Key Stuff for Final Exam

Question 1

Bonus issue

Answer 1

issue of additional shares to existing shareholders in proportion to their shareholding. They are a fre issue of shares and thus are a capitalisation of company reserves. Does not raise any cash for the business.

Question 2

Rights issue

Answer 2

issue of shares to existing shareholders in proprtion to their shareholding at a price that is normally lower than the current market price of the share. Raises additional cash for the business.

Question 3

Going concern

Answer 3

assumes organisaiton will continue in business for the forseeable future

Question 4

Accruals

Answer 4

revenue and costs are recognised as they are earned/incurred, irrespective whether money has been received/paid =profit/loss would be meaningless if depended on rec’d/paid

Question 5

Matching concept

Answer 5

attempts to match the income earned in a period with the expenses consumed in earning that income

Question 6

Sole trader & limited company

Answer 6

No requirement to keep accounting records & prepare annual financial statements but will often do so for HMRC-business tax and sales tax, management purposes, support applicaiton of loan/overdraft.
Limited company = opposite because of CA2006

Question 7

Comparability

Answer 7

to be able to make decisions, users of FS are likely to compare info. in FS’s to other figure.
INTERNAL - current period to previous, current period to budget/target
EXTERNAL - current period to sim. business, current period to industry average

Question 8

Capital account

Answer 8

for each partner original capital contributed by partner & any further capital introduced

Question 9

Current account

Answer 9

for each partner which is entered; drawings, int. on drawings, int. on capital, profit share, salaries, int. on loans

Question 10

Drawings account

Answer 10

for each partner, records money/goods withdrawn from the partnership. At the end of the year, the balances are transferred to the partners’ current account

Question 11

Partnership Act 1890

Answer 11

the relatio nwhich subsists between persons carrying on business in common with a view of profit

Question 12

Principle matters normally found in partnership agreements:

Answer 12

• capital introduced by each partner
• profit sharing ratio
• interest payable on capital
• partners’ drawings
• interest on partners’ drawings
• resolution of disputes
• dissolution of the partnership

Question 13

Reserves

Answer 13

retained profits that have not been distributed as dividends to the shareholders

Question 14

Revaluation reserves

Answer 14

capital reserve, not available for distribution. Arise when non-current assets are revalued above their original cost or value.

Question 15

Consistency

Answer 15

similar transactions should be treated in a consistent manner from one period to the next

Question 16

Fair presentation (true & fair view)

Answer 16

figuresin FS’s have been accurately arrived at when accuracy is possible (true) and that when judgement has to be exercised or estimates are needed, it has always been done without bias (fair)

Question 17

Prudence

Answer 17

degree of caution is exercised in any judgement needed in making any estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated

Question 18

Materiality

Answer 18

significant (material) = subjective. General rule 5% or less of monetary value = not material. Unless profit/loss changes/Affects sensitive issue

Question 19

Substance over form

Answer 19

accounting treatment of transactions is to reflect their commercial reality (substance) rather than the legal form, provided that it is legally possible

Question 20

Historic cost

Answer 20

historic cost convention is that the assets are recorded at their initial cost and not revalued upwards and liabilities are recorded at the amount initially received in exchange for the obligaiton = figures remain objectively based on verifiable figures. However, in times of high inflation, historical cost can be a dubious convention to follow.