Framework And Ethics Flashcards
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The main benefit of accounting standards
Credibility, comparability and discipline
Credibility?
Financial statements would lose credibility if companies carrying out similar transactions disclosed markedly different results simply because they could select accounting policies.
Therefore, accounting standards are necessary to ensure financial reports give a true and fair view of the company.
Comparability?
By having financial statements prepared on a consistent basis, inter-company comparisons can be made.
Companies act 2006 states that what items must be filed with the registrar of companies.(also referred to as published accounts)
Statement of profit and loss Statement of financial position A directors report An auditors report Group accounts (If the company has subsidiaries)
Why would investors be interested in the financial statements
Investors need to make decisions that involve buying, holding or selling shares or debt investments(loan stocks debentures), also they need information about the returns the might expect
Why would a lender/other creditor be interested in the financial statements
The would need information to make decisions about providing or settling loans and other forms of credit. They need information about the returns they can expect from lending (interest payments and the eventual repayment of the principal amount of the loan)
What do lenders and creditors need information about
Assets
Liabilities
Stewardship
Who are the secondary users who will also be interested in a companies financial statements.
Management
Regulators
Employees
Individuals
What are the fundamental qualitative characteristics
Relevance
Faithful representation
Materiality
What are the enhancing qualitative characteristics
Comparability
Varifiability
Timeliness
Understandability
Assets turnover total assets
Total assets
Revenue ÷ total assets
Assets turnover net assets
Revenue ÷ total assets- current liabilities
Capital employed
Capital and reserves (equity)+ non current liabilities
Current ratio
Current assets ÷ current liabilities
Expense/revenue percentage
Operating expenses/ cost of sale÷ revenue
X100
Gearing
Non current liabilities ÷total equity +non current liabilities
X100
Gross profit percentage
Gross profit ÷revenue
X100
What is highly geared
A company having a high proportion of debt compared with equity
Interested cover
Profit from operations/ operating profit ÷ finance costs
Inventory holding period
Investors ÷ cost of sales
X365
Inventory turnover
Cost of sales ÷inventory
What is liquidity
The ability to pay its debts as they fall due
Operating profit percentage
Profit from operations ÷revenue
X100
Quick ratio
Current assets- inventory ÷ current liabilities
Return on capital employed
Operating profit ÷total equity + non current liabilities
X100
Return on equity
Profit after tax ÷ total equity x100
Trade payables payment period
Trade payables ÷ cost of sales
X365
Trade receivables collection period
Trade receivables ÷ revenue
X365
Working capital cycle
Inventory days + receivable days - payable days
Or specified expense ÷revenue
X100
What is a subsidiary
An entity that is controlled by another entity ( the parent company)
What is non controlling interest
The remaining amount not owed but the parent company
What would is an adjusting event
Events after the reporting period which provide evidence of conditions existing at the end of the reporting period
What is a Constructive obligation
An obligation which occurs where an entity indicates that it will accept certain responsibilities and, as a result, the entity has created a valid expectation that it will discharge those responsibilities.
Contingent assets
A possible assets that arises from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the entitys control
Amortisation
The systematic allocation of the depreciable amount of an intangible asset over its useful life.
Carrying amount
The amount at which an asset is recognised after deducting any accumulated depreciation (Amortisation) and accumulated impairment losses.
