- Relevant measuring units
- Need for trend analysis
- Relevant ratios to track
