ACCA FA

CAB-GL = Cash at Bank general ledger

Define financial reporting and its objective

• main objective is to provide financial information about the reporting entity to users of the FSs that is useful in making decisions about providing economic resources to the entity, as well as other financial decisions

Identify and define types of business entity

1. Sole trader

2. Partnership

3. Limited liability companies

Identify users of the financial statements and their information needs

1. Investors, interested in:

   1. profit and returns

   2. security of their investment

   3. future profits estimated from past performance, as shown in SOP&L

2. Customers

   1. need to know if entity can continue to supply them into the future

   2. particularly true if customer is dependent on entity for specialist supplies

3. Suppliers

   1. need to know if they will be paid

   2. new suppliers may require reassurance about financial health of entity before agreeing to supply G&S

4. Lenders

   1. need to know if they will be repaid, depends on solvency of entity (SOFP)

   2. long-term loans backed by collateral assets - the value of these in the SOFP

5. Government

   1. how economy is performing in order to plan policies

   2. tax authorities use SOFP as basis for assessing amount of tax payable by an entity

6. Competitors

7. The public

   1. assess effect of entity on economy, local environment & community

   2. 
      

8. Employees

   1. trade union representatives need to know if employer can offer secure employment / pay rises

   2. interest in salaries and benefits enjoyed by senior management

   3. divisional profitability if entity is threatened with closure

9. Management

Identify the purpose of the main financial statements

To report the financial performance and position of a business

Define the elements of the financial statements

1. Asset

2. Liability

3. Equity

4. Income

5. Expense

Define and explain accounting concepts and characteristics

Sole trader

• simplest form of business entity

• business is owned and operated by 1 individual, although it may employ any no. of people

• no legal distinction between owner and business

• owner receives all profits + unlimited liability for all the losses and debts of business

• capital account which represents financial interest of owner in the business

Partnership

• Owners collectively receive all profits and have unlimited liability for the losses and debts of the business

• at least 2+ owners

• joint owners are jointly and severally liable for the losses the business makes

• capital structure = each partner will have financial interest in the business and this will be divided between capital account and current account

• capital account = a fixed amount that will only charge upon a partner joining or leaving the business

• current account = includes the share of profit or loss that each partner is entitled to, less any personal drawings by that partner

Limited liability companies

• established as separate legal entity to their owners, achieved through the legal process of incorporation

• owners of company (shareholders) invest capital in company in return for a shareholding that entitles them to a share of the residual assets of the company

• shareholders aren’t personally liable for the debts of the company and whilst they may lose investment if company becomes insolvent they won’t have to pay outstanding debts

• company is also not affected by insolvency of individual shareholders

• LLM are managed by a board of directors who are elected by the shareholders

• capital structure = more formalised, shareholders can’t make withdrawals from business they instead receive a ROI in the company (i.e a dividend) which is paid from accumulated profits

How are ‘sole traders‘ viewed differently in the eyes of the law and accounting conventions?

Accounting conventions recognise the business as a separate entity from its owner.

Legally, the business and personal affairs of a sole trader are not distinguished in any way

Advantages of operating as a sole trader

• flexibility and autonomy

• can manage the business as they please and can introduce or withdraw capital at any time

What is a partnership often referred to as?

A firm

Advantages of partnership

• mainly stem from there being many owners

• more resources, including capital, specialist knowledge, skills and ideas

• admin expenses may be lower than for sole traders due to economies of scale

• partners can substitute or act for each other to spread individual responsibilities and workloads

Compare companies to sole traders / partnerships (ST/P)

1. Property holding

   1. LLM - property belong to company, change in ownership of shares has no effect on ownership of company property

   2. P - firm’s property belongs directly to partners who are entitles to their share of each asset if they leave the partnership

2. Transferable shares

   1. LLM - shares can be transferred without consent of other shareholders

   2. P - new partner can’t be introduced into a firm without consent of all existing partners

3. Suing and being sued

   1. LLM - can sue and be sued in its own name, judgements relating to companies don’t affect members personally

4. Security for loans

   1. LLM - greater scope for raising loans and may secure them with floating charges

   2. Law doesn’t permit ST/P to secure loans with a floating charge

5. Taxation

   1. LLM - legally separate so it’s taxed separately from shareholders

   2. ST/P - personally liable for income tax on their share of the profits made by their business

6. Disadvantages of incorporation

   1. Cons of being a LLM arise mainly from restrictions imposed by relevant company law:

• When being formed, companies have to register and file formal constitution documents with the company registry, referred to in the UK as Registrar of Companies. Registration fees and legal costs must be paid. It is likely that many countries have a similar registration process to establish a company.

