MCFA Flashcards
What is the purpose of the conceptual framework?
Describe the main concepts that underpin accounting, which can help in identifying best practice and developing accounting rules.
It answers questions such as:
Who are the main users of financial statements?
What is the purpose of financial statements?
What qualities should the financial statements have?
What are the main elements of financial statements?
How should the elements be defined, recognised and measured?
What is financial accounting?
The process of recording, summarising and reporting the transactions which has occurred in a business during a period.
It is made to provide information to eternal actors such as investors and shareholders.
What is management accounting?
The process of identifying measuring, summarising, analysing, interpreting and communicating information in order to reach organisational goals and help in decision making within the organisation.
What is the difference between management accounting and financial accounting?
Management accounting is aimed at helping directors and managers within the company in decision-making. The financial accounting is used to provide information to external pars such as investors.
What questions does the IFFS (international financial reporting standards), developed by IASB (international accounting standards board) answer?
What info should be disclosed in the financial statements?
How should the info be presented?
How should assets be valued?
How should profit be measured?
What is the purpose of financial statements?
Provide information for decision- making
What does the statement of financial position (balance sheet) do?
Describe the assets, liabilities and equity of the business in a specific moment in time
Assets= equity+ liabilities
What does the income statement do?
Shows the wealth generated during a specific period.
What does the cash flow statement do?
Shows the cash movements. The increase and decrease of cash during a specific period.
What other financial statement exists except for the 3 most important ones?
Statement of changes in equity and explanatory notes
What are the to different claims against a business?
Equity and liabilities
What are the accounting principles?
Rules and guidelines that accompany should follow when reporting financial data.
To remain in major stock exchanges he company must follow the GAAP ( general accepted accounting principles) of the country
What are accounting conventions?
Rules that are developed to help with practical problems encountered when businesses follow the accounting principle.
What conventions influence the statement of financial position?
Historic cost convention
Business entity convention
Prudence convention
Going concern convention
Dual aspect convention
What conventions influence the income statement?
Accruals convention
-measure the performance of the company by recognising economic events regardless off when the cash transaction occurs
Materiality convention
What is the matching principle?
The action of matching revenues to expenses at the time the transaction is recognised, rather than when the cash payment is being made.
Example of intangible assets?
Goodwill, patentes, copyrights
Which are the main users of financial statements??
Existing and potential investors, lenders and other creditors
According to CF, what qualities should the financial statements possess?
Relevance and faithful representation
To further enhance the quality of the statements they should be timely, understandable, verifiable and comparable.
The qualities in the CF outlays the tuna mental characteristical qualities the financial information should have to be useful.
What are the main elements of financial statements?
The statements portray transactions by grouping them into broad classes according the their economic characteristics.
Financial statement: assets, equity, liabilities
Income statement: income and expense
How to describe the recognition of elements in the CF?
Recognition is the process of incorporating an item in the balance sheet or income statement.
Recognition criteria:
- is there a future economic benefit associated with the item?
- does the item have a cost or value that can be measured with reliability?
What four factors do you need to consider when it comes to depreciation?
- the cost (fair value) of the asset
- the useful life of the asset
- the residual (disposal) value
- the depreciation method (straight-line or reducing balance- method)
What are the different inventory costing methods?
First in first out
Last in first out
Average weighted cost
Valuable assets that are hard to estimate in monetary value?
Goodwill
Human resources
Monetary stability
Different ways of profit measurement ( capital maintenance)?
Financial capital maintenance:
- constant purchasing power
- nominal monetary value
Physical capital maintenance
-physical productive capacity (or operating capability)
What is the difference between the income statement and the comprehensive income statement?
The comprehensive income statement includes all the gains and losses that affect the shareholders’ equity, also the unrealised ones
What is accounting?
Can be described as the provision of figures about the performance and the financial position of the business
According to Hedlin and Mellemvik: Broadly defined concept that includes -cost accounting -Management accounting -Financial accounting -budgeting
According to Mellemvik et al the intended function of accounting is in sharp contrast the the functions assigned to accounting in actions.
What are the functions assigned to accounting?
- delegation of responsibility
- legitimation
- power
- myths
- conflicts
But the basic objectives of accounting are accountability and decision -making. It provides information about the management of resources.
Most common sources for long term finance of a business?
