Summary FFA Financial Accounting - Study Text

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ISBN-10 0857327275 ISBN-13 9780857327277
266 Flashcards & Notes
3 Students
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This is the summary of the book "FFA Financial Accounting - Study Text". The author(s) of the book is/are Kaplan Publishing. The ISBN of the book is 9780857327277 or 0857327275. This summary is written by students who study efficient with the Study Tool of Study Smart With Chris.

Summary - FFA Financial Accounting - Study Text

  • 1 Introduction to financial reporting

  • There are two elements to accounting:
    Recording and summarising (Management accounts)
  • International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs).
  • Financial accounting produces financial statements which are public documents, and therefore do not hold information about individual products' profitability.
  • Management accounting are much more detailed and up-to-date. It is used for decision making.
  • There are several types of business entity:
    The sole trader
    Partnership
    Companies

  • With a sole trader there is no legal distinction between the owner and the business. The owner receives all the profits of the business but has unlimited liability for all the losses and debts of the business.

  • WIth a parnership the only legal difference from a sole trader is that there are at least two owners.
  • Companies are established as separate legal entities to their owners. This is done through the process of incorporation. The owners invest capital in the business in return for a shareholding that entitles them to a share of the residual assets of the business (what is left when the business winds up). They are not personally liable for the debts of the company, but will only lose their initial investment.
  • Companies are very different from sole traders and partnerships:
    • Property holding
    The property of a limited co beongs to the company. A change in the ownership of shares in the co will have no effect on the ownership of the co's property. (In a partnership a partner can take property with them if they leave).
    • Transferable shares
    Shares in a limited co can usually be transferred without the consent of the other shareholders.
    • Suing and being sued
    As a separate legal person, a limited co can sue and be sued in its own name. Judgements relating to companies do not affect the members personally.
    • Security on loans
    A co has greater scope for raising loans and may secure them with floating charges (a mortgage over the constantly fluctuating assets of a co). This is useful when a co has no non-current assets such as land.
    • Taxation
    A co is taxed separately from its shareholders. Partners and sole traders are personally liable for income tax on the profit.

  • There are however also disadvantages to incorporation:
    • When forming companies have to register and file formal constitution documents with a Registrar (costs).
    • A company has to produce annual financial statements. They also have to be audited.
    • A registered co's accounts are open to public inspection.
    • Limited co's are subject to strict rules in connection with the introduction and withdrawal of capital and profits.
    • Members of a company may not take part in its management unless they are directors, whereas all parters are entitled to share in management.
  • "The Framework" or The framework for the Preparation and Presentation of Financial Statements, as prepared by the IASB is one of the most important documents underpinning the preparation of Financial Statements.
  • What is the document prepared by the IASB concerning the prep of financial statements?
    The framework for the preparation and presentation of financial statements.
  • One of the most important reports prepared by a company are the financial statements.
  • What is the main objective of Financial reporting?
    To provide financial information about the reporting entity to users of the financial statements that is useful in making decisions.
  • Fair presentation suggests that financial statements are compliant with:
    • Relevant laws and regulations
    • The relevant financial reporting framework
    • They have applied the qualitative characteristics of the Framework as far as possible.
  • The main users of financial statements are:
    • Investors
    • Employees
    • Lenders
    • Government
    • Suppliers
    • Customers
    • The public
  • To appropriateley report the financial performance and position of a business the financial statements must summarise five key elements:
    1. Assets (A resource controlled by the entity)
    2. Liabilities (An obligation to transfer economic benefit)
    3. Equity (This represents what is left when the business is wound up, all assets are sold and all outstanding liabilities paid. It is effectively what is paid back to the owners (shareholders) when the business ceases to trade.)
    4. Income (Recognition of the inflow of economic benefit)
    5. Expenses (Recognition of the outflow of economic benefit).
  • Describe Non-Current Assets, and provide examples.
    ANy tangible or intangible asset acquired on a long term basis. Land, buildings, vehicles, plant and machinery.
  • Describe Current Assets, and provide examples.
    Assets which are expected to be realised in the business normal course of trading. Inventory, receivables, cash.
  • Describe Non-Current Liabilities and give an example.
    Long term liabilities payable for more than 12 months of the reporting date. Loans.
  • Describe Current Liabilities and give an example.
    Those liabilities payable within 12 months of the reporting date. Payables, bank overdrafts, short term loans.
  • A set of financial statements include:
    • Statement of financial position (Summarises assets, liabilities and equity balances. used to be Balance sheet)
    • Statement of comprehensive income (Summarises revenues earned and expenses incurred. used to be P&L account).
    • Statement of changes in  equity (Smmarises movement in equity balances (share capital, share premium, revaluation reserve and retained earnings).
    • statement of cash flows (Summarises cash physically paid and received).
    • Notes (Comprise accounting disclosures required to enable shareholders to make informed decisions).
  • The qualitative characteristics of financial information:
    1. Relevance
    2. Reliability
    • Faithful representation
    • Materiality (Threshold of significance to users)
    • Neutrality
    • Completeness
    • Prudence (Means exercising a degree of caution when preparing financial statements so that assets/revenues are not overstated and liabilities/expenses are not understated.
    3. Comparability (Users must be able to compare financial information.
    4.Understandability
  • There are a number of other accounting principles that underpin the preparation of financial statements:
    1. The business entity concept.
        It means that the financial accounting information presented in the statements relates only to the activities of the business and not to those of the owner.
    2. The acruals basis of accounting
         This means that transactions are recorded when revenues are eearned and when expenses are incurred. This pays no regard to the timing of the cash payment or receipt.
    3. The going concern assumption
        Financial statements are prepared on the basis that the entity will continue to trade for the foreseeable future.
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Latest added flashcards

Because Irrecoverable Debt is an Expense in which Financial Statement is it placed?
Income Statement
Define amortisation:
the reduction of the value of an asset by prorating its cost over a period of years
Name the two main types of depreciation and give a short description.
Straight line = Depreciation charge is the same each year. Useful for assets which provide equal benefit each year. e.g. machinery.
Reducing balance = A reducing amount of depr is charged each years. Useful for assets which provide more benefit in earlier years (cars/IT).
What happens if inventory is undervalued?
Assets are understated in the SFP
and
Profit is understated in the IS (as cost of sales is too high)
What happens if inventory is overvalued?
Assets are overstated in the SFP
and
Profit is overstated in the IS (as cost of sales is too low)
What is tax on purchases called? and on sales?
Input tax and output tax
What are the two accounting equations?
Assets = Equity + Liabilities (Main used for exam questions)
Assets - Liabilities = Equity
what is the definition of Corporate Governance according to the Cadbury Report 1992?
The system by which companies are directed and controlled.
This may be extended with: In the interests of shareholders and in relation to those stakeholders beyond the company boundaries.
What is the UKs national financial reporting authority regarding accounting? and what are they part of?
The Accounting Standards Board (ASB) (Part of the Financial Reporting Council (FRC).
Describe Current Liabilities and give an example.
Those liabilities payable within 12 months of the reporting date. Payables, bank overdrafts, short term loans.