FSLC Flashcards
What are the 3 E’s for assessing performance of not-for-profit and public sector entities?
Economy
Efficiency
Effectiveness
What are the 3 types of profit making organisations?
Sole traders
Partnerships
Companies
What can a public limited company do?
May raise capital from the public by selling shares on the stock exchange.
What are the mandatory components of a set of financial statements?
SOFP SPLOCI SOCIE SOCF Notes to the FS
What is authorised share capital
The maximum number of shares a company may issue
What is nominal face value
The minimum share issue price
What is the issue price
The price that the shares are actually issued for ( can be > than nominal value)
What is the share capital accounts
The nominal value of shares is credited to the share capital account
What is the share premium account?
Where shares are issued at a price above their nominal value, the excess is credited to the share premium account
What are the characteristics of owning ordinary shares?
Generally carry voting rights. Ordinary shareholders are entitled to the profits of the company after all other claims have been met?
How to record the double entry of the sale of ordinary shares?
Debit - Cash
Credit - Share Capital
When is a share premium account created?
When shares are issued for more than their nominal value?
What is the double entry for recording the sale of shares (ordinary and premium)?
Debit - Cash
Credit - Share Capital (the normal / ordinary amount)
Credit - Share Premium ( the extra amount)
What is a bonus issue?
It’s the issue of extra shares to existing shareholders at no cost - does not raise any additional finance
What is bonus issue used for?
A means of reclassifying reserves as share capital (NOT FOR RAISING FINANCE)
What is a rights issue?
An issue of shares to existing shareholders at below market value - offered in proportion to their current shares.
What is a good thing about rights issue?
Relatively cheap way of earning extra capital
What can be done with profit?
Distributed via dividends to shareholders
Retained in the business
Are dividends an expense?
No
How to calculate the balance on retained earnings account at year end?
Opening balance + profit for the year - dividends
Where is the revaluation gain or loss accounted for?
Revaluation reserve account.
What are preference shares?
Shares which carry the right to a fixed rate of dividend
What is good about preference shares?
The preference dividend must be paid out of available profits before any ordinary dividend is paid
In liquidation, preference shareholders usually have the right to the return of their capital before ordinary shareholders
How else may a business raise finance other than shares?
Loan stock or bank loan
Where are preference shares accounted for?
Liabilities so in non-current liabilities in the SOFP. Dividends relating to redeemable preference shares are recorded as finance cost in the SPL.
What is the journal to include finance charges in the journals?
Debit - finance charges SPL
CREDIT - trade and other payables
How to record a tax on the journals?
Debit - Tax (SPL)
Credit - Tax Liability (SOFP)
What are the main benefits of accounting standards?
Credibility
Comparability
Discipline
Are IFRS principles or rules based?
Principles
What accounts must be in the published accounts according to the published accounts?
SPL SOFP Directors report Auditors report Group accounts
What is the objective of general purpose financial reporting?
Provide financial information about the reporting entity that is useful for existing and potential investors lenders and other creditors in making decisions
What economic decisions are influenced by financial statements?
Buying / selling / holding shares or equity
Providing or settling loans and other forms of credit
Exercising the rights to vote in management actions
What are secondary users to the financial statements?
Management
Regulators
Members of the public
What is accrual accounting?
Ensuring that all transactions are recorded in the period in which they relate to, even if the resulting cash receipts / payments were received at a different period in time.
What is a fundamental qualitative characteristics?
Information that must be included in the useful financial info
What are the fundamental qualitative characteristics?
Relevance
Faithful Representation
Materiality
Prudence
What is meant by relevance?
Relevant financial info is capable of making a difference in the decisions made by the users of financial statements
What is meant by faithful representation?
Only relevant info and the info included should be complete, neutral and free from error.
What is meant by materiality as a fundamental factor?
Information is material of omitting, misstating or obscuring such info could influence the decisions of the primary users of the financial statements
What is prudence?
Prudence is exercising caution particularly with areas where judgement or estimation is required. This supports the concept of neutrality
What are the enhancing qualitative characteristics?
Comparability
Verifiability
Timeliness
Understandability
What must be considered when looking at the fundamental / enhancing qualitative characteristics?
