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Aat Level 4 > Financial Statements Of Limited Accounts > Flashcards

Financial Statements Of Limited Accounts Flashcards

1
Q

What are the differences between incorporated and unincorporated businesses?
Type of business

A

Unincorporated: sole trader (one proprietor), partnership (more than one proprietor).
Incorporated: LTD (private limited company. Cannot invite members of the public to become shareholders), PLC (public company. Shares are traded publicly, often on the stock exchange)

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2
Q

What are the differences between incorporated and unincorporated businesses?
Owned by…

A

Unincorporated: proprietor
Incorporated: shareholders

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3
Q

What are the differences between incorporated and unincorporated businesses?
Managed by….

A

Unincorporated: proprietor
Incorporated: directors

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4
Q

What are the differences between incorporated and unincorporated businesses?
Legal entity….

A

Unincorporated: personal and business transactions must be kept separate BUT it is the owners who will enter into any contract.
Incorporated: separate legal entity (the company itself can enter into contracts in its own right)

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5
Q

What are the differences between incorporated and unincorporated businesses?
Liability…

A

Unincorporated: unlimited liability (proprietor is personally responsible for the debts of the business.
Incorporated: limited liability ( the shareholders liability is limited to the shares they have paid for. The company is responsible for its own debts.)

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6
Q

What are the advantages of trading as a limited company?

A
  • limited liability status
  • easier to raise finance
  • company continues to operate regardless of the ownership.
  • taxed under corporation tax
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7
Q

Explanation to advantages of trading as a limited company…

Limited liability status.

A

This means the owners of the business, the shareholders, will only lose a maximum of the investment they have made in the company should it fail. They Cannot be personally held liable for the debts of the company.

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8
Q

Explanation to advantages of trading as a limited company…

Easier to raise finance.

A

A limited company can have greater access to funding through the issuance of shares and other securities.

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9
Q

Explanation to advantages of trading as a limited company…

Company continues to operate regardless of the ownership.

A

If a sole trader retires then the business ceases, whereas for a limited company the ownership can transfer with no effect on the business operations.

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10
Q

Explanation to advantages of trading as a limited company…

Taxed under corporation tax.

A

Sole traders / partners are taxed under personal tax and therefore their profits are subject to income tax and national insurance, a limited company pays corporation tax.

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11
Q

What are the disadvantages of trading as a limited company?

A
  • Company accounts are submitted to companies house and anyone can access them.
  • More regulation to comply with (companies act 2006)
  • accounts of larger companies must be audited.
  • issues of shares are highly regulated.
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12
Q

Explanation to disadvantages of trading as a limited company…
More regulation to comply with (companies act 2006)

A

This places restriction on what the business can do and how it must be managed as well as placing additional reporting regulation on company.

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13
Q

Explanation to disadvantages of trading as a limited company…
Accounts of larger companies must be audited.

A

This has to be done by an external auditor and involves checking that the business is being run properly and that the financial statements which have been prepared are accurate. This can provide a significant cost for a business.

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14
Q

Explanation to disadvantages of trading as a limited company…
Issues of shares are highly regulated.

A

So although there is a greater access to financing, it is heavily controlled.

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15
Q

What are the aims of financial statements?

A
  • Identify how well the business has performed in the period
  • identify the value of the assets and the liabilities of the business
  • to help understand the cash flow position of the company.
  • to communicate these things to the users of the accounts in as clear a manner as it is possible.
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16
Q

Components of the financial statements for sole traders/partnerships are….

A
  • statement of profit or loss

- statement of financial position

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17
Q

IAS stands for…

A

International accounting standard

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18
Q

Components for the financial statements for companies (as required by IAS1) are…

A
  • statement of profit or loss
  • statement of financial position
  • statement of changes in equity
  • statement of cash flows
  • notes to the financial statements (to explain the above)
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19
Q

What is the main difference on the balance sheet of a company compared to that of a sole trader?

A

The proprietors interest section is replaced by an equity section

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20
Q

What is the share capital

A

Nominal value of shares issued (this won’t change)

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21
Q

What is retained profit?

A

The cumulative profit/loss of the company (profit or loss over the years)

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22
Q

What is the equation for equity?

A

Share capital + retained profit + other reserves = equity

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23
Q

3 names for nominal value of shares…

A

Nominal value, ‘par’ value and face value (they all mean the same thing)

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24
Q

What is the nominal value of shares?

A

The value of the shares which is decided at the time of issue of the original shares and will remain the same going forward. (Cannot sell shares for less than this value)

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25
Q

What is the market value of shares?

A

This is the value at which existing shares can be traded (what the shares are really worth). (Remember this is not reflected in the financial statements)

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26
Q

What is the authorised share capital?

A

The total number of shares a company can issue. (Scraped after 2006 companies act) (don’t all have to be issued)

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27
Q

What is allowed share capital?

A

The shares which have actually been issued.

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28
Q

Name 2 different types of shares

A
  • Ordinary shares

- preference shares

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29
Q

Another name for ordinary shares is…

A

Equity shares

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30
Q

Shareholders of ordinary shares…..

