Module 4, Chapter 12 - Financial Accounting and Management Flashcards

1
Q

What is the purpose of financial reporting?

A

Financial reporting is required for an entity to keep itself accountable and inform interested parties (stakeholders) of
its financial performance. This enables stakeholders to make decisions about the business.

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2
Q

What is the main way of providing financial information to company stakeholders?

A

Financial statements or accounts. These are produced annually to a format approved by the government of the jurisdiction
the entity operates in and form a summary of both the entity’s performance over the year and its financial position
at the end of that year.

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3
Q

There are two systems of financial reporting that entities must adhere to in the UK. Name them.

A
  1. UK GAAP
  2. IFRS
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4
Q

What does IFRS stand for?

A

International Financial Reporting Standards

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5
Q

Define IFRS (International Financial Reporting Standards).

A

IFRS (International Financial Reporting Standards) is a set of internationally-agreed financial reporting and
accounting standards that any type of entity can use. UK listed groups must report using IFRS.

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6
Q

What does UK GAAP stand for?

A

Generally Accepted Accounting Practice

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7
Q

In a UK GAAP (Generally Accepted Accounting Practice) report, the level of reporting required depends upon what?

A

With UK GAAP (Generally Accepted Accounting Practice), entities are split into micro, small, medium and large
based on their turnover, net assets and number of employees. The level of reporting required varies based on which
of these the entity falls under.

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8
Q

What are the fundamental qualitative characteristics of useful financial information?

A

Relevance and faithful representation

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9
Q

What are the enhancing qualitative characteristics of useful financial information?

A
  1. Comparability
  2. Verifiability
  3. Timeliness
  4. Understandability
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10
Q

What is meant by materiality?

A

Information is said to be material if omitting, misstating or obscuring it could reasonably be expected to
influence decisions taken by users of financial statements

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11
Q

What does ‘faithful representation’ mean?

A

Faithful representation means financial reports must represent economic events and transactions in a way
that aims to be: complete; neutral and free from error.

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12
Q

What is meant by ‘comparability’?

A

Comparability refers to how well the information in a financial statement can be compared to previous periods
for the same entity or to information about another entity.

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13
Q

What is meant by ‘verifiability’?

A

Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.

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14
Q

What is meant by ‘timeliness’?

A

Timeliness means having information available to decision-makers in time to be capable of influencing their decisions.

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15
Q

How should information be displayed in order to make it understandable?

A

Classifying, characterising and presenting information clearly and concisely makes it understandable.

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16
Q

Before computers, how did companies record their financial data?

A

In ledgers and books of prime entry using the double-entry bookkeeping process. These records were filled out by hand.

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17
Q

In the modern day, how do companies record their financial data?

A

Nowadays, books of record are entered into accounting software rather than filled out by hand.

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18
Q

What is the equation for accounting?

A

Assets = Liabilities + Capital

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19
Q

Where on the accounts are the assets recorded?

A

The balance sheet.

20
Q

Complete the sentence. The relationship between assets, liabilities and capital is ….

A

The relationship between assets, liabilities and capital is always the same, and is the dual effect of accounting.

21
Q

What is the most important ledger within a company’s books?

A

The most important ledger is the nominal ledger, also known as the general ledger.

22
Q

What is the purpose of the sales ledger?

A

The sales ledger serves as a record of individual receivables (i.e. people or companies that owe the business money, also known as debtors) as a memorandum.

23
Q

What is the purpose of the purchase ledger?

A

The purchase ledger is a record of individual payables (i.e. people or companies that the business owes money to, also known
as creditors).

24
Q

Why is the nominal ledger the most important ledger in a double-entry bookkeeping system?

A

The nominal ledger contains a number of different ‘accounts’ for each type of item, regardless of whether it is an income
or expense item, and is therefore probably the most important ledger in a double-entry bookkeeping system.

25
Q

What are ‘books of prime entry’?