Cost vs Benefit
What does materiality depend on?
The nature or size of an item or piece of information relevant to the business - is it impacting the FS?
From which side should the investors reporting / transactions listing come from?
The side of the entity so that investor bias is limited.
What is the going concern assumption that financial statements are usually based on?
That the going concern is that the company will continue in operation for the foreseeable future (at least 1 year). The company has no intention to enter liquidation or cease trading.
What are consolidated financial statements?
If a set of financial statements includes that of the parent company and it’s subsidiaries.
What are unconsolidated financial statements?
Financial statements which is from the reporting entity alone, the parent company with no subsidiaries
What are the elements of the financial statements?
Assets Liabilities Equity Income Expenses
What is the definition of an asset?
A present economic resource controlled by the entity as a result of past evening that has the potential to bring economic benefits.
What is a liability?
A present obligation of the entity to transfer an economic resource as a result of past events
What is equity?
The residual interest in the assets of an entity after deducting all of its liabilities
Equity equation?
Equity = net assets = share capital + reserves
What is income?
Increases in assets or decreases in liabilities that result in increases in equity other than those related to contributions from holders of equity claims. ( share issues)
What are expenses?
Decreases in assets or increases in liabilities that result in decreases in equity. Not including dividends
What should be recognised in the FS?
Any item that meets the definition of one of the elements Of financial statements
When should elements be recognised?
If they’re relevant
If they will faithfully represent the information given to the users of financial statements
What are the choices available for measurement?
Historical cost
Current value
What is historical cost?
The price paid for an asset or for the event that gave rise to liability. The price will not change.
What is current value?
The price paid for an asset or the liability value will be updated to reflect any changes since it was acquired or incurred.
What is the fair value?
The price that would be received to sell the asset or paid to transfer a liability in the current market
What is value in use?
Present value of the cash flows or other economic benefits that an entity expects to gain from the asset and its disposal
What is the current cost?
The replacement cost of an asset or liability
What is the accounting equation?
Assets = equity - liabilities
Assets - Liabilities = Equity
What is the equity equation?
Equity = contributions from owners + income - expenses - distribution costs
What are the fundamental principles?
Integrity Objectivity Professional competence and due care Confidentiality Professional Behaviour
What is due care?
Completing a task to:
The best of your ability
In the client / employer best interest
Within reasonable timescale
With regard to the standards
How should you go about treating a threat to the fundamental principles?
- Identify the threat
- Evaluate the threat
- For a significant threat, apply safeguards
- If safeguards cannot be applied decline or discontinue the work
What are the 5 threats?
Self interest Self review Advocacy Familiarity Intimidation
What are the safeguards created by the professional body?
Entry requirements and education and training
CPD
Corporate Gov. Regulations
Professional standards
External reviews
What are safeguards from the workplace?
Quality controls
Whistleblowing platforms
Involvement / consultation with independent third parties
Rotation of personnel
Opportunities to discuss ethical issues
According to IFRS 1 - what must be included in a complete set of financial statements?
A SOFP SPLOCI SOCIE SOCF Notes to FS
What must also be clearly displayed on the FS?
Name of the company
Date of the financial statements
The currency in which they’re presented
The level of rounding
What basis must the financial statements be prepared on?
A going concern basis, unless the entity is not a going concern.
What are the must do’s with going concern and financial statements?
Management must make an assessment of the entities ability to continue as a going concern.
Any material uncertainties about going concern, must be disclosed.
If FS are not prepared on going concern basis, this must be disclosed, along with the reasoning.
What is the accruals principle?
Means that a transaction is recognised in the period from which it relates to, and also meets the criteria to be included in the financial statements.
Examples of the accruals concept in accounting?
Accrued income
Accrued expenses
Depreciation
What does IAS 1 state?
Each material class of similar items must be displayed separately. They can only be aggregated if they are immaterial.
ie inventories materials and cash are recognised separately under the title of current assets
How should inventory be recognised?
At the lower of cost and NRV
What is the formula for straight line depreciation?
Cost - residual value / useful life
What is the formula for diminishing balance depreciation?
