Introduction to financial statements Flashcards
Financial accounting
Production of financial statements for external users
Management accounting
Production of detailed accounts, used by management to control the business and plan for the future (internal use)
What is financial accounting concerned with?
Recording and summarising the transactions of a period and presenting the summary of it.
Recording element of accounting
Recording transactions as they occur
Summarising element of accounting
The transactions for a period are summarised
Balance sheet
shows position of business at a date
Profit & Loss account (and other name for it)
shows performance of business over accounting period (statement of profit and loss)
Income & expenditure account
similar to profit & loss but prepared for finding excess of income over expenditure or excess of expenditure over income
statement of cash flows
shows cash flows in and out of company over accounting period
directors’ report
required by UK company law. Board of directors issue a document with financial statements to confirm they’re compliant to accounting standards
notes to the financial statement
allow company to give extra info. on financial statements
auditors’ report
gives assurance over financial statements from an independant, external party
Auditor’s report - title
clearly shows that it’s the report of an independent author
Auditor’s report - addressee
it’ll be addressed as required by the circumstances of engagement
Auditor’s report - opinion paragraph
paragraph detailing whether financial statements are true and fair or not
Auditor’s report - basis for opinion
description of professional standards applied during audit to give confidence to users
Auditor’s report - management’s responsibility for financial statements
describes responsibilities of those in organisation who are responsible for prep of financial statements
Auditor’s report - auditor’s responsability
makes clear the role of auditor and what management’s role is. also explains what an audit involves and that only material misstatements are considered
Auditor’s report - signature of auditor
report must be signed, either name of auditor or the firm - shows who has performed audit engagement
Auditor’s report - date of auditor’s report
dated no earlier than date on which auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements.
Auditor’s report - auditor’s address
name location where auditor practises - in case shareholders need to contact auditor
Why would an organisation produce financial statements
- fulfill legal requirements (Companies Act 2006)
- provide info. to management to assist them in making decisions
- produce accurate financial statements which are relevant to the users
- assist in auditing the accounts and trace to source documents
What does the financial accounting cycle (annually) include:
- Transactions are recorded from the year (recorded in accounting ledgers contained in computer software programs)
- Journal entries (any accounting transactions not part of everyday accounting entries)
- Trial balance ( once all transactions are recorded for period, they are summarised based on what they relate to, and compiled into a trial balance, good place to look for errors)
- Producing the final accounts (once trial balance is done, numbers can be transferred here in form of balance sheet & a profit and loss account, account in general ledger is then closed.
Best practise for management accounting
- Budgets set at start of year
- Organisation performs variance analysis on these budgets
- Can also use MA to consider detailed costs of individual products in their portfolio
Cash budgets
Used to help identify future cash prospects (so that company can understand if they should expect cash surplus/deficit in coming year
What should a cash budget include?
- Cash receipts ( e.g. from trade, sale of non-current assets, through financing)
- Cash payments ( e.g. outflows from trade, other expenses, buying non-current assets, paying off debts)
- Net cash (surplus or deficit expected at end of year/period) CASH RECEIPTS - CASH PAYMENTS
