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Accounting For Business > Recognition In Financial Statements > Flashcards

Recognition In Financial Statements Flashcards

1
Q

Who do rehires to follow the IASB system of reporting

A

From 2005 listed groups of companies in EU member states

Individual companies and unlisted groups have the choice of the IASB system or UK company law and UK ASB standards

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2
Q

What are the primary financial statements under the IASB system or UK company law

A 
Balance sheet(statement of financial position) at end of period
income statement (profit or loss account) for the period 
cash flow statement

IASB system- a statement of changes in equity for the period is required
UK ASB standards- a statement of recognised gains and losses is required and a note of movements on reserves

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3
Q

Formats of financial statements

A

UK company law- detailed formats required for the balance sheet and profit account
IASB system- more flexible on layout but provides lists of essential items

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4
Q

A group of companies consists of a parents and subsidiaries. All must be included
Explain

A

A subsidiary is defined by the control exercised by the parents.
Control is commonly evidenced by the parent holding more than half of the voting power in the subsidiary. Control may be evidenced in other kinds of agreements relating to shareholding’s or to the board of directors

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5
Q

A consolidated balance sheet contains

A

The total assets and liabilities of the group of companies after eliminating any amounts receivable and payable between group companies

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6
Q

A consolidated income statement (profit and loss account)

A

contains the total revenues and expenses of the group of companies, after eliminating any transactions and profit made between groups of companies

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7
Q

A consolidated cash flow statement

A

Contains the total cash flows of the group of companies, after eliminating any cash flows between group companies

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8
Q

How is goodwill arising on acquisition calculated

A

By comparing the the fair value of the payment for the subsidiary with the fair value of the net assets acquired

It represents future economic benefits arising from assets that are not capable of being individually identified and separately recognised

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9
Q

What is goodwill recognised as

A

An asset in the balance sheet and is tested annually for impairment

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10
Q

Where are corporate communications found

A

Beyond the annual report - often found most readily by visiting a company’s website

For small companies special disclosure rules apply to reduce the burden of providing information

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11
Q

Directive

A

A document issue by the European Union requiring all member states to adapt their national law to be consistent with the directive

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12
Q

Director(s)

A

Persons appointed by shareholders of a limited liability company to manage the affairs of the company

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13
Q

Non current asset / fixed asset

A

Include tangible, intangible and financial assets of a long term nature

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14
Q

Tangible non current asset

A

Have physical substance and are held for use in the production or supply of goods or services for rental to others or for administrative purposes
This is on a continuing basis in the reporting entity’s activities

  • land, buildings owned by entity
  • office equipment
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15
Q

Intangible asset

A

An identifiable non-monetary asset without physical substance

  • newspaper titles and publishing rights
  • trade marks
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16
Q

Why do users need information about the cost of an asset and the aggregate (accumulated) depreciation

A

They need this as separate components of net book value
Having this detail allows users to estimate the proportion of asset life remaining to be used
This information will be reported in the notes to the statement of financial position (balance sheet)

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17
Q

Depreciation

A

Estimated for the total life of the asset and allocated to the reporting periods involved, usually annual reporting

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18
Q

How is depreciation shown

A

No particular method of depreciation is required by law
Preparers of financial statements have to exercise choices
Companies in the UK commonly use straight line depreciation
An alternative is reducing balance depreciation
This is found more commonly in some other countries
Choice of depreciation method affects the comparability of profit

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19
Q

Calculation of depreciation required what 3 pieces of information

A

1 . Cost of the asset

  1. Estimated useful life of asset
  2. Estimated residual value of asset
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20
Q

Straight line method measuring depreciation

A

Cost - expected residual value
————————————
Expected life

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21
Q

Working capital

A

The amount which a business must provide to finance the current assets of a business, to the extent that these are not covered by current liabilities
Calculated by deducting current liabilities from current assets

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22
Q

What is commonly recognised in a balance sheet

A

Inventories (stocks), receivables (debtors), investments and cash

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23
Q

Why do users need information about the working capital of a business

A

To judge whether it is suitable to support the activities of the business
Information provided to help users included: detailed notes of current assets and current liabilities; notes of accounting policy describing the valuation of current assets; and a discussion of working capital management in the operating and financial review

24
Q

Inventories (stock)

A

Measured at the lower of cost and net realisable value

25
Q

Receivables (debtors)

A

Measured at the amount receivable on settlement less any provision for doubtful debts

