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AAT Professional Diploma > Financial Statements > Flashcards

Financial Statements Flashcards

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1
Q

What are the fundamental qualities characteristics

A

Relevance and Faithful representation

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2
Q

What are the enhancing qualitative characteristics?

A

Comparability
Verifiability
Timeliness
Understandability

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3
Q

What are underlying assumptions?

A

It is assumed that accounts are prepared on the accrual basis as a going concern.

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4
Q

What other accounting concepts are there?

A

Business Entity
Materiality and Aggregation
Offsetting
Consistency

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5
Q

What five classes of items make up financial statements?

A 
Assets
Liabilities
Equity
Income
Expenses
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6
Q

When should an item be recognised in a companies accounts

A

If it is probably that future economic benefit will flow to/from the entity
It’s cost can be reliably measured

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7
Q

In what ways can a cost be measured

A

Realisable Value - what it could be sold for today
Current cost - what it would cost to replace it
Present value - value at the present discounted value of future cash flows.

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8
Q

What are the five Ethical principles

A 
Integrity
Objectivity
Professional competence and Due care
Confidentiality
Professional behaviour
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9
Q

What are the potential threats to the fundamental ethical principles

A 
Self Interest
Self review
Familiarity
Intimidation
Advocacy
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10
Q

What is meant by integrity?

A

Being straight forward and honest in all professional and business transactions

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11
Q

What is meant by objectivity?

A

Not allowing bias, conflict of interest or the undue influence of others to override professional judgement

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12
Q

Professional competence and due care

A

Maintain professional Knowledge and skills.

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13
Q

What is meant by confidentiality

A

Information acquired as a result of professional and business relationships should not be disclosed the third parties except when there is a legal or professional reason to do so.

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14
Q

What is meant by professional behaviour

A

Comply with relevant laws and regulations and avoids bringing the profession in to disrepute.

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15
Q

What must a business do before it can operate as a private limited company

A

Register with companies house, the process known as incorporation

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16
Q

What documents must be submitted to companies house to form a limited company?

A

Application form used to register the company
Memorandum of Association
Articles of Association

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17
Q

What is the minimum number of directors and shares needed to form a private limited company

A

1 director and 1 share.

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18
Q

What must a company have to become a public limited company?

A

Issued share capital over £50,000
At least two share holders and two directors
A qualified company secretary

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19
Q

What is Authorised share capital?

A

The total number of shares a company is allowed to issue as detailed in it’s articles

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20
Q

What are ordinary shares?

A

These are standard shares with highest risk and reward. They are paid a variable amount when profit is distributed and are last to be paid if the company makes low profits or is wound up

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21
Q

What are preference shares

A

Shares that hold preferential treatment, so have lower risk and reward.
When profit is distributed these shares are paid a fixed amount, and are paid first if the company makes low profits or is wound up

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22
Q

What are the different prices that may be referred to with Shares?

A

Nominal Value - allowed value detailed on the Co House records
Market Value - this is likely to be higher than nominal value
Share premium - the difference between a shares nominal value and is market sale value is known as share premium.

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23
Q

What are Debenture certificates?

A

These can be issued for fixed amounts, interest is payable on them at a fixed amount irrespective of profit level.
These are a relatively low risk as they are often secured against assets.
They are for fixed terms such as 5 or 10 years

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24
Q

What should be included in a complete set of financial statements under IAS 1?

A

Statement of Financial Position - BS
Statement of Profit & loss & other comprehensive income
Statement of changes in Equity
Statement of Cash flows

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25
Q

What order are assets and Liabilities listed on the SoFP

A

In order of liquidity - Least liquid to most.

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26
Q

What does IAS 1 relate to

A

The presentation of Financial statements

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27
Q

What overriding concepts does IAS 1 require

A

Going Concern

Accrual basis

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28
Q

What does IAS 16 relate to

A

Property, Plant & equipment

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29
Q

What principle issues are covered by IAS 16

A

Recognition of assets
Determination of their carrying amount
Depreciation charges and Impairment losses to be recognised.

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30
Q

How is the initial cost of PPE measured?

A

Purchase price including import duties and other taxes
Any costs directly attributable to bringing the asset to the location and condition for it’s intended use
Estimated costs of dismantling and removing the asset at the end of it’s useful life

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31
Q

How is ongoing expenditure on PPE dealt with?

