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Interpreting Financial And Accounting Information > KCB Week 1 > Flashcards

KCB Week 1 Flashcards

1
Q

What are the 4 main financial statements?

A

Statement of profit or loss (and other comprehensive income)
Statement of financial position
Statement of cash flows
Statement of changes in equity

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2
Q

What is the main objective of financial reporting?

A

To provide financial information about the reporting entity to shareholders as well as other users of the financial statements who use the information to make financial decisions.

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3
Q

What are the 7 main stakeholder groups?

A
  • Shareholders
  • Governments
  • Public at large
  • Customers
  • Suppliers
  • Employees/managers
  • Debenture holders, including banks
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4
Q

Who

Which stakeholders provide the main capital to a company?

A
  • Shareholders (share equity)
  • Debenture holders/banks (debentures/loans/overdraft facility)
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5
Q

What is the double entry (golden rule) principle of bookkeeping?

A

Credit giver (enter right hand side) – debit
recieved debit
recieved’ (enter transaction value left hand side)
Entered on the same ledger, always the same value – each transaction is recorded twice.

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6
Q

What provides prima facie evidence that a trial balance has been prepared correctly?

A

Total of debit balances should be equal to the total of all the credit balances

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7
Q

What are the 5 main adjustments to trial balances that may balance, but are not accurate enough to yet prepare the financial statements?

A
  • Inventory
  • Depreciation
  • Provision for bad debts
  • Accruals and prepayments
  • Correction of errors
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8
Q

How does one calculate a company’s gross profit?

A

Revenue - Cost of Sales

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9
Q

What is meant by cost of sales?

A
  • Direct costs: relating to supply (incurred by directors) - materials/resources etc.
  • Excludes indirect costs/overheads such as administration/salaries/other overheads
  • May include a portion of manufacturing overheads such as the production facility
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10
Q

What is EBIT?

A
  • Also known as operating profit - before finance costs are deduced from gross profit
  • Gross profit - operating expenses (overheads) = Operating profit or EBIT
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11
Q

Profit before tax

A

Operating profit - finance costs = profit before tax

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12
Q

What are some other finance costs?

A
  • Depreciation
  • Amortisation
  • Interest
  • Tax
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13
Q

How does one calculate net profit?

A
  • It is the final line of the income statement “The bottom line”
  • Revenue less all costs (COGs/overheads/finance costs/interest and tax - inc. any depreciation/amortization)
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14
Q

How does one calculate net profit margin?

A

Net proft / Revenue * 100

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15
Q

What are the main items shown on a company’s statement of financial position (2)

A

Assets
Liabilities
Equity

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16
Q

How are a company’s assets categorised?

A
  • Long-term (non-current)- ex. PPE - property, plant & equipment
  • Short-term (current) - ex. WIP/good-will/stock - anything payable within 12 months
17
Q

What are the basics to the layout of the statement of financial position?

A

First Half
* Non-current asset value (PPE) - any depreciation = Total Non-Current Assets
* Current assets = inventory & trade & any other (ex. customers buy on credit) + cash balance = Total Current Assets
* Add both = total assets
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Second Half
* Equities (shares/any premium/revaluation surplus/’retained earnings’) = total equity value
* Non-current (ex. long term borrowing ) + current liabilities = total liabilities
* Total equity value + total liabilties = total equity and liabilities

Total of assets = Total Equity - Total Liabilities

18
Q

What is ‘the accounting equation”?

A

A = E+L / A-L = E

19
Q

What is the main objective of the regulatory framework?

A

Set out concepts that underlie the preparation and presentation of financial standards.

20
Q

What does the regulatory (conceputal) framework cover ? (5)

A
  • Objectives of financial reporting
  • Underlying assumptions
  • Qualiative characteristics
  • Elements of financial statements (5 = income/loss/assets/liabilities/equity)
  • Concept of capital & capital maintenance
21
Q

What are the main assumptions of the regulatory framework (IFRS)?

A
  • Reporting on a ‘going concern’ basis
  • Accruals concept (accounting for a full amount even if part paid at the time)
  • Companies may report on a ‘cash basis’ but this is an exception and requires clearance/permission from HMRC
22
Q

What are the qualiative characteristics of the regulatory framework?

A

Fundamental
* Relevance – relevant for users
* Faithful representation – values should be faithfully represented
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Enhanced (better to also get these)
* Comparability (is better doing better or worse than prior year)
* Verifiability (can values able to be verified)
* Timeliness (don’t give out of date information, no point – users want up to date info)
* Understandability (users need to understand – if figures don’t explain, can add notes under)

23
Q

Define ‘income’

A

An increase in economina benefit during the accounting period

24
Q

Define ‘expenses’

A

Decreases in economic benefit during the period

25
Q

Define ‘asset’

A

A resource controlled by entity as result of past event from which future eco benefit expected to flow

26
Q

Define ‘liability’

A

A present obligation arising from past events, settlement of which is expected to result in outflow from entity of resources embodying economic benefits.

