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"List the FOUR main users of financial statements.

1. shareholders (both actual and potential)

2. creditors (both long-term and short-term)

3. employees

4. business contacts (customers and suppliers).

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"List other users of the financial statements.

• the tax authorities (and other government agencies)

• competitors

• potential predators

• the management of the company

• the Stock Exchange

• stock analysts

• credit rating agencies.

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"List the sources of regulation of UK financial statements.

• National company law (specifically, the Companies Act in the UK)
• International financial reporting standards
• Other legislation
• Accounting principles, concepts and conventions
• Good practice by leading companies
• Stock Exchange requirements

The fact that there is a network of regulations and regulators can make the preparation of financial statements a complicated undertaking.

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"List the FIVE statutory requirements of the UK Companies Act.

• A statement of financial position (balance sheet) showing the financial position on the last day of the company’s financial year
• A statement of profit or loss (income statement) which forms part of the statement of comprehensive income for the financial year
• Detailed disclosures which are normally presented as a series of notes to the accounts
• A directors’ report
• An auditors’ report

Small companies have less onerous requirements.

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"List the main contents of a directors’ report.

• Detail about the company’s activities over the previous financial year, and likely events in the coming year, including any major events or deals that have happened since the end of the financial year

• A brief summary of the financial decisions that the directors have made, including:

  • the proposed dividend

  • the amount of shareholders’ profits retained by the company

  • charitable donations made by the company

  • details of any of the company’s own shares that have been purchased during the year

• Details of persons who were directors during the year, their shareholdings and their other interests in the company

• For listed companies, additional information required by the Stock Exchange such as a geographical analysis of turnover

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"# ((((

State the overriding requirement of financial statements.

That they provide a true and fair view of the financial position of the company.

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"Outline the arguments for a system of international financial reporting standards.

• Variations between the way companies prepare accounts can be eliminated

• Standards discussion process focuses attention on areas for debate

• Companies obliged to disclose more information than national laws require

• Some flexibility is allowed in a way that legislation often does not allow

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"Outline the arguments against a system of international financial reporting standards.

• Rules may not be appropriate to all companies in all circumstances
• Standard-setting may not be entirely objective
• Alternative treatments are allowed which negates the attempt to ensure conformity
• Some standards are too general, while others are too detailed

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"Explain the purpose of an auditors’ report.

The fundamental purpose of the audit report is to add credibility to the financial statements.

In the UK, every company (above a certain size) is required by the Companies Act to appoint auditors. Auditors are appointed by the shareholders to report to them on the financial and other reports prepared by the directors of the company.

The auditors must comment on whether, in their opinion,

• the statement of financial position and statement of profit or loss have been properly prepared in accordance with the Companies Act and relevant accounting standards
• that the information in the Directors’ Report is consistent with the financial statements
• the accounts give a true and fair view.

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"List the contents of an auditors’ report.

1. A title, identifying the person or persons to whom the report is addressed

2. An introductory paragraph identifying the financial statements audited

3. Separate sections, appropriately headed, dealing with:
       (a) respective responsibilities of directors and auditors
       (b) the basis of the auditors’ opinion
       (c) the auditors’ opinion on the financial statements

4. The manuscript or printed signature of the auditors, with their address

5. The date of the auditors’ report

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"List the FOUR possible qualifications or modification that a company’s external auditor can make to the standard audit report where they are unable to express an unqualified opinion that the accounts are true and fair.

There are four types of modified report:

1. emphasis of matter paragraphs
2. qualified opinion
3. disclaimer of opinion
4. adverse opinion.

Note: Auditors can't withdraw an opinion once issued.

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"Describe briefly the four possible qualifications of opinion or report that auditors can give.

Emphasis of matter paragraphs – If there is a significant uncertainty which has been disclosed in the accounts, the auditor should point this out for emphasis.

Qualified opinion – issued where there is a restriction on the evidence that the auditor can access, or where the auditor disagrees with the treatment of a matter. The auditor is still able to express an opinion of the financial statements ‘except for’ the disclosed problem.

Disclaimer of opinion – If the auditor is faced with such extreme uncertainty that it is impossible to express an opinion, a disclaimer of opinion may be issued.

Adverse opinion – This is issued where the auditor believes that the financial statements are so misleading that they do not give a true and fair view.

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"List ELEVEN accounting concepts.

1. money measurement
2. cost
3. matching
4. materiality
5. consistency
6. business entity
7. realisation
8. accruals
9. dual aspect
10. prudence
11. going concern

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"Briefly describe the money measurement concept.

Accounting statements restrict themselves to matters which can be measured objectively in money terms.

This simplifies accounting enormously.