A
  • can receive a dividend, at the discretion of the directors
  • are entitled to vote in a general meeting.
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31
Q

Shareholders of preference shares….

A
  • have the right to a fixed rate dividend

- do not have any voting rights

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32
Q

What would the double entry be for issuing 100 shares at their par value of £1 each?

A

Dr bank £100

Cr Share capital £100

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33
Q

How do you work out retained profits?

A

Retained earning b/f + current year profit - dividends = retained earnings c/f

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34
Q

What reserves could you see in the equity section?

A
  • Share premium account
  • Revaluation reserve
  • Capital redemption reserve
  • General reserve
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35
Q

What is the regulatory framework made up of?

A
  • International Accounting standards (IAS’s) and International Financial Reporting Standards (IFRS’s)
  • Companies act 2006
  • Framework for the preparation and Presentation of financial Statements.
36
Q

What does the IFRS foundation do?

A

They appoint the IASB, Advisory council & Interpretations Committee members, raise funds for the IASB and monitor the IASB’s effectiveness.

37
Q

What do the IFRS Advisory Council do?

A

They take recommendations from individuals, corporations and national standard setters and then provide advice to the IASB on priority areas of accounting.

38
Q

What do the IASB do?

A

The IASB set International Accounting Standards (IFRS’s and previously, IAS’s).

39
Q

What do the IFRS InterpretationsCommittee do?

A

Reports to the IASB with interpretations of the IFRSs and in the context of the Framework, provides guidance on financial reporting issues not specifically addressed by IFRSs.

40
Q

What are the stages to the process of developing and setting standards?

A

A - Topic is identified.
B - Topic is discussed and the IASB may set up a working group.
C - Discussion paper is issued and public comment invited.
D - An exposure draft is issued (circulated to accountancy bodies, government and all other interested parties) for public comment
E - IASB consults with SAC (Standards advisory council) and working groups before and IFRS is voted on and issued.

41
Q

What is the companies act?

A

The companies act is UK legislation which governs Limited Companies. (It lays out regulations on how the company is to be managed and also reporting requirements).

42
Q

What are directors responsible for?

A
  • Keeping proper accounting records.
  • Responsible for preparing the financial statements, having them audited and presenting them to the shareholders in a general meeting.
  • Filing the accounts at Companies House (once the shareholders have approved them). This must be done within six months of the accounting period end for Plc companies and nine months of the accounting period end for Ltd companies.
43
Q

What is the framework for the preparation and presentation of financial statements?

A

The framework Is produced by the IASB and sets out some generally accepted accounting principles. (The framework is not an actual accounting standard, it is a set of principles which provide a basis for any accounting transactions occurring in the business.)

44
Q

What are the principle based approach advantages?

A
  • an individual must use their judgement in applying the framework, rather than following a tick box exercise.
  • As there are no individual scenarios, it is less likely to go out of date..
  • When following a principle it is harder to avoid the requirements… I.e. Harder to find loopholes.
  • The spirit of the regulation can be followed where there is no specific accounting treatment.
45
Q

What are the seven sections of the framework?

A

1) the objectives of the financial statements
2) the users and their information needs
3) the underlying assumptions of the financial statements
4) the qualitative characteristics of financial information
5) the elements of financial statements
6) recognition of elements in the financial statements
7) measurement of elements in the financial statements

46
Q

What is the objective of general purpose financial reporting

A

The objective of general purpose financial reporting is to provide information about the reporting entity that is useful to existing and potential investors, lenders and other payables in making decisions about providing resources to the entity.

47
Q

What information do the users need?

A

~ the financial position - the assets and liabilities of the company.
~ the financial performance - the profitability of the business.
~ changes in the entity’s financial position - how the business has coped with changes.

48
Q

Users and their information needs…… Why/ what would management be interested in?

A

Is the company profitable?
Does the company have enough cash?
Are the assets performing well?
Trend analysis + making future strategic decisions.

49
Q

Users and their information needs…… Why/ what would investors be interested in?

A
  • Should they invest?
  • Will they get a return on their money? (Dividends and capital growth)
  • how risky is the business?
50
Q

Users and their information needs…… Why/ what would employees be interested in?

A
  • Ability of the company to pay their wages.

- Is the company profitable and do they have good cash Flow?

51
Q

Users and their information needs…… Why/ what would lenders be interested in

A
  • Will their loan/interest be paid?

- Should they loan to the business?

52
Q

Users and their information needs…… Why/ what would suppliers be interested in?

A
  • Should they sell to the business on credit?
  • What is the likelihood of getting payment on time?
  • Will look at profit and cashflow
53
Q

Users and their information needs…… Why/ what would customers be interested in?

A
  • Will the company be in business in the future?

- Will think about guarantees and replacement parts.

54
Q

Users and their information needs…… Why/ what would government be interested in?

A
  • HMRC (taxes!!!!)

- Regulation of the economy

55
Q

Users and their information needs…… Why/ what would public be interested in?

A
  • Trends and developments in sectors of business.

- Interest in large employers in the local market.

