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AAT Level 4 > FSLC - Financial Statements of Limited Companies > Flashcards

FSLC - Financial Statements of Limited Companies Flashcards

1
Q

In an unincorporated business, who is the owner of the business?

A

The proprietor (Owner)

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2
Q

In an unincorporated business, who is the manager of the business?

A

The proprietor (Owner)

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3
Q

In an unincorporated business, what would be the legal entity of the business?

A

The proprietor (Owner) will need to keep personal & business accounts separate as the owner will be entering in to business contracts

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4
Q

In an unincorporated business, what would be the liability of the business?

A

The proprietor (Owner) - will be personally responsible for any debts of the business which would be unlimited liability

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5
Q

In an incorporated business, what is the difference between Ltd & Plc of the business?

A

Ltd - Private limited company. You cannot have any member of public to become shareholder.

Plc - Public company. Shares are traded publicly, often on the stock exchange.

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6
Q

In an incorporated business, who is the manager of the business?

A

Shareholders

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7
Q

What is the legal entity of an incorporated company?

A

Separate legal entity - The company can enter into contracts in its own right.

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8
Q

In an incorporated business, what would be the liability of the business?

A

Limited liability - Only limited to the amount in shares the owners have paid for. The company itself will be responsible for its own debts.

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9
Q

What is the advantage of having a limited liability status when trading as a limited company?

A

This means the owners of the business (shareholders) will only lose a maximum of the investment they have put in to the company. They cannot be personally held liable for the debts of the company.

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10
Q

How is it advantageous to raise finance easier for a limited company?

A

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

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11
Q

In regards to a business ceasing operations, why is it advantageous for a limited company?

A

A limited company can continue to operate regardless of ownership as they can transfer with no effect.

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12
Q

What are the 4 aims of the financial statements of the business?

A

1) Identify how well the business has performed

2) To identify the value of the assets & liabilities

3) To help understand the cashflow position

4) To communicate the data to the users of the accounts clearly

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13
Q

What is the difference between Directors & Shareholders?

A

Directors are appointed by the shareholders to manage the business. They run it on a day to day basis.

Shareholders do not run the company however they do have input in to who they put as director and the removal of them.

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14
Q

What is the purpose of Directors in a company?

A
  • To run the business on a day to day basis.
  • Enter into contracts in the companies name.
  • Taking operational, tactical & strategic decisions.
  • They decide if the shareholders will get paid a dividend.
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15
Q

What is the purpose of Stakeholders in a company?

A
  • They have the right to insist that the directors call a general meeting.
  • They can then vote on key decisions such as the appointment and the removal of the directors or auditors.
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16
Q

Why is it a disadvantage for a limited company to have to register at companies house?

A

Anyone can view the accounts of the business. Whereas if you are a sole trader, you do not need to register.

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17
Q

What are the 2 components that make up the financial statements of a sole trader/partnership?

A

1) Profit & Loss / Statement of Profit & Loss

2) Balance sheet / Statement of financial position

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18
Q

What are the 5 components that make up the financial statements for a limited company?

A

1) Statement of Profit & Loss

2) Statement of financial position

3) Statement of changes in equity

4) Statement of cashflows

5) Notes to the financial statements

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19
Q

How does it show on the balance sheet (Statement of financial position) for money injected in to the company for both Sole traders & Limited companies?

A

Sole traders - will show as Proprietors Interest

Limited company - will show as Equity

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20
Q

What does “equity” mean for a limited company?

A

This is the shareholders shares they have injected in to the business

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21
Q

What does “proprietors interest” mean for a sole trader/partnership

A

This is the capital that is injected in to the business

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22
Q

What makes up the proprietors interest on the balance sheet for a sole trader?

A

Capital + Profit - drawings = Proprietors interest

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23
Q

What makes up the equity on the statement of financial position for a limited company?

A

Share capital + retained earnings + other reserves = Equity

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24
Q

What does IAS stand for?

