Understanding and interpretation of published financial reports Flashcards
What is the 6 steps in the accounting process?
journalise transactions post to ledger prepare trial balance end period adjustments prepare an adjusted trial balance prepare financial statements
For every journal transaction, what must be equal
debit
credit
in what way does the journal record events
chronological
What does the trial balance prove?
equality of debits and credits
What are the financial statements
profit and loss
balance sheet
statement of changes of equity
cash flow statement
What does the profit and loss statement show
the result of activities for the period
what does the balance sheet show?
financial position of the business as at the end of the period
What does the statement of changes in equity show
movement of equity items during the period
what does the cash flow show
cash inflows
cash outflows
Who are financial reports given to? For what?
interested parties
reporting
interested parties can come from
internal
external
internal interested parties include the
management
external interested parties include
investors
government
What are the uses of published financial reports?
aid potential shareholders to decide whether to invest in company
help creditors to decide whether to lend money to the company
Financial reports are presented in what way?
comparative
amounts for 2 consecutive periods
Reported information may be rounded off because of what principle
materiality
What is consolidation
combination of financial statements for 2 or more legal entities
What is CFS?
consolidated financial statement of a group presented as a single entity
a holding company is known as a
parent company
when is a company a subsidiary of a holding company?
when the company controls more than 50% of voting power
Who are affected by consolidated group accounts?
current and prospective shareholders
long term creditors of holding company
management
How are the respective people affected by consolidated group accounts?
profitability is affected by profitability of all companies in the group
creditors have indiret claim on subsidiaries
evaluated on management based on all resources under its control
the voting power is relative to the
issue ordinary share capital owned
when a company does not own 100% of issued share capital of a company, they do not own 100% of the subsidiary’s
net assets
The remaining net asset belongs to
outside shareholders
Non-controlling interest is the remaining
percentage
Annual Reports include
Chairman's Statement Corporate Governance directors' report statement by directors Independent auditors report balance sheet profit and loss account statement of changes in equity cash flow statement Notes to the financial statement
What does the notes to the financial statement include
significant accounting policies
What comments does the chairman statement include
overall trading conditions in period current economic climate general outlook Performance by each major activity Significant interests strategies and plans for the future
corporate government is the implementation and execution of
processes
practices
of proper stewardship
what is proper stewardship?
entity properly utlise time, talent, resources in best interest of absent owners
What does the directors report include
names of directors and interest in shares/debentures issue of shares and debentures amount of dividend recommended, paid acquisition and disposal of subsidiaries financial results principal activities of the company important events after the period (post balance sheet event) transaction that is unusual or material other voluntary information
The companies act requires that financial statement must present a
true and fair view
What does a true and fair view mean
accounts are not
materially misstated or ommited
A true and fair view means that the financial statements abide by
adoption of legal requirements, acceptable accounting standards
appropriate classification of items
consistent application of GAAP
What is GAAP
generally accepted accounting principles
the management is known as the
board of directors
What are the roles of the board of directors
responsible for preparation and presentation of financial statement
ensure proper accounting, other records maintained by the company
report to the shareholder at AGM (final accounts, directors’ report)
At each AGM, every public company has to appoint an
auditor
What is the role of an auditor?
review documents and financial data in a company
highlight errors and discrepancies in company accounts
will form an opinion if it presents a true and fair view, shown in auditor’s report
Auditors are not responsible to prevent
fraud or error
Auditors must exercise reasonable care in case fraud is uncovered so that they are not accused of being
negligent
Auditors need to ensure that any anomalies are explained by
independent evidence
