Regulation, presentation and preparation Flashcards
Managing a limited company
Executive directors vs non-executive directors (4 each)
Executive Directors
- Employees
- Salary, bonus, perks
- Day to day running of the business
- Owner/manager or elected by owners
Non-executive Directors
- Not employees
- Independent
- Relatively small remuneration
- Oversee the running of the business on behalf of the shareholders
Why is financial information required?
Shareholders require information for: (3)
Managers require information to?
Shareholders require information for:
- Stewardship (company is being managed in their best interests)
- Management performance evaluation;
- Prediction for investment decisions.
Managers require information to control the business.
How does audit fit in?
Jobs of external auditors (3)
Jobs of audit committee (2)
Jobs of internal auditors (3)
External auditors
- Independent opinion - ‘true and fair view’
- Past financial performance and current financial position
- Responsibility to shareholders
Audit committee
- Protect shareholder interests in relation to financial reporting / internal control
- Review internal control effectiveness
Internal auditors
- Independent and objective evaluation of an organisation’s internal controls
- Responsibility to management
- Employees of the organisation or outsourced from a firm
The need for regulation of financial reporting (5)
- Separation of managers and owners (ensures that managers provide accurate and honest reports)
- Accounts are publicly available
- Relied upon by many different users
- Comparability (allowing users to compare financial performance and position across different entities)
- Directors have a responsibility to provide information that gives a fair presentation of the financial position, performance and cash flows of an enterprise
Financial Reporting Standards
What is their purpose? (3)
2 examples
- Define contractual terms e.g. directors’ bonuses
- Reduce subjectivity
- Helps to avoid accounting scandals
e.g.
Patisserie Valerie - inflated cash balances and hidden debts of £10 million
Wirecard - €1.9 billion missing from its balance sheet
IASB Conceptual Framework for Financial Reporting
Not an accounting standard itself
Purpose is to assist: (5)
Not an accounting standard itself
Purpose is to assist:
- IASB
- National standard setters
- Preparers of accounts
- Auditors
- Users of accounts
Provides help when a transaction is not covered by existing standard(s)
Qualitative characteristics of financial information (6)
2 Fundamental
4 Enhancing
Fundamental:
- Relevance
- Faithful representation
Enhancing:
- Comparability
- Verifiability
- Timeliness
- Understandability
Statement of Financial Position
IAS 1 specifies items to be included such as: (5)
Disclosures / notes to the statement include: (4)
IAS 1 specifies items to be included such as:
- Property, Plant and Equipment - Inventory - Trade and Other Payables - Trade and Other Receivables - Split between Current and Non-current - Presentation and order of items is not prescribed
Disclosures / notes to the statement include:
- Accounting policies
- Greater detail of items
- Information to assist prediction of future cash flows
- Information for other stakeholders
What replaces the income statement and what section does it include?
- Replaces Income Statement / Statement of Profit and Loss
- New section ‘Other Comprehensive Income’
- Unrealised gains and losses e.g. from changes in the fair value of assets
- Other comprehensive income can be shown as extension to statement of income or as a separate statement
IAS 1 Presentation of Financial Statements (2 formats)
Format 1: costs analysed by function
e.g. cost of sales, distribution costs and administration expenses; or
Format 2: costs analysed according to nature,
e.g. raw materials, employee benefits expenses, operating expenses and depreciation.
Cost of sales
Equation?
Includes (3 +3)
Opening inventory + purchases - closing inventory (O+P-C)
- Salaries of production staff
- Substantial inventory losses
- Charges relating to production of non-current assets
- Maintenance - Depreciation - Loss on disposal
Distribution costs (6)
Includes:
- salaries etc. of marketing/distribution staff
- Sales commission
- (Distribution) vehicle running costs & carriage outwards
- Depreciation of Non-current assets (NCA) used by distribution operations
- Losses on the disposal of NCA used by distribution operations
- Advertising & selling activities
Administrative expenses (6)
Includes:
- Salaries etc. of admin staff
- Depreciation of NCA used by non-production operations
- Losses on the disposal of NCA used by non-production operations
- Amortisation of intangible assets
- Cash discounts to customers
- Irrecoverable debts
Statement of Changes in Equity (4)
Other items may include (3)
- Shows the movement in each component of equity in the year
- Effects of changes in accounting policies
- Correction of errors recognised – IAS 8
- Contributions by and distributions to equity holders
Other items may include:
- Prior period adjustments
- Share issues
- Transfers from revaluation reserve.
Disclosures / notes to the accounts (2)
Examples (3)
- Accounting policies
- Details of certain items that have been charged in arriving at operating profit
For example:
- Exceptional items
- The makeup of individual liabilities and assets
- Sensitive items such as auditors’ remuneration
- Will vary between companies depending on requirements
