5012 exam revison

The order in which assets are listed on a balance sheet based on how quickly they can be converted to cash. The most liquid assets (easily converted to cash) are listed first, followed by less liquid assets.

Combining the financial statements of a parent company and its subsidiaries to create a single set of financial statements.

These are problems that can occur when combining the financial statements of a parent and subsidiary, such as differences in accounting policies or unrecorded transactions.

Internal auditors assess the effectiveness of an organization's internal controls and processes. They evaluate the governance, risk management, and compliance frameworks.

External auditors review a company's financial statements to ensure they are accurate, fair, and comply with accounting standards. They provide an independent opinion on the financial statements.

Failing to address potential issues during consolidation can lead to inaccurate and misleading financial statements.

A qualified audit opinion indicates that the financial statements are not entirely free from material misstatements. This means there is a problem with the information provided.

Information about a company's environmental impact and sustainability practices included in their financial reports.

IAS 1 dictates the required components that must be included in a set of financial statements. These include the statement of financial position (balance sheet), statement of profit or loss (income statement), statement of changes in equity, and statement of cash flows.

Modifications needed by a company to start providing environmental and sustainability data in their financial reports.

Accounting standards focused on guiding principles rather than prescriptive rules. Allows greater flexibility in applying standards to specific situations but may lead to inconsistencies.

Unincorporated organizations generally follow International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS) for their financial reporting.

Financial statements that provide users with valuable and relevant information for making informed decisions.

A set of principles and best practices aimed at improving corporate governance in the UK.

A committee of independent directors responsible for overseeing the financial reporting process and audit function.

The practice of providing clear, accurate, and timely financial information to users.

A set of rules and principles governing how financial information is recorded and presented.

A liquidity ratio that measures a company's ability to pay its short-term obligations using its current assets. It is calculated by dividing current assets by current liabilities.

A more stringent liquidity ratio than the Current Ratio that excludes inventory from current assets. It measures a company's ability to pay its short-term obligations using its most liquid assets.

The direct costs associated with producing the goods or services a company sells. It includes the cost of materials, labor, and manufacturing overhead.

A measure of how long it takes a company to sell its inventory. It is calculated by dividing the average inventory by the cost of goods sold and multiplying by 365 days.

A measure of how long it takes a company to collect its receivables from customers. It is calculated by dividing the average receivables by the revenue and multiplying by 365 days.

A measure of how long a company takes to pay its suppliers. It is calculated by dividing the average payables by the purchase cost and multiplying by 365 days.

The process of evaluating a company's financial performance and position using its financial statements. It involves calculating ratios and analyzing trends over time.

The method of calculating and interpreting financial ratios to assess a company's financial performance and health.

Financial Reporting Standards (FRS) and Generally Accepted Accounting Principles (GAAP) are sets of accounting rules and standards that companies must follow in their financial reporting.

Public limited companies must comply with a specific set of regulations, including International Accounting Standards (IAS), International Financial Reporting Standards (IFRS), and the Companies Act.

The assumption that a business will continue to operate in the foreseeable future and that it will not be liquidated or cease operations.

US GAAP follows a rules-based approach to accounting, meaning it provides specific, detailed rules for transactions.

Using legal but unethical accounting practices to manipulate financial statements and present a more favorable picture of the company's performance.

A positive opinion given by an auditor that the company's financial statements are free from material misstatement.

The accumulated profits of a company that have not been distributed to shareholders as dividends.

A method of accounting that recognizes revenues and expenses when they are earned or incurred, regardless of when cash is received or paid.

Different accounting methods allowed by standards for the same transaction or event.

International Financial Reporting Standards, used by many countries for consistent financial reporting.

International Accounting Standards, a part of the IFRS framework.

Financial Reporting Standards, specific to a particular country or region.

An entity must disclose the policy chosen and its impact on the financial statements. They also need to justify why it's appropriate for their situation.

The difference in financial statement items (e.g., profit, assets) caused by choosing one policy over another.

The reason why the chosen policy is considered the most appropriate for the entity's circumstances.

Corporate governance is the system that controls how a company is managed and directed to protect owners' interests. It ensures accountability, transparency, and ethical behavior.

An audit committee is made of independent directors who oversee the financial reporting process and the company's financial audits. They ensure accuracy and compliance with accounting standards.

GAAP (Generally Accepted Accounting Principles) are the rules and standards that companies follow when preparing financial statements. They ensure uniformity and consistency in reporting financial information.