A

Routine servicing and maintenance will be an expense

Replacement parts can be included in the carrying value of PPE

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32
Q

What are the two methods for determining the carrying value of PPE

A

Cost Model

Revaluation model

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33
Q

How is an asset values under the cost model?

A

Asset is carried at Cost less accumulated Depreciation and impairment losses

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34
Q

How is an asset valued under the revaluation model?

A

Asset is carried at fair value less subsequent depreciation and impairment losses

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35
Q

What is fair value for land and buildings?

A

This is provided by professional valuers using market based evidence

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36
Q

What is fair value for Plant & Equipment?

A

Fair value is usually the market value

37
Q

How is an increase in fair value recorded

A

DR Asset account in SoFP

Cr Revaluation surplus/other income in the P&L

38
Q

What must be disclosed in Financial statements in relation to PPE

A

For each class of Asset
The basis for determining the carrying amount
The depreciation methods used
The useful lives or depreciation rates
The Gross carrying amount and opening and closing Acc Dep’n
A reconciliation of the fixed asset account for the period

39
Q

How should I convey IAS knowledge in writing?

A

Identify the standard that applies
Explain the key features of the standard
Apply the features to the situation given in the question

40
Q

What does IAS 36 relate to?

A

Impairment of Assets
It sets out procedures to ensure that assets are carried in the financial statements at no more than their value to the business.

41
Q

What external indicators are there that an asset is impaired?

A

Significant fall in market value
increase in interest rates
Adverse effects from Economy,laws or tech

42
Q

What internal indicators are there that an asset is impaired?

A

Physical damage or becoming obsolete
Significant internal reorganisation having adverse effects
Under performance of the asset
A fall in the overall performance of the company

43
Q

What must be done if there are indications of possible impairment?

A

A full impairment review must be carried out

44
Q

What are the steps in an impairment review?

A

Step 1 - Identify the assets carrying value
Step 2 - Identify the assets recoverable amount, this will be the higher of Fair value less cost to sell or Value in use.
Step 3 -If the carrying value is greater than the recoverable amount then the asset is impaired and it value must be written down.

45
Q

Which types of assets must be tested for impairment annually?

A

Intangible assets with an indefinite useful life
Intangible assets that aren’t yet available for use
Goodwill

46
Q

What does IAS2 require in regard to inventory?

A

That it be valued at the lower of cost or net realisable value.
Prudence

47
Q

How is IAS 2 applied to valuing inventories

A

Inventory is valued at the lower of Cost and Net realisable value.
Cost included costs to bring the product or service to it’s present location and condition.
Net realisable value is selling price less completion cost and sales costs.

48
Q

What are the three types of inventory a manufacturer may have?

A

Raw Materials
Work in Progress
Finished goods

49
Q

What are bonus shares?

A

Where a company convert reserve funds in to share capital. This is then an issue of bonus shares to shareholders free of charge

50
Q

What is a Rights issue?

A

This is when additional shares are sold to share holders at a reduced price

51
Q

What type of adjustments may be included in distribution costs and admin expenses

A

Additional accruals and prepayments (not already on TB)
Depreciation charges
Bad debt and allowance for bad debt
Profit/loss on disposal of assets

52
Q

What are the five steps to recognise revenue under IFRS 15?

A
  1. Identify the contract with the customer
  2. Identify performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations
  5. Recognise the revenue once performance obligations are satisfied.
53
Q

What does IAS 37 deal with?

A

Provisions, Contingent Liabilities and Contingent assets.

Basically how to deal with uncertainties that could have an effect on future financial statements.

54
Q

What is the objective of IAS 37

A

To explain if an uncertainty should be:
Adjusted for
Disclosed as a note
Completely left out

55
Q

What is a provision and how do we recognise when it should be included in the financial statements?

A

A provision is a liability of uncertain timing and amount.
It can be included in the financial statements when:
There is an actual liability
It is probable that a payment will be made
A reliable estimate can be made of the amount of the obligation.

56
Q

How should provisions be accounted for?

A

A Dr entry to the expense side of the P&L

A Cr entry to the liability section on the BS

57
Q

What must be included in the note in regard to provisions?

A

Description
Expected timings
Uncertainties that exist.
Reconciliation of movement in the provision.