It also means that a statement of financial position will rarely give even a rough approximation of the value of the business because it will exclude such items as the values of the company’s:

• customer base
• workforce
• brand names.

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"Briefly describe the cost concept.

Non-current (or fixed) assets generally appear in the statement of financial position at their original cost less depreciation to date, subject to a possible impairment writedown.

This convention ignores changes in the purchasing power of money and can produce different values for identical items but simplifies the task of maintaining bookkeeping records because the original cost of an asset is normally a straightforward matter to determine.

The cost concept is being gradually phased out in order to provide more scope for realism in the financial statements. For example, tangible non-current assets such as property, plant and equipment can be shown at their fair value rather than their historical costs.

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Briefly describe the matching concept.

The matching concept is a mixture of the realisation concept (for income) and the accruals concept (for expenses) and says that income and expenses which relate to each other should be matched together and dealt with in the same statement of profit or loss.

"Briefly describe the materiality concept.

Grouping – Financial statements can be made clearer by showing totals such as ‘administrative expenses’ instead of listing every item which make up this total.

Approximation – There is very little point in making minute adjustments which have no real effect on the picture portrayed by the financial statements. So approximations for certain costs might be reported.

What is, or is not, material however does depend to some extent on the emphasis which the company will put on the relevant figures.

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"Briefly describe the consistency concept.

The figures published by the company should be comparable from one year to the next. Accounting policies should not, therefore, be changed unless there is a very good reason for doing so.

Any changes should be highlighted and their impact explained and the numerical effect on the company’s results for the year should be shown.

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"Briefly describe the business entity concept.

The affairs of the business are kept separate from those of its owners.

This is perfectly valid in the case of a limited company, which has its own legal identity. It also applies to sole traders and partnerships where the business does not have a separate legal form.

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"Briefly describe the realisation concept.

Income is recognised as and when it is earned

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"Briefly describe the accruals concept.

Expenses are recognised as and when they are incurred, regardless of whether or not the amount due has been paid.

This avoids the random allocation of costs to periods depending on whether the bill happens to have been paid or not.

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"Briefly describe the dual aspect concept.

Every transaction or adjustment will affect two figures.

This concept forms the basis for the double-entry bookkeeping system.

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"Briefly describe the concept of prudence.

Financial statements should avoid presenting an unduly optimistic position.

The lowest reasonable figure should be stated for profit or for any of the assets. The highest reasonable figure should be stated for any liabilities.

However, it is not permitted to include deliberate margins in the financial statements by understating assets or revenues, or by overstating liabilities or expenses. Prudence should only be applied in situations where there is uncertainty.

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"Briefly describe the going concern concept.

The going concern concept means that the business will continue in operational existence for the foreseeable future.

It is usually assumed that a business will continue indefinitely in its present form.

Directors are required to report that the business is a going concern. If they are in doubt, they should not prepare accounts on a going concern basis.

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Explain the implications of the going concern concept in financial accounting?

The going concern concept assumes that a business will continue indefinitely in its current form. The concept means that using historical values of assets can be tolerated as it is unlikely they will need to be sold.

"Define relevant according to IAS 8.

In the absence of a specific rule to specify an appropriate accounting policy, the company should select policies on the basis that they yield information that is both relevant and reliable.

Information is relevant if it informs decisions taken by users of the financial statements.

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"Define reliable according to IAS 8.

Information is reliable if it has the following attributes:

• it provides a faithful representation of the entity’s financial position, financial performance and cashflows
• it reflects the economic substance of transactions, other events and conditions, and not merely their legal form
• it is neutral and free from bias
• it is prudent
• it is complete in all material respects.

There can sometimes be a conflict between relevance and reliability.

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"Define ‘sustainable development’

Sustainable development is development that meets the needs of the present, without compromising the ability of future generations to meet their own needs.

It recognises the interdependence of economic, social and environmental factors, and the importance of intergenerational timescales.

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"Define ‘sustainability reporting’.

Sustainability reporting enables organisations to measure, understand and communicate the economic, social and environmental effects of their activities.

A sustainability report also presents the organisation's goals, values and model of governance.

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"State FOUR advantages of sustainability reporting.

1. It compels organisations to recognise that actions taken now have implications for the future.

2. It helps organisations to consider and communicate their sustainability strategy.

3. It recognises the variety of stakeholders involved in an organisation and encourages businesses to consider the overall public interest in making decisions.

4. It demands greater transparency, enabling stakeholders to make informed decisions.

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"State TWO potential problems of sustainability reporting.

1. Difficulties of measurement and projection

2. Lack of credibility if companies report good news and hide bad news

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"List TWO alternatives to traditional financial reports.

1. Non-financial reports, eg sustainability reports, strategic reports

2. Integrated reports (combining financial and non-financial performance in a single holistic context)

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