Meaning of GAAP 1 Flashcards
What is the purpose of accounts?
Accounts have the objective of providing information about the financial position, performance and cash flows of the company
How would you define reliability?
When it is free from material error and bias. It represents the position faithfully.
Legal ownership of an asset is necessary to be recognised in accounts?
False, the company must have control over the access to future economic benefits regardless of legal ownership.
What is the definition of a liability?
The company must have a present obligation, not necessarily legal. It can be constructive.
What is equity?
The residual interest in assets after deducting the liabilities
What is income?
Any item which increases net assets, except for those which involve transactions with owners in that capacity
What is the recognition criteria for assets?
It should have a cost or value which can be measured reliably.
And it is probable that future economic benefits will flow
What is Historical cost?
The amount of cash actually paid.
What is fair value?
The amount the asset could be exchanged for
What are the steps for choosing an appropriate accounting policy
- FRS 102 for specific guidance
- If within the scope of the Statement of Recommended Practice (SORP), then specific guidance within that
- Definitions, recognition criteria, and measurement bases for assets, liabilities, income and expenses
Bonus point for IAS
What are prior period adjustments used for?
Correcting retrospective material errors.
How are changes in accounting estimates accounted for?
They are accounted for prospectively
When is there a change in accounting policy?
Change in recognition or measurement basis and change in basis of presentation.
When can accounting policies be changed?
If the change is required by changes in accounting standard, or if it produces more relevant and reliable information.
If information was not available at the time that the accounts were approved, how would you account for a change in accounting estimates. For example, a fault was discovered following approval which required a greater warranty provision.
You would apply the change prospectively for an accounting estimate.
If there was an increase in accounting estimates, what would the double entry be?
Dr expenses in the P&L
Cr provision for liabilities in BS
What is a prior period error?
A prior period error is when information was available but not acted on or obtained. Prior Period Errors should be accounted for retrospectively
If a revenue transaction is deferred beyond normal credit terms how do we treat it?
The revenue transaction is recognised at the present value of the future receipt. It should exclude amounts collected on behalf of other parties
What is revenue?
Revenue is income arising in the course of ordinary activities of the company.
How would you recognise revenue on the sale of an item where the seller has retained managerial involvement/control?
You wouldn’t. A condition for recognising revenue is that the risks and rewards of ownership have been transferred to the buyer.
How is interest income recognised?
It is recognised using the effective interest rate
If it is uncertain that a construction contract may recover the costs, how would you recognise it?
If the recovery of construction contract costs is not probably, we recognise it as an expense immediately
What is bundling?
Grouping a series of construction contracts together to reflect their substance
If a government grant takes the form of a non-cash asset, how would you recognise it?
The fair value of the donated asset
When should revenue be recognised on the sale of goods?
When the risks and rewards of ownership have been passed and there’s no managerial control retained by the vendor.
If a company makes sales of £100,000 in one year, and it can estimate that 12% of this could be returned how do we recognise it?
We recognise the full £100,000 as revenue as the sale has taken place.
As the company can reliably estimate the expected costs of the returns to be £12,000 we would place a provision for £12,000 in the returns
What is a layaway sale?
A layaway sale is when an item is put on hold whilst the customer pays the full purchase price in instalments
How are layaway sales recognised in accounts?
In general they should only be recognised upon delivery. But, if the client has a good history of completing sales then the revenue can be recognised when there’s been a significant deposit and the goods are ready to be delivered
If the outcome of construction contract can’t be estimated reliably, what contract revenue and costs should be recognised?
You recognise revenue from rendering of services only to the extent of the recoverable costs incurred & recognise costs as an expense in the period that they are incurred. The overall effect is a no profit recognised approach.
If progress on a construction contract can be reliably estimated, and it is not expected to overrun, how would you deal with it?
We would recognise the percentage completion for the revenue, less incurred expenses on the project
What are the conditions for making reliable estimates of revenue arising from rendering of services? (there’s 4)
- Its probable any associated future economic benefit will flow to the company
- Costs incurred and, the costs to complete can be measured reliably
- Transaction has a value which can be measured reliably
- Stage of completion of the transaction at the end of the period can be measured reliably
How would you account for music concerts before they have happened? Including the double entry
You recognise the revenue when the event actually takes place. Once all the contractual obligations have been fulfilled
You would enter a deferred income creditor for the value, and then increase assets at the same value
How do we recognise income on maintenance contracts?
Revenue needs to be deferred, and released to the P&L when services are provided. It tends to be on a straight line basis.
If the costs are expected to vary largely then you would release it in line with the expected costs. Similar to that of construction contracts, you apportion the reasonable and reliable estimate.
When should non-returnable deposits be recognised?
They should be recognised when the seller has performed their obligations. Until then they should remain in the creditors column of deferred income, dr cash.
If the deposit is not refundable then recognise it as revenue when the cancellation happens, and subsequently the vendor has no obligations. Dr Deferred income Cr revenue
What is the accrual method of recognising income?
Income is recognised by being matched against the related costs of the expense the grant is intended to compensate. If you get a grant to build a jungle gym, you match the grant as income to the cost of the jungle gym
When are dividends recognised?
When the shareholder has the right to receive them.
What is the discount formula?
1/(1+R)n
R is the rate of the return as a decimal
N is the number of periods until the cash is expected to come into the business
What is the time value of money?
The amount of money received now is worth more than in the future. Time value measures the return required by the person for not having use of their money.
When should a provision be recognised?
When there’s significant uncertainty over the amount or timing of the expected liability
What is an accrual?
An accrual is a liability to pay for goods/services that have been received but not yet invoiced. Tends to be more certain
What is an executory contract?
An executory contract is one where neither party has performed any of their obligations, or have performed their obligations equally
If we recognise a provision, where does the matching debit entry go?
It will be shown as a debit expense in the PL
What’s an onerous contract?
An onerous contract is one where there’s unavoidable costs arising from the contract which are higher than economic benefits expected to be received.
What is a restructuring programme?
A restructuring programme is one planned by management which changes either the type of business undertaken or the way in which business is carried out
What is a post balance sheet event?
An event which occurs between the balance sheet date, and the date the accounts are authorised for issue to shareholders.
What is an adjusting post balance sheet event?
An event which provides additional evidence of conditions which existed at the balance sheet date.
What is a contingent asset?
A contingent asset is a possible asset. It arises from past events. It’s existence will only be confirmed by future events which are not in control of the business