Depreciation rate - carrying amount (where carrying amount =
Cost - accum depreciation to date)
Double entry for writing off an irrecoverable debt?
DR irrecoverable debt expense (SPL)
CR trade recievables (SOFP)
Double entry for allowance of doubtful debt?
DR Allowance for doubtful debt adjustment (SPL)
CR allowance for doubtful debt account (SOFP)
What do we net off allowance for doubtful debt with?
Trade recievables
Double entry for an accrual?
DR (Relevant) Expense account (SPL)
CR Accruals (SOFP - current liabilities)
Double entry for a prepayment?
DR - Prepayments (SOFP Current Assets
CR - (Relevant) Expense account (SPL)
What is total comprehensive income?
The difference between opening and closing equity other than changes resulting from transactions with owners in their capacity as owners (eg payment of dividends)
What is included in total comprehensive income?
Profit or loss for the period
PLUS
it’s other comp income
How can I come and expenses be presented?
In a single statement of SPLOCI
In 2 statements an SPL and then a OCI
What will other comprehensive income be in this exam?
Revaluation reserve
How may expenses be classified?
By function ( COS, distribution costs, etc)
By nature (raw materials, employee costs etc)
How should material items of income and expense be disclosed?
Separately to the others. On their own line.
What is revaluation?
When an NCA is revalued, the difference between its original cost less depreciation and it’s fair or market value is not included in PL. Instead it is recognised in OCI
How to treat shares in SOCIE?
Nominal amount of shares issued is credited to share capital and any excess is credited to share premium.
Where do dividends come out of??
ALWAYS retained earnings - debit!!!!
What is the accounting equation?
A = E + L
What is the purpose of the statement of cash flows?
To show the effect of a companies commercial transactions on its cash balance.
What are cash equivalents?
Short term highly liquids investments that are readily convertible in to known amounts of cash
What 3 types of activities can cash flows arise from?
Operating activities (day to day) Investing activities (investments by the company) Finance Activities (money to and from investors)
Examples of cash flows from operating activities?
Cash received from customers
Cash paid to suppliers for goods and services
Cash paid to and on behalf of employees
Example of cash flow from investing activities?
May be an investment in PPE resulting in net cash outflow. Or disposals of old PPE results in cash inflow
Example of cash flow from financing activities?
Business issuing shares for cash or borrowing money from a bank there is a cash inflow.
Repaying a bank loan = outflow
What is the indirect method of reporting cash flows?
Profit before tax is adjusted for the effects of any non cash items and movement in working capital
Why is depreciation added back in the SOCF?
Because it has been charged in arriving at profit before but it does not Involve the movement of cash - so it should be added back.
Do you add or deduct a loss on disposal from cash flow statement?
Added back
Do you add or deduct the profit from a disposal on asset in SOCF?
Deducted
Do you add or deduct finance costs / interest?
Add back
What do movements in working capital represent?
The differences between sales and cash received and purchases and cash paid.
How to deal with interest / finance costs when preparing a statement of cash flows?
Interest paid may need to be calculated or just transferred to the proforma. Interest figure must be removed from (added back to) the profit before tax. And put into the proforma after cash generated from operations.
How should dividends be treated in the statement of cash flows?
Need to be removed from the operating activities and put into investing activities.
What is the direct method in terms of the statement of cash flows?
Looking back at their accounting records and extracting information relating to gross cash receipts and gross cash payments. IASB encourages use of this method when it is not too costly to obtain.
What can the SOCF help us to assess?
The changes in an entities bet assets and it’s liquidity and solvency
An entity’s ability to generate cash and cash equivalents and to affect the amounts and timing of cash flows in order to adapt to changing circumstances
Other advantages to producing a SOCF?
Shows the ability to turn profit into cash.
Cash flow is hard to manipulate
Not affected by choice of accounting policies.
Help you predict future cash flows
Easier to understand than profit
Limitations of the SOCF?
Measures at a point in time - so preparations can be made to make it look ‘better’ for example by offering prompt payment discounts etc.
A high bank balance isn’t necessarily a sign of good cash management. Sometimes cash flow may be sacrificed in order to purchase new PPE
Based on Historical information - not necessarily a reliable indicator of future cash flows.