• In addition, it is normally a requirement for a company to produce annual financial statements that must be submitted to the company registry. It is also usually a requirement for those financial statements to be audited (in some countries this is only a requirement for large and medium sized companies). The costs associated with this can be high. Partnerships and sole traders are not subject to this requirement unless it is required by a regulatory authority, such as a professional body.

• A registered company's accounts and certain other documents are open to public inspection. The accounts of sole traders and partnerships are not open to public inspection.

• Limited companies 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 also directors, whereas all partners are entitled to share in management of the business, unless the partnership agreement provides otherwise.

What is a ‘floating charge‘?

A mortgage over the constantly fluctuating assets of a company providing security for the lender.

It doesn’t prevent the company using the assets in the ordinary course of business.

Such a charge is useful when a company doesn’t have non-current assets (eg) land, buildings) but does have significant and valuable inventories

What is the purpose of the Conceptual Framework?

• To assist the IASB in the development of FRS

• To assist preparers of FSs to develop accounting policies when reporting standards don’t provide sufficient guidance

• Useful reference document to assist in understanding, interpreting and applying accounting standards

Explain ‘prudence‘

The exercise of caution when making judgements under conditions of uncertainty.

Helps to ensure that assets and income aren’t overstated in the FSs, and that liabilities and expenses aren’t understates

What are the qualitative characteristics that make info provided in the FSs useful to others?

• Fundamental qualitative characteristics

  • Relevance

  • Faithful representation

• Enhancing qualitative characteristics

  • Comparability

  • Verifiability

  • Timeliness

  • Understandability

‘Relevance‘ as a fundamental qualitative characteristic of FSs

Information is relevant if:

• it has the ability to influence the economic decisions of users

• it is provided in time to influence those decisions

• materiality has a direct impact on the relevance of information

• info that is relevant has predictive, or confirmatory value

• predictive value enables users to evaluate or assess past, present or future events

• confirmatory value helps users to confirm or correct past evaluations and assessments

What is a ‘threshold quality‘?

• One that needs to be studied before considering the other qualities of that information

• a cut-off point - if any info doesn’t pass the test of the threshold quality, it’s not material and doesn’t need to be considered further

• info is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the users of FSs make

‘Faithful representation‘ as a fundamental qualitative characteristic of FSs

• if info is to represent faithfully the transactions and other events that it purports to represent, they must be accounted for and presented in accordance with their substance and economic reality and NOT merely their legal form

To be a perfectly faithful representation, financial info should possess following characteristics:

1. Completeness

   1. contain all necessary descriptions and explanations

2. Neutrality

   1. free from bias

3. Free from error

   1. doesn’t mean perfectly accurate, just that it doesn’t present any material error that leads to it being false or misleading

‘Comparability‘ as an enhancing qualitative characteristic of FSs

Users must be able to:

• compare FSs of an entity over time to identify trends in financial performance and position

• compare FSs of different entities to evaluate their relative financial performance and position

• for this: consistency and disclosure is needed

• compliance with accounting standards

‘Verifiability‘ as an enhancing qualitative characteristic of FSs

• can be direct and indirect

• direct verification - verifying an amount or other representation through direct observation (i.e counting cash)

• indirect verification - checking the inputs to a model, formula or other technique and recalculation of the outputs using the same methodology

‘Timeliness‘ as an enhancing qualitative characteristic of FSs

• having info available to decision makers in time to be capable of influencing their decisions

• generally, the older the info is, the less useful it becomes

‘Understandability‘ as an enhancing qualitative characteristic of FSs

• Depends on:

  • the way in which info is presented

  • capabilities of users

• Assumed that users:

  • have a reasonable knowledge of business and economic activities

  • are willing to study the info provided with reasonable diligence

Asset

A present economic resource controlled by the entity as a result of past events.