Share issues
Retained earnings
Long term borrowings
Common share issue methods ?
Private placing
Public issue
Rights issue
What are the core components of the annual reports?
Financial statements
Corporate governance
Management commentary
What are the important external accounting rules?
Exchange rules
Company law
IFRS
Examples of creative accounting methods, to portray misleading picture of the financial health of the business?
- misstating revenue
- Inadequate disclosure
- Concealing bad news
- misstating assets
In what order is the standard layout of the cash flow statement?
Cash flow from operating activities
Cash flow from investment activities
Cash flow from financing activities
Net cash flow, increase and decrease of cash during the period
What does it mean to use the indirect method for deducing cash flows?
It means that the profit during the period will be linked to the net cash flow from operating activities. Information from the income statement is used a s a starting point to deduce cash flows from operating activities (p.207)
What is the Working capital?
Consists of the short term assets and liabilities of the business. Such as inventories, trade payables, trade receivables.
What does overtraining mean?
Overtrading means that the business has insufficient assets to sustain the level of sales revenue achieved. It occurs when the business is operating at a level of activity that cannot be supported by the amount of finance that has been committed.
It results in liquidity problems.
Non-discounted investment appraisal methods?
Payback and ARR ( Accounting rate of return)
Discounted investment appraisal methods?
Internal rate of return and net present value
What is the difference between Net present value and internal rate of return?
Net present value calculates the sum of all future cash flows, discounted to the value of today’s money minus the cost of the investment. I other words the difference between the cash outflow and the present value of the cash inflows.
While the IRR provides the required return for making the investment, so then the NPV will be zero,
What is a sensitivity analysis?
When you analyse how changes in different key input values for an investment will affect the outcome of the investment.
What is a relevant cost for decision making?
- It is related to future costs
- It changes with the decision
- it relates to the objective of the business
What is an opportunity cost?
The value of an opportunity foregone. The cost incurred when one course of actions prevents an opportunity to derive some benefit from another course of action.
What is the contribution when it come to cost- profit analysis and break-even analysis?
Contributing is the sales revenue minus the variable cost. It it what’s left over that can contribute to the fixed costs and profit.
What are the four key areas of decision-making for the marginal analysis?
- pricing/assessing opportunities to enter contracts
- make-or-buy decisions
- determining the most efficient use of scarce resources
- closing or continuation decisions
What is full costing?
Full costing takes into account all the costs for producing a particular product or service.
Fours areas where full
Costing is used by managers ?
- pricing any output decisions
- assessing relative efficiency
- exercising control
- assessing performance
What is a marginal analysis?
In a marginal analysis only the costs and revenues that vary with the decision are considered, the fixed costs are ignored.
Management styles when it comes to budgeting?
- budget constrained style
- profit conscious style
- non-accounting style
What are the benefits from using budgets in a business?
- helps to coordinate sections of the business
- provides a system for authorisation
- Provides a basis for control
- motivates managers to better performance
- promoted forward thinking
What does it mean to have zero based budgeting?
The budget is 0 from the beginning. Then it increases if a good case can be made as to why money should be spent on something. Encourages managers to adopt a more questioning approach.
What is incremental budgeting?
Budgeting on the basis of what happened last year.
Criticisms of budgeting?
- cannot deal with the fast changing environment
- focusing on short term financial targets.
- takes up too much management time
- based on business functions rather than business processes
Two different types of budgeting control?
Feedback control
Feedforward control
What is activity based costing?
Activity based costing aims to directly trace the costs of all supporting activities to particuLar products and services to provide a more realistic views of the overhead costs
Disadvantages to budgeting ( why wallander abandoned budgeting) ?
- takes up too much time for managers
-can’t use historical experiences to
predict the future
- it’s inflexible
- its costly
- make you blind for opportunities
- shouldn’t make assumptions based on history
-
Alternatives to budgeting?
- present the employees “a good days work”
- decentralisation
- define basic info needed, what is relevant for decisions
- give the employees detailed info and ability to influence
Major sources of internal finance?
Long term:
- retained profits
Short term:
- delay trade payables
- tighter control
- Reduced inventory levels
Major sources of external finance?
Long term:
- ordinary shares
- long term borrowings
- finance leases
- hire purchase agreements
Short term:
- banking overdrafts
- debt factoring
- invoice discounting
