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MN20501- Intermediate Accounting > Regulatory Framework/Role of professional judgement > Flashcards

Regulatory Framework/Role of professional judgement Flashcards

1
Q

What is the income statement?

A

Entity’s ability to earn a profit

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2
Q

What is the balance sheet?

A

About the financial position of an entity at a given time

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3
Q

What is the equation of the income statement to calculate profit/loss?

A

Income - expenses = profit/loss

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4
Q

What is profit also known as?

A

Earnings

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5
Q

What does the balance sheet show?(3)

A

Assets
Liabilities
Equity

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6
Q

How are the assets funded?

A

Using equity and liabilities

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7
Q

What is equity?
What is it made up of and how do these effect equity?

A

The owner’s stake within the company.
Made up of:
- Capital from owner/share capital (increase equity)
- Drawings/dividends (decrease equity)
- Retained earnings/reserves (increases equity)

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8
Q

What does equity equal in terms or assets and liabilities?

A

E = A - L

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9
Q

What is profit measured on ad what does this mean?

A

Measured on the accrual basis.

Income and expenses are recognised as they occur, not when the cash is received or paid.

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10
Q

What is net cash position?

A

Cash position = Cash receipts - Cash payments

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11
Q

What do you exclude when calculating net cash payments?

A

Accruals

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12
Q

What is cash?

A

Cash is a resource of the business and is seen as an asset

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13
Q

What are the advantages of measuring profit in an accrual basis rather than cash basis?(1)

A
  • Recognising revenue and expenses when they are earned or incurred is more accurate
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14
Q

What are the disadvantages of measuring profit on an accrual basis rather than a cash basis?(2)

A
  • The accrual process is more complex
  • More judgement involved when determining the timing of things
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15
Q

What sort of company might prefer measuring profit through cash?

A

Small companies

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16
Q

What is a conceptual framework?

A

A set of ideas and principles that can be used to establish specific guidelines and/or guide specific decisions

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17
Q

What is the name of the conceptual framework in Financial Reporting?

A

IASB = International Accounting Standards Board

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18
Q

What are accounting standards?

What is the difference between this and the conceptual framework?

A

Specific principles and/or rules on particular areas.

Conceptual framework are broad principles and sets boundaries.

19
Q

What are the benefits of having a conceptual framework? (2)

A

Provides some protection from political interference in accounting standard setup.

Guides financial statement preparers in accounting for difficult issues not yet covered by existing accounting standards.

20
Q

Who is the regulator for accountants, auditors and actuaries?

A

The Financial Reporting Council (FRC)

21
Q

What does GAAP stand for?
Summarise what it means?

A

Generally Accepted Accounting Principles

The frameworks of different regions and nations

22
Q

Since 2005, what has been mandatory for companies listed in the EU?

A

To prepare their accounts using International Financial Reporting Standards (IFRS)

23
Q

What standards do the US use?

What is different about this?

A

GAAP

Very different to IFRS, unlike the UK GAAP

24
Q

What was the IFR formally known as?

A

International Accounting Standards (IAS)

25
Q

What are the pros of international standards?

A
  • Improve comparability across companies
  • One common business language
  • Opens up more investment and trade opportunities- firms raise funds across the border
26
Q

What are the cons of international standards?

A
  • Costly to convert from local GAAP to IRFS
  • Reliance on IFRS expertise from developed nations at the expense of local accounting talent
  • May not be well suited to country/culture specific transactions
27
Q

What is IFRS based on?

A

The broad principles outlined in the Conceptual Framework- not based on rules, but principles

28
Q

What do principles rather than rules allow for?

A

Professional judgement

29
Q

What is the Net realisable value (NRV)?

A

The estimated selling price in the ordinary course of the business less the estimated costs of completion and the estimated costs necessary

30
Q

What is an example in accounting when professional judgment is necessary?

Why is it important that this is done professionally?

A

Inventories

Effects the year-end profit and assets

31
Q

What can create a distortion of economic reality of the entity?

A

The judgments and choices made in the accounts can serve the
interest of the preparers rather than the users

32
Q

What is an example of an area of professional judgement within accounting?

A

Provisions- represent liabilities of uncertain timing or amount

33
Q

According to IAS 37, when should a provision be recognised ?

A
  • There’s a present obligation as a result of past events
  • it is probable that a transfer of economic benefits will be required
  • a reliable estimate can be made of the amount of the obligation
34
Q

If a provision does not follow meet the recognition criteria, what happens?

A

Obligations are disclosed as contingent liabilities off the balance sheet

  • Not part of the company’s financial position
35
Q

How is professional judgement used when determining provisions?

A
  • How probable an obligation is?
  • Estimating the amount of the obligation
  • Whether and how much to recognise as provision on balance sheet
36
Q

What is the impact of provisions on the financial statements?

A

To create/increase a provision:
- Dr relevant expense (e.g bad and doubtful debt)
- Cr provision liability

37
Q

What is another example of where professional judgement is required?

What is this an example of?

A

Accounting for research and development expenditure

An intangible asset

38
Q

Under IAS 38, what is an intangible asset? More specifically, what is said about accounting for research and devolvement expenditure?

A

Non-monetary assets which are without physical substance and identifiable.

Expenditure on research which
may or may not lead to a
marketable product or service
should be expensed in the
Income Statement in the period
in which it was incurred.

39
Q

Development expenditure for
which a viable profitable
market is envisaged may be…

A

Capitalised - recognised as an asset on the balance sheet

40
Q

When an intangible asset is recognised, what happens?

A

The recognised intangible has to be amortised on a systematic basis over its estimated useful life

41
Q

Where is professional judgment involved within accounting for research and development expenditure?

A
  • Judgment in determining the research vs development phase of a project
  • Judgment involved in determining the method of amortisation and
    estimating the useful life of the intangible
42
Q

How does an intangible asset effect financial statements?

A

The ability to capitalise on development expenditure arising from a given R&D project:
* Increases the company’s financial position in the development phase
* Protects the profits in the development phase and defers recognition of the expenditure into the future

43
Q

What are 4 other examples of professional judgement?

A
  • Bringing forward or deferring the recognition of revenue and/or expenses
  • Depreciation of Property Plant and - Equipment: method, estimated useful life
  • Inventory valuation: whether to write down to NRV depends on judgment on condition and saleability
  • Impairment of non-current assets
44
Q

Where can you see what judgements have been made?

A

The annual report

MN20501- Intermediate Accounting (6 decks)

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