Liability

A present obligation of the entity to transfer an economic resource as a result of past events.

e.g) unpaid tax obligation or a bank loan is a liability

Equity

This is the ‘residual interest‘ in the assets of the entity after deducting all liabilities.

It is effectively what is returned to the owners (shareholders) when the business ceases to trade.

Income (as an element of the FS)

Consists of the increases in assets or decreases in liabilities that result in increases in equity (other than those relating to contributions from holders of equity claims)

Can be achieved through: e.g) generating revenue from sales or through the increase in the value of an asset

Expense (as an element of the FS)

Consists of the decreases in assets or increases in liabilities that result in decreases in equity (other than those relating to distributions to holders of equity claims)

Can be achieved through: e.g) Purchasing G&S from another entity or through the reduction in value of an asset

Compare current assets to non-current assets

CURRENT ASSETS

• assets expected to be realised, sold or consumed within the normal operating cycle

• or expected to be realised within 12 months after the reporting period

• or held primarily for trading

• e.g) inventory, receivables, cash

NON-CURRENT ASSETS

• any tangible or intangible asset acquired on a long-term basis to be used in providing a service to the business

• not held for resale in the normal course of trading

• not expected to be realised within 12 months after the reporting period

• e.g) land and buildings, motor vehicles, plant and machinery

Compare the current liabilities and non-current liabilities

CURRENT LIABILITIES

• expected to be settled within the normal operating cycle

• or held primarily for trading

• or is due to be settled within 12 months after the reporting period

• or there is not an unconditional right to defer settlement for at least 12 months after the reporting period

NON-CURRENT LIABILITIES

• have not been classified as current

• payment can be deferred unconditionally for more than 2 months after the reporting period

• e.g) loan

Statement of Financial Position

Summarises the assets, liabilities, and equity balances of the business at the end of a reporting period

Statement of Profit & Loss (& other comprehensive income)

Summarises the revenues earned and expenses incurred by the business throughout the reporting period

What 3 subtotals must be bold in the SOP&L? IFRS 18

1. Operating profit

2. Profit before financing and income taxes

3. Profit for the year

Statement of changes in equity

Summarises the movement in equity balances (share capital, share premium, revaluation surplus and retained earnings) from the beginning to the end of the reporting period.

It applies only to limited LLC and would not be required for a ST/P

Statement of Cash Flows

Summarises the cash paid and received throughout the reporting period.

Normally only relevant to only LLC’s.

Notes to the Financial Statements

Comprise a statement of accounting policies and any other disclosures required to enable to the shareholders and other users of the FSs to make informed judgements about the business.

Usually more detailed and extensive for a LLC’s FSs than for a ST/P

What 10 accounting principles underpin the preparation of FSs?

1. Materiality

2. Substance over form

3. Going concern

4. The business entity

5. Accrual accounting

6. Prudence

7. Consistency

8. Offsetting

9. Duality

10. Historical cost and current value

Materiality

• item regarded as material if its omission or misstatement is likely to change the perception of the users of that info

• subjective assessment made by preparers of FSs, requires them to consider the reliability of the FSs for decision-making purposes by users

• aggregation of similar items is permitted

Substance over form

• If info is presented faithfully, the economic reality must be accounted for and not just the strict legal form

Going concern

• FSs are prepared on the assumption that the entity is a going concern, and will continue to operate for the foreseeable future

• i.e it is reasonable, based on current knowledge, to assume the business will continue to operate for the next 12 months

• HOWEVER, there is no guarantee that this will always be the case as evidenced by business failures and insolvencies

The business entity

This principle means that the FA info presented int he FSs relates only to the activities of the business and not to those of the owner.

From an accounting perspective, the business is treated as being separate from its owners

Accrual accounting

• Transactions are recorded when revenues are earned and when expenses are incurred

• This pays no regard to any associated cash payment or receipt

Prudence

• Exercising caution

• i.e) assets and income shouldn’t be overstates whilst liabilities and expenses shouldn’t be understated

• helps to ensure FSs are fairly stated and can be relied upon by users

Consistency

• relies not only from one accounting period to the next, but also within an accounting period so that similar transactions are accounted for in the same way

• application of IFRS helps promote this

• Should be comparable over a no. of years

Offsetting

• netting-off transactions and balances, which results in recording or presenting only the net effect of those transactions and balances

• reduces info available to users of FSs and isn’t permitted

Duality

• recognises that every transaction has 2 effects, so must be recorded twice in accounting books

• fundamental principle for double-entry bookkeeping

Historical cost and current value

• historical cost = original monetary value of a transaction at the date that transaction was entered into

  • bears no relation to the current value

• current value may increase significantly due to cumulative effect of inflation and other economic factors or from factors like:

  • depreciation

  • wear and tear

  • changes in tech

Explain the purpose of the financial reporting regulatory system

Necessary because:

• ensure needs of users of FSs are met with at least a basic minimum of info

• ensure all info is provided in the relevant economic arena - both comparable and consistent

• increase users’ confidence in the FR process

• regulate the behaviour of companies and directors towards their investors

Explain the role of IFRS Accounting Standards

• Due to increasingly global nature of investment and business operations - move towards ‘internationalisation‘ of FReporting

• ‘harmonisation‘ was considered necessary to provide consistent and comparable info to an increasingly global audience

• IFRS-AS aren’t automatically enforceable in any country

• Developed by an international organisation that has no international authority

• To become enforceable, they must be adopted by a country’s national FR standard setter

Explain what is meant by corporate governance

• According to Cadbury Report 1992: “the system by which companies are directed and controlled“

• in the interests of shareholders and in relation to those stakeholders beyond the company boundaries

Describe the duties and responsibilities of company directors

Responsibility to:

• economy

• society at large

• public duty

• corporate social responsibility

If directors have responsibility to these groups then they must also be held accountable to them

A typical national regulatory framework structure includes…

1. National financial reporting standards

2. National law

3. Market regulations

4. Security exchange rules

What are the entities within the international regulatory system?

1. IFRS Foundation

2. IASB - International Accounting Standards Board

3. ISSB - International Sustainability Standards Board

4. IFRS Interpretations Committee

5. IFRS Advisory Council (provide advice to IFRS Foundation, IASB, IASSB)

IFRS Foundation

• supervisory body for the IASB

• responsible for governance issues and ensuring that each member body is properly funded

• consists of a monitoring board that deals with public accountability and a board of trustees that has responsibility over governance, strategy, and oversight of activities

What are the principle objectives of the IFRS Foundation?

• develop a set of high quality, understandable, enforceable and globally accepted financial reporting standards

• promote the use and rigorous application of those standards

• take account of the financial reporting needs of emerging economies and small and medium sized entities

• bring about the convergence of national and international financial reporting standards

International Accounting Standards Board (IASB)

• independent standard setting body of the foundation

• primary objective: develop a set of high-quality, understandable and enforceable global accounting standards that require transparent and comparable info in the FSs of all companies

• responsible for the development and publication of IFRS-AS and interpretations developed by the IFRIC

• many national standard setting bodies are represented on the Board and their views are taken into account so that a consensus can be reached

IFRIC - IFRS Interpretations Committee

• reviews widespread accounting issues on a timely basis and provides authoritative guidance on these issues

• meetings are open to the public and, similar to the Board, works closely with national standard setters

IFRS-AC - IFRS Advisory Council

• the formal advisory body to the Board and the Foundation

• it’s comprised of a wide range of members who are affected by the Board’s work

What are the objectives of the IFRS-AC?

• advising the Board on agenda decisions and priorities in their work

• informing the Board of the views of the council with regard to major standard-setting projects

• giving other advice to the Board or to the Trustees

What is the procedure for the development of an IFRS Accounting Standard?

1. The Board identifies a subject and appoints an advisory committee to advise on the relevant issues

2. The Board publishes an exposure draft for public comment, being a draft version of the intended standard

3. Following the consideration of comments received on the draft, the Board publishes the final text of the standard

4. At any stage the Board may issue a discussion paper to encourage comment

5. The publication of an IFRS-AS, exposure draft or IFRIC interpretation requires the votes of at least 8/15 Board members

ISSB - International Sustainability Standards Board

• objective: delivering a comprehensive global baseline of sustainability-related disclosure standards

  • this should provide relevant info to investors and other interested parties to help them make informed decisions concerning sustainability-related risks and opportunities relevant to individual companies

• to meet objectives: ISSB has commitment to publish standards that are cost-effective, decision-useful and market informed

• helps ensure they’re user-friendly and companies producing sustainability-related disclosures and relevant to users of that info

What are the 4 principal objectives of the ISSB?

1. to develop standards for a global baseline of sustainability disclosures

2. to meet the info needs of investors

3. to enable companies to provide comprehensive sustainability info to global capital markets

4. to facilitate the flow and communication of sustainability-related info and disclosures that are jurisdiction-specific and/or aimed at broader stakeholder groups

What is a ‘company‘?

A corporate body that has registered in accordance with the requirements of a relevant national company law, thus becoming a legal entity.

Ownership of the company is evidenced by the issuing of shares to the owners (i.e the shareholders)

What leads to the separation of ownership and control?

The appointment of directors to manage the business on behalf of the owners

What can be done to reduce the risk of directors acting in their own interests and not being accountable to shareholders?

An effective system of corporate governance to encourage effective and responsible management of companies, along with having annual FSs subject to 3rd party examination or audit to ensure that they’re credible

What is the purpose of an audit?

To provide an opinion to the shareholders on whether the FSs are ‘fairly stated‘ or ‘true and fair‘

An audit places a certain amount of credibility to the FSs of a company so the users can trust it more / rely on it

What is the purpose of corporate governance?

To monitor those parties within a company who control the resources and assets of the owners.

The primary objective of sound corporate governance is to contribute to improved corporate performance and accountability in creating long-term shareholder value

Summarise the primary and supporting purposes and objectives of corporate governance?

Why is there a need for corporate governance?

There needs to be a system that ensures publicly-owned companies are run in the interests of the shareholders and that provides adequate accountability of the people managing those companies

What are the 7 basic elements of sound corporate governance?

1. Effective management

2. Effective systems of internal control

3. Oversight of management by non-executive directors

4. Fair appraisal of director performance

5. Fair remuneration of directors

6. Fair financial reporting

7. Constructive relationships with shareholders

In order to be accountable to the stakeholders of the business, the directors of a company have a range of duties, such as…

• a general duty of care to act in good faith for the benefit of the company and its shareholders

• a duty of care to avoid a conflict of interest between personal interests and those of the company and its stakeholders, and to make disclosure if such conflict arises

Directors responsibilities that are more specific are normally imposed by law or regulation in many countries and typically include the following responsibilities…

• establishing and maintaining an adequate system of internal controls which prevents and detects fraud and error

• maintaining adequate accounting records that provide a basis for the preparation of the annual FSs

• preparing annual FSs that show a ‘true and fair‘ view of the financial position and performance of the company, including compliance with relevant laws, regulations and IFRS Accounting standards

• responsibility to approve the annual FSs prior to their publication, and to distribute or file the annual FSs in accordance with local law and regulations

Explain the main forms of business transactions and documentation

Understand and apply the concepts of duality, double-entry bookkeeping and the accounting equation

Identify, explain, and understand the main forms of accounting record, including: accounting records and systems, source documents

E

Explain, understand and apply ledger accounting and the use of the journal

What is the purpose of a ‘source document‘?

To confirm that the transaction did take place, where and when the transaction took place and the monetary value of the transaction

What are the 13 principal business documentation and data sources for an accounting system?

1. Quotation

2. Purchase requisition

3. Purchase order

4. Sales order

5. Despatch note (goods despatched note - GDN)

6. Sales Invoice

7. Purchase (supplier) invoice

8. Supplier statement

9. Credit note

10. Debit note

11. Remittance advice

12. Receipt

What is the contents and purpose of the quotation?

• Contents:

  • quantity and description of goods required

• Purpose:

  • to establish the price from various suppliers and cross-refer to purchase requisition

What is the contents and purpose of the purchase requisition?