26
Q

Prepayments

A

Amounts paid in advance for benefits expected
These are assets until the benefit is used up
The amount is then transferred from an asset to an expense

27
Q

Revenue

A

The gross inflow of economic benefits during a period

28
Q

Risk of understatement of liabilities

A

Will result in overstatement of the ownership interest

29
Q

Off- balance sheet finance

A

Means keeping liabilities (and related assets) off the statement of financial position (balance sheet)

30
Q

Contingent liabilities

A

Obligations of the company which fail the recognition test because there is significant uncertainty about future events that may cause benefits to flow from the company
These are in the notes to the financial statements

31
Q

Users need to know information regarding liabilities

A

About the existence of liabilities, the amount and timing of expected repayments and interest charges payable on loans

32
Q

Accruals basis

A

The effects of transactions and other events are recognised when they occur (not as cash or its equivalent it received or paid)
They are recorded in the accounting records and reported in the financial statements of the periods to which they relate

33
Q

Liabilities for unpaid expenses are often called

A

Accruals

34
Q

The matching concept

A

The idea that all expenses of the accounting period must be matched against the revenue earner in the period
If a benefit has been consumed, the effect must be recorded whether or not documentation has been received

35
Q

Corporation tax

A

Companies pay corporation tax with arrangements that vary depending on the size of the company but there will usually be a liability for unpaid corporation tax in the current liabilities section of the statement of financial position (balance sheet)

36
Q

Deferred taxation

A

Where government policy allows payment to be delayed for more than 12 months

37
Q

Principal (sum)

A

The agreed amount of a loan, on which interest will be charged during the period of the loan

38
Q

Users need information regarding liabilities

A

About the principal sum repayable and the interest payable during the lifetime of a liability.
Also the dates on whivh significant payments will be required (called the maturity profile of debt)

39
Q

Where are detailed information about non-current liabilities found

A

In the notes to the financial statements

40
Q

Provision

A

A liability of uncertain timing or amount
The smoking of a provision is reported in the liabilities section of a statement of financial position (balance sheet)

Changes in provisions are reported in the income statement (profit and loss account)

41
Q

Deferred income

A

Arises where a business receives a government grant or receives cash for goods or services before these are provided
The cash received is reported as an increase in cash and an increase in a liability to represent the obligation to satisfy the conditions or the grant or provide the goods or services
When the conditions are satisfied the liability is reduced and the ownership interest is increased by recording the revenue

42
Q

Statement of comprehensive income

A

Provides information on all gains and losses causing a change in ownership interest during a period, other than contributions and withdrawals made by the owner

43
Q

Statement of total recognised gains and losses

A

A financial statement reporting changes in equity under the UK ASB system

44
Q

Nominal value

A

The named value each share has when the company is formed

It does not change unless the shareholders agree to split shares into smaller units

45
Q

Market value

A

The value of shares when they are sold on a stock market

The market value of frequently traded shares changes daily with the forces of supply and demand

46
Q

Share premium

A

The difference between the nominal value and the market value
When the company issues further shares at market price the share premium is recorded separately from the nominal value

47
Q

Unrealised

A

Gains and losses representing changes in value of assets and liabilities that are not realised through sale or use

48
Q

Revaluation reserve

A

The claim which owners have on the assets of the business because the balance sheet records a market value for an asset that is greater than its historical cost

49
Q

What happens when non-current assets are revalued

A

The unrealised increase in value is added to the revaluation reserve

50
Q

Dividend

A

Amount paid to a shareholder usually in the form of cash as a reward for investment in the company
Amount of dividend paid is proportionate to the number of shares held

51
Q

What happens to accounting equation when dividends are paid

A

This reduces the ownership interest and is reported in the statement of comprehensive income
The effect on accounting equation is reported when dividends are paid
Dividends proposed to be paid in future are described in the directors report

52
Q

Capitalisation issue

A

Issue of shares to existing shareholders in proportion to shares already held
Raises no new finance but changed the mix of share capital and reserves

53
Q

Offer for sale

A

A company makes a general offer of its shares to the public

Increases ownership interest

54
Q

Rights issue

A

A company gives its existing shareholders the right to buy more shares in proportion to those already held

Increases the ownership interest

55
Q

When a company issues more shares after incorporation it may be through:

A
  • capitalisation issue
  • an offer for sale
  • a rights issue

Accounting For Business (6 decks)

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