56
Q

What are the two underlying assumptions?

A

Accruals

Going concern

57
Q

What is the accruals concept?

A

The accruals concept says that costs and revenues should be matched together and included in the period which they relate.

58
Q

What is going concern?

A

This is the assumption that the business will continue trading for the FORESEEABLE FUTURE.

59
Q

What are the two fundamental qualitative characteristics according to the framework?

A

Relevance and faithful representation.

60
Q

What is relevance?

A

Financial information is relevant if it makes a difference to the decisions of a user.

61
Q

Financial information can make a difference to decisions if……..

A

~ predictive value - it can be used to predict future outcomes
~ Confirmatory value - it provides feedback about previous evaluations (it confirms whether past predictions were reasonable)
~ Information’s relevance is affected by its nature and materiality

62
Q

What is materiality?

A

An organisation specific aspect of relevance based on the nature or size (or both) of the items to which the information relates in context of the organisations financial statements.

63
Q

To faithfully represent the transactions, information will be:

A
  • Complete
  • Neutral/unbiased (especial with estimates)
  • Free from error
  • Report substance over form (a/c for economic reality not legal form)
64
Q

What are the four enhancing qualitative characteristics?

A

Comparability
Verifiability
Timeliness
Understandability

65
Q

What is comparability?

A

Information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date. Comparability enables users to identify and understand similarities in, and differences among, items.

66
Q

How is comparability achieved?

A

We have set standard formats of presentation and rules to follow when preparing financial statements.

67
Q

What Is verifiability?

A

Verifiability helps to assure users that information represents faithfully the economic reality of the transactions. Verifiability means that different knowledgeable and independent observers could reach an agreement that a particular treatment of an item is a faithful representation.

68
Q

What is timeliness?

A

Timeliness means that information is available to decision-makers in time to be capable of influencing their decisions.

69
Q

What is understandability?

A

Classifying, characterising and presenting information clearly and concisely will make it understandable. Financial reports are prepared for users who have a reasonable knowledge of business and economic activities.

70
Q

What are the 5 elements of the financial statements?

A 
Assets
Liabilities
Equity
Income
Expense
71
Q

Define a asset?

A

A RESOURCE CONTROLLED by the enterprise as a RESULT OF PAST EVENTS and from which FUTURE ECONOMIC BENEFITS and expected to FLOW to the enterprise.

72
Q

Define liabilities

A

A PRESENT OBLIGATION of the enterprise arising from PAST EVENTS, the settlement of which is expected to result in an OUTFLOW from the enterprise of resources embodying ECONOMIC BENEFITS.

73
Q

Define equity

A

The residual interest in the assets of an entity after deducting all its liabilities.

74
Q

Define income

A

INCREASES IN ECONOMIC BENEFITS during the accounting period in the FORM OF INFLOWS or enhancements of assets or decreases of liabilities that results in increase in equity, OTHER THAN THOSE RELATING TO CONTRIBUTIONS FROM OWNERS.

75
Q

Define expenses

A

DECREASES IN ECONOMIC BENEFITS during the accounting period in the FORM OF OUTFLOWS or depletion of assets or increases of liabilities that result in decreases in equity, OTHER THAN THOSE RELATING TO DISTRIBUTIONS TO OWNERS.

76
Q

An element of the financial statements should be recognised if it:

A

1) MEETS THE DEFINITION of an element; AND
2) it is PROBABLE that future economic deceits associated with the item will flow either to or from the entity; AND
3) the item has a cost of value that can be RELIABLY MEASURED.

77
Q

What are the four possible basses of measurement?

A

Historical cost
Current cost
Realisable cost
Present value

78
Q

What is historical cost?

A

This is the most usual method as it is the original price paid.

79
Q

What is current cost?

A

Measured at replacement cost, what it would cost if you bought it today.

80
Q

What is realisable value?

A

Measured at the amount you would receive if you sold the asset today.

81
Q

What is present value?

A

Measured at the discounted value of all future cash flows.

82
Q

What are the 5 fundamental principles relating to ethics governing the accountancy profession?

A
  • Integrity
  • Objectivity
  • Professional (and technical) competence and due care
  • Confidentiality
  • Professional behaviour
83
Q

What is integrity?

A

Members should be straight forward and honest when doing work.

84
Q

What is objectivity?

A

Members should be fair in what they do. Members should not allow any prejudice or bias to influence the work they are doing.

85
Q

What is professional (and technical) competence and due care?

A

Members should refrain from undertaking or continuing any assignments which they are not competent to carry out. Members have a duty to maintain their professional knowledge at a level to ensure their client receives a competent service. Members have a duty to carry out assignments with due care and skill to do the work to the best of their ability.

86
Q

What is confidentiality?

A

Members should respect all information given to them by clients or employers as confidential and should not disclose any details of their work or findings without proper authorisation or legal obligation to do so.

87
Q

What is professional behaviour?

A

Members should act in a manner which is consistent with the good reputation the profession has developed. Members should not discredit the profession and should try to enhance the reputation.

Aat Level 4 (1 decks)

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