58
Q

What is a contingent Liability?

A

This is a liability that has less than a 50% likely hood of occurring, so is either:
A possible obligation dependant on an uncertain future event
A present obligation but payment is not probable or cannot be measured reliably.
These are not adjusted for in the Financial statements.

59
Q

What does IAS 10 relate to ?

A

Events after the reporting period.

60
Q

What are adjusting events

A

These provide evidence of conditions that exist at the reporting periods date

61
Q

What are non adjusting events?

A

Indicate conditions that arose after the reporting periods date.

62
Q

How should dividends declared/ proposed after the reporting period be dealt with?

A

As a non adjusting event with disclosure in the notes.

63
Q

What can a provision never be made for?

A

Future operating losses

64
Q

What does IAS 7 relate to ?

A

Statement of cash flows

Presenting this as an integral part of it’s primary financial statements

65
Q

What does a statement of cash flows explain?

A 
How cash received from:
Trading
Loans and Debentures
Share capital
Sales of assets
Is used for:
Trading activity
Asset investment
Dividends
Corporation tax
66
Q

What sections does IAS 7 suggest dividing the statement in to?

A

Operating activities
Investing activities
Financing activities

67
Q

What does IAS 2 relate to ?

A

IAS 2 tells us how to account for taxes on income.

68
Q

What does IFRS 16 relate to ?

A

IFRS 16 explains how to account for assets that are obtained for use via a lease agreement.

69
Q

What does IAS 38 relate to?

A

IAS 38 tells us how to account for Intangible assets (except goodwill)

70
Q

How do we identify an Intangible assets?

A

It must be indentifiable, either:
Be separable from the company.
Arise from contractual or other legal rights.
Under the control of the company - must be able to earn future economic benefits from it.

71
Q

When can intangible assets be included in financial statements?

A

Recognised at cosy when:
It is probable that future economic benefits will flow to the entity
The cost can be reliably measured.

72
Q

What to Gross and Net profit margins tell us?

A

Gross - What percent of sales value is left after direct costs
Net - what percent of sales value is left after all costs.

73
Q

What does Return on Capital employed show us?

A

The proportion of profit generated by the capital the business uses.

74
Q

What does return on Equity show us?

Profit for year/total equity x 100

A

Measures as a percentage the proportion of profit generated by total equity.
You are comparing the bottom line profit to the shareholders investment.

75
Q

What does asset turnover show us?

Turnover/Net assets

A

Compares size of turnover to size of capital employed.

76
Q

What is working capital?

A

Current assets less current liabilities.

77
Q

What does financial gearing show us?

A

The proportion of capital employed which is funded by debt.

78
Q

What does interest cover show us?

A

How many times profit covers interest payments.

79
Q

What does control mean in relation to IFS 10?

A

When the investor is exposed, or has rights, to variable returns from it’s involvement with the investee and has the ability to affect those returns through its power over the investee.

80
Q

What could power to direct the activities of an Investee include?

A

Owning more than 50% of voting shares
Right to appoint or remove Key Personnel
Rights to appoint/remove another entity in solved
Rights to affect any transactions for benefit

81
Q

What are shares owned by entities outside the business called?

A

Non- controlling interest.

82
Q

How is Goodwill Calculated?

A

Compare cost of investment in the subsidiary with the value fo the share of the Equity.

83
Q

What are the six steps to preparing a consolidated SoFP?

A
  1. Establish Ownership
  2. Account for fair values
  3. Intercompany adjustments
  4. Calculate goodwill
  5. Calculate post acquisition profits
  6. Calculate non controlling interest
84
Q

How does IFRS 3 define and Aquirer

A

The entity that obtains control of the aquiree

85
Q

How does IFRS 3 define an Acquiree

A

The business or businesses that an acquirer obtains control of in a business combination

86
Q

How does IFRS 3 define a business combination?

A

A transaction or other event in which an Acquirer obtains control of one or more businesses

87
Q

How does IFRS 3 Business combinations,define goodwill

A

When a company pays more/less than the value of it’s share in the subsidiary, the difference is Goodwill.

88
Q

How does IFRS 3 business combinations, define Fair Value?

A

Fair value of the subsidiary is the value of the identifiable assets and liabilities that existed at the date of acquisition.

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