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BUS275 - Financial Reporting for Business > Lecture 1 - The Regulatory & Conceptual Framework - Presentation of FSs > Flashcards

Lecture 1 - The Regulatory & Conceptual Framework - Presentation of FSs Flashcards

1
Q

companies are owned by …
companies are managed by…

A

owned by shareholders
managed by directors

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2
Q

do shareholders have day-to-day involvement in the company?

A

no

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3
Q

what do shareholders rely on to help them make important decisions?

A

financial reports

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4
Q

who uses financial reports as a source of information on a company?

A

shareholders, creditors and other user groups

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5
Q

what is the purpose of regulations surrounding financial reports?

A

to ensure that financial reports provide a faithful representation

no fraud / dishonesty

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6
Q

what are the 3 main sources of regulation?

A

legislation
accounting standards
stock exchange regulations

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7
Q

legislation characteristics?

A

legislation is a source of regulation for financial reports

  • broad rules
  • e.g., companies act 2006 in UK
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8
Q

accounting standards’ characteristics?

A

accounting standards are a source of regulation for financial reports

  • detailed rules
  • e.g., national standards (FRC in UK, FASB in US)
  • international standards (IASB)
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9
Q

stock exchange regulations?

A

source of regulation for financial reports of listed companies

e.g., requires listed companies to publish quarterly figures

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10
Q

GAAP?

A

generally accepted accounting practice

a complete set of accounting regulations and conventions that apply in a certain jurisdiction

e.g., US GAAP, UK GAAP etc

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11
Q

‘international GAAP’?

A

refers to the standards issued by the IASB

IASB = international accounting standards board

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12
Q

IASB?

A
  • international accounting standards board
  • formed in 2001 to replace IASC (international accounting standards committee)
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13
Q

what is the link between the IASB and the IFRS?

A
  • IASB is responsible to the IFRS foundation
  • IFRS advisory council advises the IASB on its agenda
  • IFRS interpretations committee interprets international standards and provides guidance on matters not covered by the standards
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14
Q

IFRS Foundation?

A

umbrellas the IFRS advisory council, the IASB and the IFRS interpretations committee

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15
Q

what is the objective of general purpose financial reporting?

A

to provide 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 company

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16
Q

4 pieces of information that financial reports must cover?

A
  • financial position
  • financial performance
  • cash flows
  • changes in equity
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17
Q

primary users of financial reports?

A
  • existing/potential investors
  • existing/potential lenders
  • other creditors
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18
Q

other users of financial reports?

A
  • employees
  • customers
  • governments and their agencies
  • the public
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19
Q

fundamental characteristics of financial information?

A
  • relevance
  • faithful representation (complete, error-free)
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20
Q

enhancing characteristics of financial information?

A
  • comparability
  • verifiability
  • timeliness
  • understandability
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21
Q

‘going concern’ basis?

A

financial statements are normally prepared on the ‘going concern’ basis

the assumption that the entity will continue operations into the foreseeable future

22
Q

what’s included in a SOFP?

A

assets (a resource controlled by the entity expected to derive future economic benefits)

liabilities (a present obligation of the entity arising fro past events)

equity (residual interest in assets after deducting liabilities)

23
Q

whats included in a P&L?

A

income (increases in economic benefits during the accounting period)

expenses (decreases in economic benefits during the accounting period)

24
Q

bases of measurement for assets?

A

historical cost
current cost
realisable value
present value

25
Q

what is the most commonly used measurement basis?

A

historical cost

this is sometimes combined with other costs (e.g., inventory is valued at the lower of cost and net realisable value)

sometimes companies use current cost to deal with assets that have fluctuating valuations (e.g., property)

26
Q

who is responsible for preparing FSs?

A

directors

27
Q

5 components of financial statements?

A
  • statement of financial position (B/S or SOFP)
  • statement of profit or loss and other comprehensive income (I/S or SOCI)
  • statement of changes in equity (SOCE)
  • statement of cash flows (SOCF)
  • notes
28
Q

must financial statements be prepared on the accruals basis?

