Lecture 6 Flashcards

1
Q

What is the definition of a provision?

A

A liability of uncertain timing or amount
In the future, might have expenses so set aside money/note it down just in case
- doubtful debts

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2
Q

What are some examples of provisions?

A

Losses on contracts
Obsolescence of stock
Costs related to closure of a division of the company

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3
Q

How do you calculate provision?

A

Sales of manufactured goods x % of provision of sales (will probs say in question)

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4
Q

What effect does provision have on the accounting equation?

A

When provision established:
Liabilities increase, oi decrease (expense)

As repairs under warranty are carried out (or whatever):
Assets decrease (cash), liabilities decrease

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5
Q

What is a non-current liability?

A

Any liability that does not meet the criteria of a current liability
Also described as long-term liabilities

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6
Q

What are some examples of non-current liabilities?

A

Loan stock
Debentures
Bonds
Bank borrowing and commercial paper

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7
Q

What are the characteristics of non-current liabilities?

A

The amount borrowed (the capital sum)
How much is to be repaid
When is it to be repaid
What interest payments must be made
Whether the lender required security for the loan

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8
Q

What is the measurement of non-current liabilities?

A

General principle - valued at fair value (price that would be paid to transfer a liability in an orderly transaction between market participants)

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9
Q

Tell me about unsecured borrowing

A

Lender has no first claim to any particular assets of the reporting company
In the event of default by the company, the lender must wait for payment with other unsecured creditors

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10
Q

Tell me about secured borrowing

A

The lender has first claim to named assets of the reporting company in the case of default

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11
Q

Change in the nature of finance source - tell me about convertible debentures or loan stock

A

Allows a change in the nature of the source of finance
Issued as a long-term liability
Some time in the future it may be converted into ordinary shares on specified terms

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12
Q

What is the general principle for interest payment on loans?

A

The amount shown as the expense of interest payable in the income statement (profit/loss account) should be based on the compound rate of interest applying over the entire period of the loan

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13
Q

What is the spreading of interest charges over the period of the loan?

A

An application of the accruals or matching concept

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14
Q

The issue of shares at the date of incorporation (when the company first comes into existence)

A

Company issues shares to the owners who become shareholders
Each share has a named value which is called nominal value (par value)

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15
Q

What is accrual?

A

Matching revenue to expense

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16
Q

What is the share capital?

A

The nominal value of the share

17
Q

What is the share premium?

A

Market value - nominal value

18
Q

How would you calculate the total share premium?

A

Share premium x number of shared issued

19
Q

How would you calculate the total nominal value?

A

Nominal value x number of shares issued

20
Q

What are the options available to a company if asset is worth more than expected?

A
  1. Keep balance sheet value the same (historical cost) and include a note to balance sheet explaining market value has increased
  2. Recognise in financial statements the increase in value but not a realised profit (asset increase in increase in value of current/non-current asset, OI increase in revaluation reserve)
21
Q

Effect on accounting equation - issue of shares at nominal value

A

Assets increase cash
OI increase share capital

22
Q

How would you record an issue of further shares at an increased price in statement?

A

Number of shares sold x (increased) price (put this number into increased assets, cash)
Nominal value x number of shares sold (put this into OI, share capital)
Share premium x number of shares sold (put this into OI, share premium)

23
Q

How would you calculate the ownership interest at the end of a period?

A

Ownership interest at the start of a period + movements in ownership interest during the period (business activities during the year, addition/withdrawal of capital)