FSLC Flashcards
Primary users of financial statements
Government, investors, lenders, other creditors (suppliers), employees, customers, public
Fundamental characteristics of financial statements
Relevance- capable of influencing decision making
Faithful representation- complete, neutral and free from error
Enhancing qualitative characteristics of financial statements
Comparability- between entities, and one entity between time periods
Verifiability- provides assurance regarding reliability of information
Timeliness- information available within appropriate timescale for decision making
Understandability- information understandable to those who use it
Underlying assumption
The entity is a going concern, ie. will continue in operational existence for the foreseeable future (12 months)
If not a going concern need to be prepared on a break up basis, ie. no non current assets or liabilities, assets measured at realisable value
Five elements of financial statements
Assets Liabilities Equity Income Expense
Define asset
A resource controlled by the entity as a result of past transaction or events, from which future economic benefits are expected to flow
Define liability
A present obligation as a result of past transactions or events, the settlement of which is expected to result in an outflow of economic benefits from the entity
Define equity
The residual interest of the business when it cases to trade (and all the assets are sold and liabilities paid)
Define income
The increase in economic benefits during an accounting period
Define expense
The decrease in economic benefits during an accounting period
What three points must be met for an element to be recognised in the financial statements
It meets the definition of the element (asset, liability, income, etc)
It is probable the last the benefits associated with the item will flow to or from the entity
The item can be reliably measured
Four possible ways of measuring the elements
Historical cost- assets at price paid to acquire them
Current cost- current purchase price for assets
Realisable value- assets carried at amount that would be obtained from their sale
Present value- assets Carrie day discounted value of future cash inflows the item will generate
Five fundamental principles of AAT Code of Professional Ethics
Integrity- straightforward and honest
Objectivity- should not allow bias
Professional competence and due care- ensure professional skill and knowledge is at level required
Confidentiality- only disclose clients information with clients permission or where there is a legal duty to do so
Professional behaviour- comply with relevant laws and regulations, act in a professional manner
Threats to objectivity
Self- interest Advocacy (must remain independent) Familiarity Self- review Intimidation
What is a statement of financial position
Summary of all assets and liabilities of the limited company at the accounting end period
What is a statement of profit or loss
Summary of income and expenses for a period, usually one year to calculate profit or loss made
Two types of limited company
Plc- public limited company
Raise their capital through shares, shares bought and sold through stock exchange
Ltd- private limited company
Shares sold to close family and friends
Difference between preparing accounts for a sole trader and a limited company
No legs requirement for a sole trader or partnerships to prepare accounts
Sole traders and partners in a partnership pay income tax on their share on the taxable profits, companies pay corporation tax as they are separate legal entities
Sole traders and partners are free to borrow from the business bank account (drawings), owners are personally liable for these debts
Define tangible asset
Assets which have tangible physical form, such as land, buildings and cars
Define intangible assets
Assets for that have no physical form, eg patents and licenses
Define revenue expenditure
All other expenditure with a business that is not of capital nature. This may include expenditure which maintains but does not improve non current assets
Define depreciation
Consumption or usage of a non current asset in the accounting period which is spread over the estimated useful life to the business
Formula for straight line depreciation
(Cost- residual value)/ useful life
Formula for finishing balance depreciation
Carrying value x %
What is IAS 16
Permits the revolution of PPE (not compulsory)
Must revalue all assets within class or category Revalued assets deprecated over remaining useful economic life Revalue at regular intervals (3 to 5 years)
What’s is IAS 38
Defines intangible assets as an identifiable non-current monetary asset without physical substance
When are intangible assets recognised
Meet definition of asset Are identifiable (capable of being separate from other assets) Are controlled (able to use) Reliable measure of cost (internally generated assets not normally recognised) Future economic benefits
Development costs for compulsory captilisation
SECTOR
sufficient resource to complete Entity will complete development (commercially viable) Complete project (intention) Technically feasible Overall profitable Reliably measured
IAS 36
Impairment of assets
Define impairment
A reduction in the recoverable amount of an asset below it’s carrying amount
Define recoverable amount
The higher of either fair value less costs to sell or value in use
What does IAS 2 require
Inventories to be stated at the lower of cost and net realisable value
IAS 12
Prescribed accounting treatment for taxation
Any difference between original estimate and the actual amount paid at a later date will be adjusted in the following year
What is a lease
What is a lessor
A contract that conveys the right to use an underlying asset fir a period of time in exchange for consideration
A lessor is the entity that provides the right to use an underlying asset in exchange for consideration
A right of use asset is depreciated in accordance with…
If ownership transfers to the lesser at the end of the lease, over the remaining useful economic life of the asset
If ownership does not transfer, over the shorter of the lease term and the useful economic life of the asset
