The Context & Purpose Of Financil Reporting

Question 1

What is financial reporting?

Answer 1

Is a way of recording, analysing and summarising financial data.
3 steps:
1. Transactions are recorded in books of prime entry.
2. The totals of these books of prime entry are posted to the ledger accounts.
3. Transactions are summarised in the financial statements.

Question 2

Sole traders, Partnerships & Limited liability companies

Answer 2

1. People who work for themselves.
   Has unlimited liability (liable for the debts even with private possessions).
2. Two or more people decide to run a business together. Have unlimited liability although there may be circumstances when one or more partners have limited liability.
3. Limited liability companies are incorporated to take advantage of limited liability for their owners (shareholder).
   Apply the separate entity concept: business is regarded as being separate from the owner.

Question 3

Difference between sole trader, partnership and limited company

Answer 3

Sole trader & partnership are not separate entities from their owners.
A partnership ceases and a new one starts whenever a partner joins or leaves the partnership.
A limited liability company has a separate legal identity from its shareholders. It continues to exist regardless of the identity of its owners.

Question 4

Advantages of limited company

Answer 4

Limited liability
More capital can be raised as not limit on number of shareholders
Control of company can not be lost to outsiders - shares only sold if all shareholders agree
The business will continue even if one of the owners dies shares being transferred to another owner - separate legal identity.

Question 5

Disadvantages of limited company

Answer 5

Profits have to be shared out amongst a potentially large number of people
Detailed legal procedures must be followed to set up the business- consuming time and money
Financial statement have to comply with legal and accounting requirements
Financial information can be inspected by any member of the public once filed with the Registrar, including competitors

Question 6

Advantages of Sole trader

Answer 6

Personal satisfaction
Secrecy
Personal control
Enjoyment of all profits
Absence of legal formalities when establishing business
Financial advantages in terms of low taxes longer period to pay taxes and lower accountancy fees

Question 7

Disadvantages of sole trader

Answer 7

Limited sources of finance
Restricted growth
Full personal responsibility for the decisions and due to unlimited liability the debts of the business

Question 8

Advantages of partnership

Answer 8

There are no legal formalities to complete when setting up the business
Each partner can specialize
Partners can share the workload
Financial advantages in terms of low taxes, longer period to pay taxes and lower accountancy fees

Question 9

Disadvantage of partnership

Answer 9

Partners are jointly and severely liable for the acts and omissions of the other partners
Profits have to be shared amongst more owners
Partners may disagree
The size of a partnership is limited to a max of 20 partners, however there are exceptions to this general rule
Any decision made by one partner on behalf of the company is legally binding on all other partners (cannot be legally avoided or stopped)
Partnerships are unincorporated, resulting in unlimited liability for the partners, making them personally liable for the debts of the firm.

Question 10

Financial accounting / Management accounting

Answer 10

FA is mainly a method of reporting the results and financial position of a business. Provides historical information.
MA need to plan future. Require detailed info as they are responsible to plan and control the resources of the business

Question 11

Statement of Financial Position

Answer 11

It is a list of all the assets owed and the liabilities owed by a business as at a particular date.
It is a snapshot of the financial position of the business at a particular moment

Question 12

Statement of Profit or loss

Answer 12

It is a record of revenue generated and expenditure incurred over a given period.
Shows whether the business has had more revenue than expenditure (profit) or vice-versa (loss)

Question 13

Assets

Answer 13

Resources controlled by the entity as a result of past events and from which future economics benefits are expected to flow to entity.
Non-current assets: held and used in operations for a long time. ei: Building and land
Current assets: held for only a short time, within 12 months.