A qualified opinion means the auditor found some issues with the financial statements, implying that not all information is accurate or complete. It's not as good as an unqualified opinion.

These disclosures are information companies include in their financial reports about their environmental impact and sustainability practices. It's about being transparent about their social responsibility.

A company that is owned and controlled by another company (the parent company). The parent company owns more than 50% of the subsidiary's shares.

A company that owns and controls at least 50% of the shares in another company (the subsidiary).

Control in this context means the ability to direct the financial and operating policies of the subsidiary company. This usually comes from owning more than 50% of the subsidiary's voting shares.

A business partnership where two or more companies collaborate to create a new entity. Both companies share the resources, risks, and profits.

A subsidiary is completely owned and controlled by a parent company, while a joint venture is a partnership where multiple companies share ownership and control. Subsidiaries are under the full direction of the parent, while joint ventures operate with shared decision-making.

A company operating in the UK with one or more subsidiaries meeting specific requirements under the Income Taxes Act 1988.

Subsidiaries in a UK group company must meet the specific criteria outlined in Section 240 of the Income Taxes Act 1988.

Section 240 of the Act outlines the conditions that subsidiaries must meet to be considered part of a group company in the UK for tax purposes.

It determines which companies are eligible for specific tax benefits associated with group companies.

A subsidiary is controlled by another company (the parent company), meaning the parent can direct the subsidiary's financial and operating policies.

This standard specifies how changes in accounting estimates should be reported. The changes are reported prospectively, meaning they affect future periods but not past periods.

Changes in accounting estimates are reflected only in future financial statements. Past periods are not adjusted.

Reporting changes in accounting principles to apply them to prior periods as if they were always in effect.

Adjustments made to financial statements to reflect new or improved information about past transactions or events.

This standard provides guidance on how to account for and report changes in accounting policies, changes in accounting estimates, and accounting errors.

The order in which current assets are listed on a balance sheet, based on how quickly they can be converted to cash. The most liquid assets are listed first, followed by less liquid assets.

The order is: Inventories, receivables, prepayments, and cash. This represents the decreasing order of liquidity, with cash being the most liquid asset.

The goods a company has available for sale. They are considered less liquid than receivables because they need to be sold first before converting to cash.

The money owed to a company by its customers for goods or services already delivered. Receivables convert to cash sooner than inventories because they are already owed to the company.

Payments made in advance for goods or services that will be consumed in the future. They convert to cash the slowest because the goods or services haven't been used yet.

The Conceptual Framework identifies the information needs of users of financial statements, including relevance, materiality, faithful representation, prudence, comparability, verifiability, timeliness, and understandability.

Accounting estimates are used when there's uncertainty about the value of something. They are approximations based on the best available information.

Changes in accounting estimates are reported prospectively, meaning they only affect future periods, not past periods. The financial statements are adjusted to reflect the new estimate going forward.

Internal auditors report to the Audit Committee, providing insights into the organization's governance and control systems.

Internal auditors do NOT review published financial statements for external stakeholders. That's the job of external auditors who provide independent opinions.

The Audit Committee is made up of independent directors who oversee the internal audit function and the company's financial reporting.

Internal auditors focus on a company's internal processes and controls, while external auditors provide an independent opinion on the company's financial statements for external stakeholders.

An external auditor reports their findings and opinions to the Audit Committee, a committee of independent directors responsible for overseeing financial reporting and auditing.

Internal auditors focus on a company's internal processes and controls, while external auditors review the company's financial statements for external stakeholders.

The Audit Committee, composed of independent directors, oversees the internal audit function and the company's financial reporting process, ensuring accuracy and compliance.

The external auditor's opinion provides assurance to investors, creditors, and other stakeholders that the financial statements are reliable and can be used for making informed decisions.

A qualified audit opinion raises concerns about the accuracy and reliability of financial statements, potentially leading to investors and creditors having less confidence in the company.

An unqualified audit report indicates that the financial statements are trustworthy and can be relied upon by investors, creditors, and other stakeholders for making informed decisions.

A qualified audit opinion indicates some issues with the financial statements, while an unqualified opinion signifies that the financial statements are free from material misstatements and are reliable.

Qualities that improve the usefulness of financial information. They include relevance, reliability, comparability, understandability, timeliness, and verifiability.

Consistency is a foundational characteristic of financial information, not an enhancing one. It emphasizes the need for similar accounting methods over time.