27
Q

Define ‘equity’

A

Income – increase in eco benefit during accounting period

28
Q

What is the main role of the regulatory framework? (5)

A
  • Ensuref financial reporting is regulated through financial rep standards (IFRS/UK GAAP/US GAAP)
  • Ensure financial information is reported objectively to provide relevant, reliable and faithfully represented information
  • Adequate minimum level of information
  • Ensure financial information is comparable and consistent
  • Improve transparency and credibility of financial reports (not to mislead aka fraud)
29
Q

What are rules-based and princples-based systems?

A
  • Rules – designed to cover every aspect of reporting (ex. US GAAP)
  • Principles – ‘conceptual framework’ used to provide underlying set of principles within standards set (guidelines) – ex. IFRS system – a degree of flexibility is permitted
30
Q

What are the advantages of each of rules-based and principles-based systems?

A
  • Rules - Minimises subjective judgement – less scope for controversial arguments
  • Principles – Flexibility permitted (accountant has limited scope of accounting treatment/to deviate from standard if explained)
31
Q

Wh

What are the 5 main arguments against
regulatation?

A
  • Rigid regulatory system = detrimental effect in long-term ( so much regulation becomes a ‘straight-jacket’ and true information cannot be put out because just following rules alone )
  • Political/economic/social differences of different countries not taken into account (how can all countries adapt a single state of standards given differences to their realities)
  • Arbitrary valuations possible (WHY?)
  • Rigid standards remove need for judgements
  • Does not provide precision and comparability
  • Increased complexity
32
Q

History notes on standards

A
  • IASC until 1991 : set IAS
  • IASB replaced : set IFRS
  • IAS are still applicable, both sets of standards are seen as equal
33
Q

What does IASB’s Conceptual Framework cover?

A
  • Objectives of financial reporting
  • Underlying assumptions
  • Qualiative characteristics
  • Elements (5) of financial statements
    (ex. new machine recognised value in statement of financial position but life of machine 5 yrs, show value in fin statements, end of 5th year remove value out as the machine is retired)
  • Measurement of elements – sometimes historic cost value / sometimes replacement values (need to make a judgement which to use when)
  • Concepts and guidance related to regulation and disclosure
  • Concepts of capital and capital maintenance
    Ex. When calculating profit – normally, i.e. if inflation is under control, can prepare FS in formal way as money has same value at start and end of the period/year – if inflation very high and money loses value, statements need to be prepared accordingly and the previous standard is no longer relevant because money has lost value – cap maintenance will then need to be looked at from another angle
34
Q

What are the main advantages of IFRS System?

A
  • Global comparison easier (must be in same industry)
  • Facilitation of cross-border listing, easier to raise funds / make investments abroad
  • Multinational companies with foreign subsidiaries have common company-wide accounting language
  • Multinational companies benefit because
    * Preparation of group financial statements easier possibly
    * A reduction in audit costs possibly
    * Management control would be improved
    * Transfer of accounting knowledge/expertise across national borders easier
35
Q

w

What are the main disadvantages of IFRS System?

A
  • Cost of implementing
  • Lower level of detail
  • IFRS are principles-based and require application of judgement and not all favour this- ex. US GAAP is rules-based, US accountants subject to high degree of litigation and their defence is usually compliance with the relevant section of the detailed standards of a rules-based system. Such people fear IFRS may remove this defence.
  • Challenges in emerging economies
    * Economic environment
    * Incompatible legal/regulatory environments
    * Concerns around SMEs
    * Level of preparedness (willingnness)
    * Education needs of auditors
     
36
Q

What are the main barriers (5), therefore, to global harmonisation ?

A
  • Legal systems: affects standardisation process (common or code law) – differences can restrict development of accounting practices
  • Business financing/accounting practice – decision making regarding arrangement of funds may including accounting practices – many do not have strong independent accountinacy/business bodies who would press for higher standards/great harmonisation
  • Tax systems – v. influential – re connection with accounting, most countries tax authorities influence accounting rules (not in uk) re recording of revenue and expenses
  • Level of inflation – likely to influence valuation methods for various types of assets
  • Political/economic relationships – some countries very different and affected by issues such as civil war/fluctuating exchange rate- imbalance – do not allow prep / adaption of same standard for all international companies.

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Nonetheless, IFRS has been a huge success – promoting global harmonisation, many have adopted it and are benefiting from it.

Interpreting Financial And Accounting Information (25 decks)

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