A

These are where the business’s main financial transactions are recorded and fed through to the accounts in the nominal
ledger.

26
Q

What records are kept within the books of prime entry? List 5.

A
  1. The sales day book
  2. The purchases day book
  3. The cash book
  4. The petty cash book
  5. The journal
27
Q

What is meant by ‘double-entry bookkeeping’?

A

Double-entry bookkeeping is based on the concept that every economic transaction has two parts – a
positive entry and a negative entry, and will therefore affect two ledger accounts. Double-entry accounting makes up the foundation of all businesses’ recorded financial transactions.

28
Q

On a balance sheet, what is meant by ‘assets’?

A

Assets are things that the business either owns or expects to receive monetary amounts from (such as cash, debtors or work in progress that will be sold once finished).

29
Q

On a balance sheet, what is meant by ‘net assets’?

A

Net assets are the amount of assets that are left after all liabilities have been accounted for (i.e. net assets = assets
– liabilities).

30
Q

On a balance sheet, what is meant by ‘capital’?

A

Capital is, broadly speaking, the money that is injected into the business or that is used to keep the business
operating.

31
Q

On a balance sheet, what is meant by ‘the closing balance sheet amount’?

A

The closing balance sheet amount (also known as the closing capital) is a reconciliation of how the capital in the
business has changed over the period – it adds any new capital injections and profit to the opening capital figure,
then subtracts total drawings or business loss to get the closing capital figure (or closing balance sheet figure).

32
Q

True or false? The net assets figure is equal to the closing balance sheet figure.

A

True! The balance sheet’s net assets figure – all assets minus all liabilities – is always equal to the closing balance sheet
(closing capital) figure and illustrates how the balance sheet is a representation of the accounting equation in action.

33
Q

What is a ‘trial balance’?

A

The trial balance is a list of all the balances on the all the accounts in the nominal ledger. The total of all debit balances
must be equal to the total of all the credit balances – if they are not, then it means a mistake has been made in the
bookkeeping entries.

34
Q

There are two ways of accounting for transactions in the books. List them.

A

Under the cash basis and under the accruals basis.

Most businesses use the accruals basis.

35
Q

What are ‘year-end adjustments’?

A

Year-end adjustments are made where necessary before the figures are used to make up the financial statements.

36
Q

Define ‘financial statements’.

A

Financial statements are a formal record of a business’s financial performance over a period of time.

37
Q

There are four basic reports that make up the financial statements. List them.

A
  1. The statement of profit or loss and other comprehensive income
  2. The statement of financial position
  3. The statement of cash flows
  4. The statement of changes in equity
38
Q

Define ‘assets’.

A

Assets are things that a business owns that either generate cash or have the potential to do so. They may be
tangible or intangible, fixed or current.

39
Q

Define ‘liabilities’.

A

Liabilities are things that a business owes. They may be either long-term or current.

40
Q

How do you work out a company’s equity?

A

The company’s total assets - its total liabilities = its equity

41
Q

There are three basic types of analysis that can be performed on financial statements. List them.

A
  1. Horizontal – where you compare values on the same row of a financial statement.
  2. Vertical – often expressing items as a percentage of turnover within the same column.
  3. Ratio analysis – which includes the return on assets and return on equity ratios.
42
Q

What can the ‘income statement’ be used to calculate?

A

Profitability ratios such as: gross profit, operating profit, net profit and profit margins.

43
Q

What can the ‘the statement of financial position’ be used to calculate?

A

Business liquidity ratios: working capital, current ratio, quick ratio and gearing.

44
Q

What is the ‘working capital cycle’ made up of? List the three ratios.

A

The working capital cycle is made up of the following three ratios: debtors’ turnover, creditors’ turnover, and inventory turnover.

45
Q

In order to be considered solvent, a business needs enough working capital to do what?

A
  1. Pay its staff
  2. Pay its debts as they fall due and benefit from any discounts offered for prompt payment by its suppliers