Preparation of company accounts

Question 1

What is a statement of comprehensive income?

Answer 1

– A SoCI (IS + Statement of other comprehensive

income)

Question 2

For Preparation of company accounts what 3 statements do we mainly look at?

Answer 2

– A SoCI (IS + Statement of other comprehensive income)
– A SoFP
– A statement of changes in equity (SoCE)

Question 3

For revision (IAS 1) what are the 5( there are 6 but we dont need to know) statements that are included as a part of financial statements?

Answer 3

1) a statement of financial position at the end of the period;
2) a statement of profit or loss (income statement) and other comprehensive income for the period;
3) a statement of changes in equity for the period;
4) a statement of cash flows for the period;
5) notes, comprising a summary of significant accounting policies and other explanatory notes;

Question 4

What is deferred income?

Answer 4

Income that i have been paid for but not. been earned yet ( cannot be recognised yet)

Question 5

What are some C and NC assets that go in SOFP?

Answer 5

Question 6

What are some current and Non current liabilities that go into IAS(1) ?
Also Equity/ capital & Reserves?

Answer 6

Question 7

How does the statement of comprehensive income look like( IS + OCI)?

Answer 7

Question 8

What are finance costs ?

Answer 8

is the cost, interest, and other charges involved in the borrowing of money to build or purchase assets.

Question 9

What is other comprehensive income and why do we have it ?

Answer 9

items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs.
We have it do to volatility e.g. lets say a asset increases in value but you don’t sale, this can continue to happen, so its put in other comprehensive income because firms want smooth income over time.

Question 10

What is the definition of comprehensive income, whats the difference between this and net income?

Answer 10

Comprehensive income (CI) for a period = all the changes in equity during the period except those resulting from investments or distrbutions by owners. ( net income is not all) 
(Profit/loss + OCI = CI for the period)

Question 11

What does realised mean and what does unrealised mean?

Answer 11

Realised mean = when sold

Unrealised = haven’t sold but revenue generated.

Question 12

What is the IAS for PPE and what is the IAS for investment + property?

Answer 12

IAS 16 PPE. ( how to account for PPE)

IAS 40 INVESTMENT + PROPERTY.

Question 13

If unrealised gains/losses become realised what happens?

Answer 13

They can reclassified in the income statement

Question 14

So where are the two places revaluation of PPE ( IAS 16) go?

Answer 14

Recognised in OCI

As in equity section of balance sheet ( revaluation reserve)

Question 15

What is IAS 40 Investment + Property and where is unrealised gains/losses recognised 2 places?

Answer 15

IAS 40 Investment Property applies to the accounting for property (land and/or buildings) held to earn rentals or for capital appreciation (or both).
Unrealised gains are recognised in the IS. ( SOPL).
It is also what of the RE of that year.

Question 16

What does the OCI include?

Answer 16

GAINS AND LOSSES THAT CANNOT BE CLASSIFIED TO PROFIT/LOSS ( IS) such as :
1) Changes in revaluation surplus where the revaluation method is
used under IAS 16 Property, Plant and Equipment and IAS 38
Intangible Assets
2) Remeasurements of a net defined benefit liability or asset
recognised in accordance with IAS 19 Employee
Benefits (2011)
Gains and losses that could be reclassified to profit/loss (IS)
3) Exchange differences from translating functional currencies into
presentation currency in accordance with IAS 21 The Effects of
Changes in Foreign Exchange Rates

Question 17

Explain why Changes in revaluation surplus where the revaluation method is
used under IAS 16 Property, Plant and Equipment and IAS 38
Intangible Assets cannot be reclassified?

Answer 17

Lets say we have an asset £100, then the value goes up to £120 revalued, so when we record that we record 120 in sofp and 20 in revaluation reserve and OCI of 20. Next year i want to sell this asset, i sell at £130, How much gain can i recognise, when i dispose these assets? £10, not £30, if i didn’t do revaluation then it would be £30, we cannot reclassify the revalution reserve of £30 into our OCI. So in SOFP RE goes up by 30 but in SOCI profit goes up by £10.

Question 18

Lets look at M&S statement of comprehensive income, what can we see?

Answer 18

We just see 2 splits, of items that cannot be reclassified and items that can be reclassified.

Question 19

does comprehensive income increase information usefulness, and therefore
enable more informed decision-making? ( FOR AND AGAINST)

Answer 19

Useful : smooth income over time ( separates itself from volatility)
Useful: By adding this statement to the financial statement package, investors have a more detailed view of revenue and expense items that will be realized in the future. This extra information can provide some clues as to the financial results that a business will report at a later date, though only a portion of it.