A

International Accounting Standards

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25
Q

What does IFRS stand for?

A

International Financial Reporting Standards

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26
Q

What does the IFRS Foundation do?

A
  • Appoint members for IASB, Advisory Council & Interpretations Committee.
  • Monitor the effectiveness of the IASB’s
  • Raise funds for IASB
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27
Q

What does the IFRS Advisory Council do?

A
  • They provide advise to the IASB on the priority areas of accounting.
  • These are advisory so before the standards are written they can take recommendations from individuals, corporations, auditors and national standard setters.
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28
Q

What does the IASB do?

A
  • They write the rules for IFRS & IAS.
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29
Q

What does the IFRS Interpretations Committee do?

A
  • After the standards are written, they can provide guidance on financial reporting issues that are not specifically addressed by IFRS to the IASB
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30
Q

What are the 5 stages to the process of developing and setting standards?

A

1) Identify the topic - with the help of the advisory council.

2) A working group may be set up to discuss the topic

3) Public are invited to comment after a discussion paper is issued

4) An exposure draft is issued for public comment and circulated to accounting bodies, government and other interested parties made available on the website.

5) IASB consults with IFRS advisory council and working groups before an IFRS is voted on and issued

31
Q

What is the Companies Act 2006?

A

A UK legislation which governs Limited Companies

32
Q

What are the 3 duties and responsibilities of the Director under the Companies Act 2006?

A

1) Can produce P&L, B/S & Cashflow reports as proper accounting records

2) Responsible for preparing the financial statements , having them audited and present them to the shareholders in a general meeting.

3) Filing the accounts at Companies House after being approved by the shareholders.
- Plc = within 6 months of the accounting period
- Ltd = withing 9 months of the accounting period

33
Q

Conceptual framework for financial reporting is a rules or principals based approach?

A

Principals

34
Q

What are 4 advantages of using a principle based approach when preparing financial statements?

A

1) Judgement is needed rather than following a tick box exercise.

2) Less likely to go out of date as not based on individual scenarios.

3) Harder to find loopholes.

4) Its more general, so if no rule, then look at the underlying framework.

35
Q

What is the objective of general purpose financial reporting?

A

To provide financial information to potential investors, lenders & other creditors in making decisions relating to providing resources to the entity.

36
Q

What is accruals accounting?

A

Costs & revenues should be included in the period in which they relate to.

37
Q

Why would management (directors) be interested in the financial statements and what would they 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.

38
Q

Why would Investors (Shareholders) be interested in the financial statements and what would they be interested in?

A

Should they invest?
Will they get a return on their money? (Dividends and capital growth)
How risky is the business?

39
Q

Why would employees be interested in the financial statements and what would they be interested in?

A

Ability of the company to pay their wages.
Is the company profitable and do they have good cashflow?

40
Q

Why would lenders be interested in the financial statements and what would they be interested in?

A

Will their loan/interest be paid?
Should they loan to the business?

41
Q

Why would suppliers be interested in the financial statements and what would they 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.

42
Q

Why would customers be interested in the financial statements and what would they be interested in?

A

Will the company be in business in the future?
Will think about guarantees and replacement parts

43
Q

Why would government be interested in the financial statements and what would they be interested in?

A

HMRC – taxes!
Regulation of the economy

44
Q

Why would the public be interested in the financial statements and what would they be interested in?

A

Trends and developments in sectors of business.
Interest in large employers in the local market.

45
Q

What are the 2 fundamental qualitative characteristics in the framework?

A

1) Relevance

2) Faithful representation

46
Q

What does materiality mean in terms of the qualitive characteristics when looking at relevance?

A

Qualitive & quantitative - Information is material if omitting, misstating or obscuring as it could be used to influence decisions

47
Q

What does relevance mean in terms of the qualitive characteristics?

A

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

48
Q

What does faithful representation mean in terms of the qualitive characteristics?

A

Means it should be accurate, real & not misleading.

49
Q

What does prudence mean in terms of the qualitive characteristics?

A

Prudence means exercising caution when making judgements under conditions of uncertainty. Being careful not to overstate assets and income or understate liabilities and expenses.

50
Q

What are the 4 “Enhancing” qualitive characteristics?

A

1) Comparability

2) Verifiability

3) Timeliness

4) Understandability

51
Q

What does comparability mean in terms of enhancing characteristics?

A

Setting standard formats of presentation and rules to follow when preparing financial statements so that users can identify & understand similarities in, and differences among items that can be compared.

52
Q

What does verifiability mean in terms of enhancing characteristics?

A

This helps to assure users the economic reality of the transaction. Verifiability means that observers could reach agreement that a particular treatment of an item can be faithfully represented.

53
Q

What does Timeliness mean in terms of enhancing characteristics?

A

Decision-makers can make use of the information and make decisions in a timely manner.

54
Q

What does understandability mean in terms of enhancing characteristics?

A

Making the data understandable to the users of the accounts in order to make the decisions needed. Not to mislead by incomplete information.

55
Q

What does stewardship mean?

A

Directors or managers are accountable to the shareholders. They must ensure the company resources are used in a proper, efficient and profitable way and are responsible for the safekeeping of them.

56
Q

What are the 5 elements of the financial statements?

A

1) Assets

2) Liabilities

3) Equity

4) Income

5) Expense

57
Q

What are the 4 main points to remember for the assets definition?

A

1) Control

2) Past event

3) Right

4) Potential to produce economic benefits

58
Q

What are the 3 main points to remember for the Liabilities definition?

A

1) Present obligation

2) Past event

3) Transfer to an economic resource

59
Q

What is Equity in terms of financial statements as laid out in the framework?

A

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

Equity = Net assets = Share Capital + Reserves

60
Q

What is Income in terms of financial statements as laid out in the framework?

A

Increases in assets, or decreases in liabilities, that result in decreases in equity, other than those relating to contributions from holders of equity claims.

61
Q

What is Expenses in terms of financial statements as laid out in the framework?

A

Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.

62
Q

When should an element of the financial statements be recognised? (3)

A

1) If it meets the definition of an element

2) If it provides relevant information

3) If it can be faithfully represented

63
Q

When should an element of the financial statements be derecognised?

A

If it no longer meets the definition of an asset or liability.

64
Q

What are 2 bases of measurements in the framework?

A

1) Historical cost - Original price paid or received

2) Current value - Updated values to reflect conditions at reporting date

65
Q

What are the 3 ways to obtain a current value?

A

1) Fair value - What is it worth today?

2) Value in use (assets) / Fulfilment value (liabilities) - Present value discounted?

3) Current cost - What would it cost to buy new?

66
Q

What are the 5 fundamental ethical principles?

A

1) Integrity

2) Objectivity

3) Professional and technical competence and due care

4) Confidentiality

5) Professional behaviour

67
Q

In shares, what is the nominal value?

A

The nominal value is the face value of one share from when the company was formed.

68
Q

What are preference shares?

A

A special type of share that carries a right to a fixed dividend.

69
Q

What is allotted share capital?

A

The number of shares issued by the company.

70
Q

How do you account for share capital?

A

DR Bank (Asset)
CR Share Capital

71
Q

How do you account for shares at a premium?

A

DR Bank (Asset)
CR Share Capital (Nominal)
CR Share Premium (Excess over nominal)

72
Q

What is a share premium?

A

It is a special type of reserve which is non distributable and there are very few transactions it can be used for.

73
Q

What is a bonus issue of shares?

A

This is where the company gives away free or bonus shares to existing shareholders. This is based on the nominal value.

74
Q

How to account for bonus shares?

A

DR Share premium account
CR Share capital

AAT Level 4 (3 decks)

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