Section 5/6

Question 1

What is the purpose of a cash flow statement

Answer 1

A summary of all cash movements during the year

Question 2

What three standard headings are in a cash flow statement?

Answer 2

Operating activities
Investing activities
Financing activities

Question 3

when is a parent / holding company classified as one?

Answer 3

o Holds the majority of the voting rights (greater than 50% - legal control so can exercise dominant influence) in another company (a ‘subsidiary’); and/or
o Exercises dominant influence

Question 4

What is a partially owned subsidiary?

Answer 4

Where less than 100% but normally more than 50% of the share capital is owned by the holding company

Question 5

What is a wholly owned subsidiary?

Answer 5

Where all the share capital is held by the holding company or indirectly through a wholly owned subsidiary.

Question 6

What is a holding company and its subsidiary’s known as?

Answer 6

A group

Question 7

If at the end of a financial year a company is a parent company then what must be prepared?

Answer 7

Group accounts in addition to the holding company’s individual accounts

Question 8

What is the purpose of group accounts?

Answer 8

reporting the performance of a group of companies tat operate effectively under a single direction.

Question 9

What is a minority interest?

Answer 9

If a subsidiary is only partly owned and where the proportion of shareholder’s funds in the subsidiary are owned externally to the group

Question 10

How are minority interests presented in financial statements?

Answer 10

In the consolidated balance sheet within equity, but separate from the parent’s shareholder’ equity.

Minority interests in the profit or loss of the group should also be separately presented

Question 11

how does goodwill arise

Answer 11

an intangible asset that arises when one company acquires another for a value in excess of book value.

Question 12

What does goodwill represent?

Answer 12

• brands
• customer loyalty
• good employee relations
• patents

Question 13

how is goodwill presented in accounts?

Answer 13

Initially recognised as an asset and initially measured at cost

After initial recognition goodwill must be recorded at cost less accumulated impairment charges

Question 14

how often must goodwill be tested

Answer 14

impairment testing at least annually

Question 15

what happens if goodwill is negative in accounts

Answer 15

ie. if total fair value of acquired assets and liabilities is more than the purchase consideration, the excess must be mediately as profit

Question 16

talk about lifespan of goodwill

Answer 16

considered to have a finite useful life, and is amortised on a systematic basis throughout its life

if an entity is unable to make a reliable estimate of the useful life of goodwill, the life does not exceed ten years

Question 17

what intangible assets must be identified separately to goodwill

Answer 17

if following conditions are met

• the asset is identifiable
• future economic benefits are probable
• the company has the intent and ability to complete the asset

e.g. trademarks and patents

Question 18

how would a trademark and patent be recorded on the accounts?

Answer 18

after initial recognition the normal treatment is that intangible assets should be carried at cost less any amortisation and impairment losses