Not useful : Net income can tell a different story from OCI, so loss can be scewed by e.g. a reasumenent of pension liability, but in the previous year, it was put up.
Not useful: Though this statement has some predictive value, it makes no indication of the timing for when revenue and expense items will be realized in the future.

Question 20

What is another disadvantage of other comprehensive income?

Answer 20

this statement introduces complexity to the financial reporting package that can be annoying for the accounting department producing it, and likely to only be understood by a few external stakeholders

Question 21

What is the statement of changes in equity?

Answer 21

Shows how each component of equity has changed during an accounting period. Reconciles opening and closing equity balances. ( start from last year then till end date this year)

Question 22

What are the components of Statement of changes in equity?

Answer 22

Components of equity: broadly “capital and
reserves”, may include:
– New shares issued
– Dividends declared and paid out
– Revaluation reserves
– Other changes involving the equity section of the SoFP

Question 23

What are components of equtiy?

Answer 23

1) Capital transactions with owners ( includes dividends, new share issues, new bonuses and any buyback of shares)
2) Prior Period adjustments ( any changes in RE bought forward
3) Transfers from Revaluation reserve ( when a revalued asset is disposed of any revaluation surplus may be transferred to RE
4) Comprehensive income ( any item of OCI needs to be shown here)

Question 24

Why do firms buy back shares?

Answer 24

1) buying back shares means that their is less supply and more demand hence price goes up
2) incentivise investors to sell shares after buyback, as prices higher in the market due to the buyback of shares from company.

Question 25

For groups, how do they show whats attributable to them in Statement of changes in equity?

Answer 25

They show separately the amounts attributable to owners of the parent and to non controlling interest.

Question 26

What is the outline of Statement of changes of equity?

Answer 26

Opening balance 
Profit or loss for the year
New shares issued 
Dividends ( Preferene and ordinary) 
OCI
Ending balance
 ( ON THE TOP YOU HAVE COMPONENTS OF EQUITY)

Question 27

Using HK LTD last week what is the Statement of Changes in equity template?

Answer 27

Question 28

Fill this in?

Answer 28

Question 29

An entity must normally present a classified statement of financial position, separating current and non-current assets and liabilities, unless presentation based on liquidity provides information that is reliable.
Select one:
True
False

Answer 29

True

Question 30

Shareholders’ equity is divided into
Select one:

a.
ordinary shares and retained earnings.

b.
authorised preference and ordinary shares, and retained earnings.

c.
ordinary shares and preference shares.

d.
paid-in-capital and retained earnings.

Answer 30

d. paid-in-capital and retained earnings.

Question 31

The shareholder’s equity section of the statement of financial position is more comprehensive than the statement of changes in equity.
Select one:
True
False

Answer 31

False
The shareholder’s equity section of the statement of financial position is one of the components in the statement of changes in equity.

Question 32

A statement of changes in equity would not include which type of transaction?
Select one:

a.
Cash dividends declared by the board of directors

b.
Treasury shares reacquired by the company

c.
Foreign exchange gain

d.
Cumulative translation adjustment

Answer 32

c

Question 33

On 24 May 2019, Weiss Ltd’s accountant prepared a cheque for June’s rent payment. Weiss Ltd mails the cheque on 28 May to the landlord. The landlord receives the cheque on 31 May and cashes the cheque on 3 June. When should Weiss Ltd record the rent expense associated with this transaction?
Select one:

a.
30 June 2019

b.
28 May 2019

c.
3 June 2019

d.
24 May 2019

Answer 33

At the end of the month when the expenses incurred

The correct answer is: 30 June 2019

Question 34

On 10 August 2019, Blake Co. purchases £15,000 of machinery by issuing a 30-day 8% note payable. The amount of accrued interest on 31 August 2019 is

Answer 34

5,000 x 0.08 x 21/365 = 69

Question 35

What are the limitations of financial statements? (5 limitations)

Answer 35

1) Financial vs non-financial information disclosures?
2) Financial information focuses on investing decision.
– SoCI, SoFP, SoCE, SoCF, notes and comparative
information (‘a set of financial statements’) focus on the
owners’ interests
3 ) Doesn’t account for inflation, when inflation is high or low, this can be misleading, as SOFP based on historic cost.
4) Comparability of a reader is an issue with 2 companies use different accounting policies, hence their is extra time and effort for the reader to now look at discloures.
5) financial statements are prone to fraudulent practices - e.g. thomas cook, and enron.