ch1 - intro to accounting

what is accounting/ definition of accounting

• Recording transactions

• Summarising transactions

to provide useful financial information

why maintain accounting records

• Monitor business performance

• Prepare financial statements

• Help management make decisions

• Provide information to stakeholders

who are different stakeholders and why do they care about accountants

• Owners/Shareholders - Profitability, Dividends, Business growth

• Banks/Lenders - Ability to repay loans, Cash position, Solvency

• Suppliers - Whether they will be paid

• Employees - Job security, Profitability

• Government/HMRC - Correct tax payments

• Customers - Stability of supplier

sole trade

• Owned by one person

• Simplest form

• Owner manages business

• Unlimited liability

Owner and business are legally the same

partnership

• Two or more owners

• Shared management

• Joint and several liability

Exam tip

Partners are personally liable.

company

• Owned by shareholders

• Managed by directors

• Separate legal entity

• Usually has limited liability

Exam favourite

Who has limited liability?

✅ Shareholders

Not directors.

statement of financial position (SFP) - what does it show

financial position at a point in time- reflected in the resources it controls (assets), financial structure (debt and capital), liquidity (cash) and solvency (ability to pay its debts). Most of this information is provided in the statement of financial position.

assets

Resources owned/controlled.

Examples:

• Cash

• Inventory

• Buildings

liabilities

Amounts owed.

Examples:

• Loans

• Trade payables

equity

Owner's interest.

statement of profit or loss

Performance over a period. - The statement of profit or loss primarily provides information about an entity’s financial performance, while the statement of cash flow reflects changes in the financial position. The statement of changes in equity reflects changes in various types of equity over a period, including share capital and retained earnings.

elements of statement of financial position

• assets

• liabilities

• equity

income

Money earned.

Examples:

• Revenue

• Interest income

expenses/ cost of sales

Costs incurred.

Examples:

• Wages

• Rent

• Depreciation

statement of changes in equity - what does it show?

Shows movements in:

• Share capital

• Retained earnings

• Reserves

capital vs revenue expenditure

Capital expenditure = spent on non-current asset, improving a non-current asset

✅ New machine

✅ New computer

✅ Building extension

✅ New vehicle

professional fees, such as legal fees, incurred on the acquisition of a non-current asset are capitalised as part of the cost of that asset.

Recorded in:

✅ Statement of Financial Position

revenue expenditure = day-to-day running costs or maintenance

✅ Wages

✅ Rent

✅ Repairs

✅ Electricity

✅ Advertising

re-sale

Recorded in:

✅ Statement of Profit or Loss

five fundamental principles of ethics

• integrity - be honest

• objectivity - no bias or conflicts of interest

• professional competence and due care - maintain knowledge and perform work properly (maintaining professional knowledge and skill carrying out work diligently)

• confidentiality (don’t disclose client information)

• professional behaviour - comply with laws and avoid discrediting the profession

IOPCP

IFRS vs UK GAAP

IFRS

• Main examinable framework

• International standards

UK GAAP

• UK framework

• Different terminology/layout in some areas

what is ISSB + what do they do

International Sustainability Standards Board.

Purpose:

✅ Improve sustainability-related reporting.

Which of the following items should be treated as a capital item in the financial statements of a large shop?

1. Purchase of fixed shelving units

2. Payment of wages

3. Repairs to fixed shelving units

 1 only

 1 and 2 only

 2 and 3 only

 1, 2 and 3

Purchase of fixed units Capital. This is because the asset will be used to assist in the business process and lasts more than one year.

Payment of wages Revenue. The benefits of paying wages (the ability to sell goods and services), are consumed during the year on a time basis.

Repairs to fixed united Revenue. This is because repairs represent a restoration of a product to a previous level of performance.

Available Answers

• 1 only (1 Mark)

which of the following should be accounted for as capital expenditure?

• annual cost of painting a factory floor

• repair of a window in a building

• purchase of a vehicle for re-sale by a car retailer

• legal fees incurred on the purchase of a building

• legal fees incurred on the purchase of a building

professional fees, such as legal fees, incurred on the acquisition of a non-current asset are capitalised as part of the cost of that asset.

according to the conceptual framework for financial reporting, which of the following are enhancing qualitative characteristics?

• A) comparability, understandability, timeliness, verifiability

• B) consistency, prudence, measurability, verifiability

• C) consistency, reliability, measurability, timeliness

• D) materiality, under stability, reliability , measurability

A

• comparability

• understandability

• timeliness

• verifiability

according to the conceptual framework for financial reporting, information on which two of the following areas can help users identify the reporting identity’s financial strengths and weaknesses?

• economic resources it controls

• its financial performance in the past

• demographic structure of the local economy

• claim on an entity’s resource (entity’s liability)

• management structure

• economic resources it controls

• claim on an entity’s resource (entity’s liability)

according to the conceptual framework for financial reporting, financial information is capable of making a difference in decisions if it has what characteristics?

predictive, confirmatory

which of the following statements is correct?