• Contents:

  • Name of the requestor

  • Date of request

  • Details and reason for G&S requested

  • (may) include suggested supplier and cost

• Purpose:

  • Completed by an employee to request the purchase of G&S by the entity

  • Must be approved by a responsible person to generate a purchase order

  • If a quotation has been received, that would be included as well

What is the contents and purpose of the purchase order?

• Contents

  • Details of supplier

  • Quantity

  • Price and description of goods

  • T&Cs of delivery, payment, etc

• Purpose:

  • Sent to supplier as a request to supply based upon details from the purchase requisition

  • When goods received, this info will be checked against the supplier despatch note and invoice to ensure that the correct goods, quantity and price are as expected

What is the contents and purpose of the sales order?

• Contents

  • Quantity / description / details of goods required by a customer including price and other criteria (e.g date required)

• Purpose

  • Generated by the supplier

  • When received, will be cross-checked with the purchase order placed by the customer

  • sent to stores / warehouse department for processing

What is the contents and purpose of the GDN?

• Contents

  • Details of supplier

  • Quantity and description of goods despatched by the supplier to the customer

• Purpose

  • Issued by the supplier

  • Checked by customer against goods received and purchase order

What is the contents and purpose of the GRN?

• Contents

  • Quantity and description of goods received by the customer

  
  

• Purpose

  • Produced by the customer as proof of receipt

  • matched with despatch note and purchase order

What is the contents and purpose of the sales invoice?

• Contents

  • Name and address of supplier and customer, details of goods

• Purpose

  • Issued by the supplier of goods as a request for payment

  • Usually be in a standard format and sequentially numbered

What is the contents and purpose of the purchase (supplier) invoice?

• Contents

  • Name and address of supplier and customer

  • details of goods

• Purpose

  • Received by the customer as a request for payment from the supplier

  • customer may allocate a sequential number to each purchase invoice received to aid recording and tracing of transactions

What is the contents and purpose of the supplier statement?

• Contents

  • Details of supplier

  • includes details of date, invoice numbers and values, payments made by customer, refunds, amount owing

• Purpose

  • Issued by the supplier to the customer

  • summarises transactions recorded by the supplier in the previous month

  • customer can use this to check against other documents to ensure that the amount demanded by the supplier is correct

What is the contents and purpose of the credit note?

• Contents

  • Details of supplier

  • Contains details of goods returned

• Purpose

  • Issued by the supplier to the customer

  • checked against records of goods returned

What is the contents and purpose of the debit note?

• Contents

  • Details of the supplier containing details of goods returned

• Purpose

  • Produced by the customer

  • Cross-referenced to the credit note subsequently issued by the supplier

What is the contents and purpose of the remittance advice?

• Contents

  • Raised by the customer and contains details of payment made to supplier

• Purpose

  • Sent to supplier with, or as notification of payment

What is the contents and purpose of the receipt?

• Contents

  • Details of payment received

• Purpose

  • Issued by the supplier confirming the payment received

What is the accounting equation?

A simple expression that at any point in time, an entity’s assets = liabilities + equity/capital, where:

• equity/capital is the residual interest in the assets after all liabilities have been settled which si due to the owner(s) of the business

What does equity (a.k.a capital) represent?

The net assets of the entity (the net investment that the sole proprietor has in the business)

Summarise the process to prepare FSs?

1. Transactions occur

2. Effects recorded in ledger accounts

3. Ledger accounts balanced off

4. Trial balance

5. Year end adjustments made and ledger accounts closed off

6. Financial Statements

When an accounting transaction has occurred, it must be recorded in the accounting system using…

double-entry bookkeeping principles

Depending upon the nature of the transaction, data recorded is likely to include:

• transaction date

• nature of the transaction (e.g purchase on credit, cash sale, journal entry)

• product quantity plus description or code

• monetary value, including any sales tax element if applicable

• any trade or early settlement discount applicable

• the due date of payment on credit terms

Irrespective of the size and complexity of an entity, what 3 components does an accounting system always have?

1. Inputs

• source documents

• standing data

2. Accounting system processes

• calculations

• ledgers

• journal entries

• record keeping

3. Outputs

• trial balance

• reports