A

yes

other than the statement of cash flows (SOCF)

29
Q

what makes information ‘material’?

A

if it is capable of changing a user’s decision

  • can be significant in AMOUNT
  • or significant in NATURE or FUNCTION
30
Q

offsetting?

A

an entry can be offset by an equal but opposite entry that nullifies the original entry

e.g., a loss in one division can be eliminated by an equal profit in another division

31
Q

frequency of FS reporting?

A

normally, annually

an entity which presents FS for a period which is longer or shorter than a year should disclose the reason and the fact that the amounts in the prolonged/shortened period aren’t comparable with a regular 12-month period

32
Q

how is comparability ensured?

A

consistency of presentation

meaning the way in which items are presented and classified should be consistent from one accounting period to another

33
Q

current assets?

A

assets that are realised, sold or consumed in one operating cycle

held for trading purposes

expected to be liquidated within 12 months

e.g., cash or cash equivalents or inventory

all other assets are non-current (e.g., PPE)

34
Q

current liabilities?

A

liabilities that are expected to be settled within 12 months

all other liabilities are non-current (e.g., long term loan)

35
Q

examples of line items on SOFP / BS?

A

PPE
intangible assets
financial assets
trade receivables
cash/ cash equivalents
provisions
liabilities
tax
equity capital and reserves

36
Q

what is included in SOFP OR notes?

A

classes of PPE
receivables
classes of inventory
provisions
classes of equity / reserves

37
Q

difference between I/S and SOCI?

A

I/S shows profit/loss after deducting business expenses from revenues

SOCI shows total comprehensive income after taking into account other comprehensive income (e.g., profit on sale of a NCA or interest income or revaluation of NCA)

38
Q

what information is presented in the statement of comprehensive income (SOCI)?

A

everything on a P&L + comprehensive income

39
Q

statement of changes in equity (SOCE)?

A

shows how much each component of equity has changed during an accounting period

includes
- total comprehensive income for the period
- effects of any changes in accounting policies
- share issues
- dividends paid

shows reconciliation of the opening/closing balance of each component of equity

40
Q

what do FS notes include?

A
  • measurement bases and other accounting policies
  • further information required by international standards
  • additional information relevant to an understanding of the FSs
41
Q

dividends - interim?

A

most listed companies propose & declare an interim dividend half way through the FY

42
Q

dividends - final?

A

most listed companies propose & declare the final dividend JUST AFTER the FY, but before the FSs are issued

43
Q

journal entry to recognise dividends?

A

when proposed/declared:
dr retained earnings, cr dividends payable

when paid:
dr dividends payable, cr bank

44
Q

impacts of IFRS?

A
  • enhanced investor confidence due to increased transparency
  • seamless cross-border M&A due to consistent FR principles
  • reduced reporting costs due to consistent standards that comply with multiple jurisdictional regulations
  • facilitation of capital flows by eliminating barriers arising from diverse accounting practices
45
Q

what do IFRS aim to enhance?

A

efficiency, comparability, accuracy and transparency of financial information

46
Q

what do the IASB do?

A

develop and amend international accounting standards

47
Q

are dividends an expense?

A

no, they come out of retained earnings on the balance sheet

e.g., dr owners equity, cr div payable… dr div payable, cr bank

48
Q

under which circumstances can presentation/classification of items on an FS change?

A
  • change of operations
  • change in law
49
Q

revaluation of PPE journal entry?

A

dr PPE, cr revaluation reserve

revaluation reserve is an equity account that goes on the SOCI

50
Q

are leased equipment classed as an asset on the SOFP?

A

yes, but it’s classed as a ‘right of use’ asset

you also need to disclose the amount owing to the lessor as a liability

51
Q

define liability

define asset

A

liability = present obligation to transfer an economic resource as a result of past events

asset = a resource controlled by the entity as a result of past events from which future economic benefit is expected

BUS275 - Financial Reporting for Business (16 decks)

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