Question 14

Liabilities

Answer 14

A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
Current liabilities: settled within 12 months after the end of reporting period.
Non-current liabilities: liabilities may take some years to repay. ei: Loans

Question 15

Capital/Equity

Answer 15

Capital is amount invested in a business by the owner. This amount the business owes to the owner. In a sole trader:
CAPITAL = ASSETS - LIABILITIES
CAPITAL = NET ASSETS

For Limited liability companies capital is usually takes the form of shares. It is known as Equity: the residual interest in the assets of the entity after deducting all its liabilities

Question 16

Revenue

Answer 16

Income for a period. Gross inflows of economics benefits (cash, receivables other assets) arising from the ordinary operating activities of an enterprise (sales of goods, sales of services, interest, royalties and dividends)

Question 17

Expenses

Answer 17

Expenses arise in the course of the ordinary activities of the enterprise. ei: cost of sales, wages, depreciation

Question 18

Accounting standards we developed for 2 reasons

Answer 18

To reduce subjectivity

To achieve comparability between different organisations

Question 19

IFRSF Foundation independent organization

Answer 19

IASB- International Accounting Standards Board
IFRS AC - Advisory Council & IFRS IC - Interpretations Committee
IFRSF is governed by a board of 22 trustees
Review annually the strategy if the IFRSF and the IASB and its effectiveness but not determination of the IASB agenda
Raise funds to support IFRSF

Question 20

IASB - International Accounting Standards Board

Answer 20

Is an independent, privately funded accounting standard-setter based in London
IASB is committed to developing a single set of hight quality, understandable and enforceable global accounting standards.
Cooperates with national accounting standars-setter to achieve convergence in accounting standards around the world.

Question 21

Due process: involves interested individuals and organisations from around the world. 6 stages

Answer 21

1 IAASB reviews auditing developments and take suggestions
2 Planning the project
3 Developing and publishing the discussion paper for public comment
4 Draft standard produced and commented
5 Project task force considers comment and amendments made if appropriate
6 Standard finalised and approved by meeting of IAASB (min 12 members)

Question 22

IFRS Advisory Council

Answer 22

It gives advice to the IASB on a range of issues:
1. Input on the IASB agenda
2. Input on the IASB project timetable
3. Advice on project
Also support the IASB in the promotion and adoption of IFRS throughout the world

Question 23

IFRS Interpretations Committee

Answer 23

Report to IASB,
Reviews the current IFRS and the IASB Framework, accounting issues (new identified financial reporting issues or unsatisfactory or conflicting interpretations)

Question 24

Corporate governance

Answer 24

The system by which an organisation is directed and controlled, at it’s most senior levels in order to achieve its objectives and meet the necessary standards of accountability and probity.

Question 25

Board of Directors: 7 duties

Answer 25

1 Act within their powers
2 Promote the success of the company
3 Exercise independent judgement
4 Exercise reasonable skill care and diligence
5 Avoid conflicts of interest
6 Not accept benefits from third parties
7 Declare an interest in an a proposed transaction or arrangement

Question 26

Board of Directors: 6 considerations

Answer 26

1 The consequences of decisions in the long term
2 The interest of their employees
3 The impact of the company on the local community and the environment
5 The desirability of maintaining high standards of business conduct and good reputation
6 The need to act fairly between all members of the company

Question 27

Directors Responsibility for the Financial Statement

Answer 27

Select suitable accounting policies and then apply them consistently
Make judgments and estimates that are reasonable and prudent
State whether they have been prepared in accordance with IFRS

Question 28

Which of the following statements are TRUE about limited liability companies?
1 the company exposure to debt and liability is limited
2 Financial statements must be produced
3 a company continues to exist regardless of the identity of its owner

Answer 28

2 and 3

Question 29

Which TWO of the following differences between sole trader and liability companies?

Answer 29

A sole traders financial statement are private; a company financial statement are sent to shareholders and may be publicly filed

A sole trader is fully and personally liable for any losses that the business might make

Question 30

If a company erroneously excludes goods bought on credit from its closing inventory and also fails to record the purchase of those goods on credit in its accounting records, the effect would be to understate;
A. Cost of sales
B. Gross profit
C. Current assets
D. Working capital

Answer 30

C. Current assets

Question 31

Which of the following bodies is NOT involved in the Regulatory Framework of setting, monitoring and advising of International Accounting Standards?

1. International Accounting Standard Board
2. The International Financial Regulations Conventions Council
3. IFRS Advisory Council
4. The IFRS Foundation
5. International financial reporting interpretations committee

Answer 31

2. The International Financial Regulations Conventions Council