• A) ICAEW code of ethics applies to its members only

• B) icaew code of ethics applies to its members and employees of member firms only

• C) icaew code of ethics applies to its members, employees of member firms and icaew students

• D) icaew code of ethics applies to its members, employees of member firms, icaew students and all other members of UK accountancy bodies

C

which two of the following were consequences of historically having no mandatory standards relating to the disclosure of sustainability-related information:

• A) lack of guidance being available for entities on the disclosure of sustainability-related information

• B) inconsistency in the nature and type of information disclosed

• C) lack of understanding of how sustainability-related information linked to financial reporting

• D) entities did not take any action relating to sustainability-related matters in their operations

B,C

some companies had issues a range of guidance to follow eg GRI standards

and not fair to say entities didn’t take action relating to sustainability-related matters

Liability for the debts of the business does not fall on:

• A sole trader

• Partners in a general partnership

•  A limited liability company

• Owners of a limited liability company

• Owners of a limited liability company

According to IAS 1, which of the following is  not  an objective of financial statements?

•  To provide information to investors in making economic decisions

• To provide information to managers in making business decisions

•  To show the results of management's stewardship of the resources entrusted to it

•  To provide information about the cash flows of the entity 

• To provide information to managers in making business decisions

Which one of the following issues in an entity's financial statements is likely to be of most interest to an entity's lender? 

• Whether the entity has paid a dividend

• Whether the entity will repay a loan when it falls due

• Whether the entity will continue to be able to employ people

• Whether the entity patronises local suppliers

• Whether the entity will repay a loan when it falls due

In applying fundamental accounting concepts, the preparers of financial information are also using:

• Legislation

•  Accounting standards

• Judgement

• Financial reporting standards

judgement

 

Which of the following would not be a suitable question to ask yourself when resolving an ethical dilemma? 

• Would my colleagues think my solution is reasonable?

• Have I thought about all the possible consequences of my solution?

• Could I defend my solution under public scrutiny?

• Does my solution benefit my career?

• Does my solution benefit my career?

Which of the following is not a source of the accounting rules embodied in UK GAAP?

•  The Companies Act 2006

• UK accounting standards

• Listing requirements of the London Stock Exchange

• Accounting requirements of an entity’s US parent company

• Accounting requirements of an entity's US parent company - UK GAAP refers to Generally Accepted Accounting Practice; the rules applied as a result of internal requirements can therefore not be part of GAAP.

Materiality is an entity-specific aspect of which qualitative characteristic?

• Understandability

• Relevance

• Faithful representation

• Comparability

• Relevance

FRS S2 focuses specifically on which type of disclosures?

• Climate-related threats and benefits

• Climate-related risks and benefits

• Climate-related threats and opportunities

• Climate-related risks and opportunities

• Climate-related risks and opportunities

business entity concept

treat the business as separate from its owner.

How to disclose sustainability-related risks and opportunities

• Governance

• Strategy

• Risk management

• Metrics and targets

Five ethical principles

• Integrity

• Objectivity

• Professional competence + due care

• Confidentiality

• Professional behaviour

IFRS S1 - general requirements for disclosure of sustainability-related financial information

• Requirement to disclose sustainability-related risks and opportunities that is decision-useful for

• disclosure across four areas of governance, strategy, risk management and metrics and targets –

IFRS S2 climate-related disclosures risks and opportunities

• Requirement to disclose climate-related risks and opportunities that is decision-useful for primary users

Enhancing characteristics

• Comparability

• Verifiability

• Timeliness

• Understandability - classifying and presenting information clearly and concisely

what should Financial information be

Relevance: capable of making a difference

• predictive

• confirmatory

• materiality

Faithfully represented:

• complete

• neutral

• free from error

materiality

• Omissions or misstatements ,  individually or collectively, influence the economic decisions of users taken on the basis of the financial statements

• Depends on size and nature or omission or misstatement ( determing factor)

• Each material class of similar items should be represented separately in financial statements

what helps users identify reporting entity's financial strengths and weaknesses

• Economics resources it controls

• The claim on an entity's resource ( entity's liabilities)

Prudence

inclusion of degree of caution when making judgements in relation to estimates

effect of No mandatory standards for sustainability related information

• Inconsistency in the nature and type of information disclosed

• Lack of understanding of how sustainability-related information linked to financial reporting

fair representation of Fair representation IAS 1

• accounting policies must be selected and applied.

• presented in a manner which provides relevant, reliable, comparable and understandable information.

• enable users to understand the impact of particular transactions, events and conditions on the entity's financial position and performance additional disclosures may be required

• Compliance with IFRS Accounting Standards must be explicit and complete.

• faithfully reflect the effects of transactions, other events and conditions

Decisions third parties make using financial information

• buying, selling or holding equity and debt instruments

• providing or settling loans and other forms of credit;

• exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources.

• predicting the entity's future cash flows and, in particular, their timing and certainty

• need for additional financing and how successful the entity is likely to be in obtaining that financing

Purpose of accounting information

• economic resources of an entity (eg, its cash and other assets), claims against the entity (eg its liabilities) and changes in those resources and claims + equity and cash flows

• how efficiently and effectively the entity's management have discharged their responsibilities relating to the management of the entity's resources./ management's stewardship of the resources entrusted to it.

• show the results of assist users in predicting the entity's future cash flows and, in particular, their timing and certainty. / useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity.