intro and financial statments Flashcards
What are the primary statements?
statement of profit or loss
statement of financial position
statement of changes in equity
statement of cash flows
how long is a fiscal year?
52 weeks
what is the statement of profit or loss?
its knows as the income statement and shows the financial performance of an entity such as a business within a given time period
what is the statement of financial position?
aka a balance sheet. It gives a snapshot of a businesses assets liabilities and equity at a single point in time
What does a statement of changes in equity do?
It enhances interest of owners during the period
what is the statement of cashflows?
presents all cash movements. Shows the cash inflows and outflows
what are the accounting policies?
holds all the rules followed in preparing financial statements
what are notes to the accounts?
provide details about the numbers in the financial statement
what is accounting?
the process of identifying, measuring and communicating economic information to make informed judgements and decisions by the users of the information
Give some examples of who uses annual reports
Shareholders
Banks
Employees
Managers and directors
Suppliers
Customers
HMRC
Credit rating agencies
What do users want from financial statements?
financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity’
what makes information in financial statements useful?
conceptual framework produced by the international accounting standard board which sets out underlying concepts for financial statements
What does IASB stand for?
international accounting standard board
what 3 things make for a faithful representation of information?
completeness neutrality and freedom from error
list 4 enhancing characteristics of financial information?
Comparibility
Verifiability
Understanability
Timliness
What des IFRS stand for?
international financial reporting standards
what is a sole trader?
one owner
what is a partnership
2-20 owners
what is limited liability?
legal protection which only allows shareholders to lose what you put into the business leaving them unresponsible for potential debts etc
what does IFRS stand for?
international financial reporting standards
who uses IFRS?
international businesses although it was used in EU only before
what is IFRS?
globally agreed upon guidelines that are followed internationally by firms when producing financial statements aka balance sheets
when was IFRS first published?
2003
who created the IFRS?
the international accounting standards board
what does IFRS aim to achieve?
comparability, global consistency, fair presentaion, relevance and reliability
how does IFRS enhance investor confidence?
it provides a standardised framework for assessment of financial performance which can attract investment and lead to a more efficient allocation of capital
how can IFRS reduce costs?
compliance with IFRS means that theres less worry of compliance of other rules as its standardised meaning companies can easily prepare statements making sure they’re fully legal
how does IFRS facilitate capital flows?
due to the standardised practises barriers of a complex or different process are avoided allowing for more efficient capital flows globally
What does GAAP stand for?
generally accepted accounting principles
when did GAAP emerge?
1970s
What is GAAP?
a set of standards and procedures followed when producing financial statements in order to provide a common language for financial professionals
What countries follow GAAP?
The US
What were the 4 major rules for GAAP when it emerged in the 1970s?
Accrual accounting methods
Depreciation of capital
Reporting of historical costs
Reporting of bad debts
What does accrual accounting methods refer to in GAAP?
It records revenue when a good is sold not when a payment is received
DIrect expenses for goods solds are recorded when a sale is transacted
Indirect expenses are recorded when expenses are paid
What does depreciation of capital refer to in GAAP?
costs are accounted for over the entire life of the asset
What does reporting of historical costs refer to in GAAP?
some assets are accounted for using original purchase costs rather than current market values eg property equipment of facilities
What does reporting of bad debts refer to in GAAP?
companies with high account receivables must report that some or all of that money may not be received
What are the 10 principles in GAAP?
principle of consistency
principle of permanent methods
principle of non compensation
principle of prudence
principle of regulartor
principle of sincerity
principle of good faith
principle of materiality
principle of continuity
principle of periodicity
What is principle of consistency
ensures consistent standards are followed
What is principle of permanent methods
ensures consistent procedures and practises allowing for comparison
What is principle of non compensation
all aspects of an organisations performance must be reported
no compensating a debt with an asset
What is principle of prudence
all finance reporting must be factual reasonable and not speculative
What is principle of regularity
all accountants must stand by the GAAP consistently
What is principle of sincerity
accountants must always report with basic honesty and accuracy
What isprinciple of good faith
must act honestly and in good faith
What is principle of materiality
has to disclose the general financial position of the business
What is principle of continuity
asset valuations must be made with the assumption that the business will continue on moving foward
What is principle of periodicity
have to abide by financial reporting periods eg quarterly or annually
benefits of GAAP
credibility
compatibility
regulatory compliance
What is Neutrality?
faithful financial statements without any bias
What is understandabiity?
presenting and describing financial information clearly, so that a user with a reasonable level of knowledge can understand it
What is the main objective of financial statements, according to the Conceptual Framework?
To provide information to help users make economic decisions.
the use of standard layouts for the primary financial statements, such as the statement of profit or loss, is an example of applying the principle of:
Comparability
what is conceptual framework?
it sets out the fundamental concepts for financial reporting that guide the Board in developing IFRS Standards.
what is the structure of most conceptual frameworks?
who are users of financial statements?
what are the info needs of the user?
what type of financial statements will best satisfy their needs?
what are listed companies?
companies that have shares listed on the stock exchange eg public limited company
what are unlisted companies?
companies that don’t have shares listed on the stock exchange
name some real life examples of unlisted companies
Aldi
name some real life examples of listed companies
Apple
what is external reporting?
not involved in the day to day running of the business and is also known as financial accounting
what is internal reporting?
they are involved in the day to day running of the business and also known as management accounting
what is an entity?
something that exists independently
name 3 limitations of a sole trader
high risk
no limited liability leaving assets etc in jeopardy
hard to expand
banks may give unfavourable interest rates
name some benefits of a partnership
more skills
allows easier expansion than a sole trader
higher efficiency
name some benefits of a sole trade
all the profits
high risk high reward
own ideas
free reign of ideas and control
name 3 limitations of a partnership
profits are shared
joint and several liability
clashing ideas and disagreements
what is a dividend?
Joint and several liability is a way to reduce the risk of financial loss to one party to a contract. It allows a plaintiff suing for damages to pursue full payment, if necessary, from the party with the deepest pockets if the others named cannot pay.
what is an owners capital?
this is the amount of money the owner has invested into the business