Financial information is timely if it is available to users before it loses its relevance for decision-making.

Financial information is verifiable if different knowledgeable observers would reach a consensus regarding its representation of the underlying economic phenomena.

Financial information is understandable if it is presented clearly and concisely, making it comprehensible to users with a reasonable understanding of business and economic activities.

These are the core statements required by IAS 1: Statement of Financial Position (balance sheet), Income Statement, Statement of Comprehensive Income, Statement of Changes in Equity, and Statement of Cash Flows.

This statement shows a company's assets, liabilities, and equity at a specific point in time, providing a snapshot of its financial health.

This statement shows a company's revenues and expenses over a period, revealing its profitability or loss.

This statement expands on the income statement, reflecting all changes in equity except those from owner contributions (investor activities) and distributions (dividends).

The IASB Conceptual Framework aims to guide the development of consistent accounting policies to ensure the reliability and comparability of financial statements.

When there's no specific IFRS standard for a particular event, the Conceptual Framework helps determine how to account for it.

The Conceptual Framework helps account for items not covered by an existing IFRS, ensuring consistency and transparency in the financial reporting process.

Although the Conceptual Framework provides a foundation, it is not an authoritative guide for a specific IFRS that conflicts with it. IFRS always takes precedence.

One of the main purposes of the Conceptual Framework is to assist preparers in developing consistent accounting policies, ensuring comparability across different companies and periods.

Accounting rules that focus on broad principles and allow more judgment in application. They encourage analyzing the economic substance of events.

Accounting rules that provide detailed, specific guidelines for transactions. They aim to standardize practices and reduce ambiguity.

A rules-based system requires more detailed regulations to cover all possible scenarios.

In which system do accountants have to use more professional judgment? A principles-based system or a rules-based system?

A principles-based system seeks to cover every eventuality by providing general principles that can be applied to a wide range of situations.

An organization that doesn't have a separate legal identity from its owners, meaning the owners are personally responsible for the organization's debts. Examples include partnerships and sole proprietorships.

International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) are global standards used by many countries to ensure consistency in financial reporting.

The Companies Act outlines the legal framework for running a company, including aspects like financial reporting requirements.

These regulations ensure that financial statements are prepared accurately, consistently, and transparently, so investors and other stakeholders can make informed decisions about the company.

Examples of specific regulations include the requirements for preparing consolidated financial statements, reporting on corporate governance, and disclosing environmental and social impacts.

It's not a specific time period, but rather a reasonable expectation that the business will continue operating based on its current circumstances and plans.

The financial statements need to be prepared on a 'liquidation basis' instead, assuming the business will be sold off and its assets disposed of.

It forms the basis of many accounting principles, as it assumes a business will continue to generate revenue and operate in the future.

Situations like significant financial losses, lawsuits, or the loss of a key customer could threaten a business' ability to continue operating.

A director's responsibility to act in good faith to promote the success of the company for the benefit of its members as a whole.

Directors' duty doesn't mean they can only make deals that bring short-term profit. They need to consider the long-term health of the company as a whole, even if that means sacrificing immediate gains.

These are individuals or groups that have an interest in a company's success, but who aren't usually considered members like shareholders (e.g., employees, customers).

A director's duty is NOT to act in good faith to promote the success of the company for the benefit of its members as a whole and connected stakeholders.

Directors must prioritize actions that benefit the members (shareholders) as a whole. The company's overall success is the ultimate aim.

The main difference is that a rules-based system gives specific detailed instructions while a principles-based system gives wide-reaching guidelines.

A rules-based system has more detailed regulations to cover every possible scenario.

Exploiting financial regulations to present figures in a misleadingly favorable way.

This describes false accounting, where made-up transactions are used to create a wrong impression of a company's performance.

This is not considered creative accounting. It involves intentional negligence in accounting, not deliberate manipulation of figures.

To make a company's financial performance appear better than it actually is to gain an advantage, often at the expense of investors and stakeholders.

It deceives investors and other stakeholders by providing false information, making them make decisions based on incorrect data.

Taking advantage of loopholes or ambiguities in accounting rules to achieve a desired outcome, often to misrepresent the company's financial position.

Financial statements that don't accurately reflect the company's true financial performance or position, often due to creative accounting.

Made-up or fake transactions that are included in financial statements to distort the company's financial performance.

Intentionally overlooking or ignoring errors in accounting records to achieve a desired financial outcome.

Organizations generally prefer to receive an unqualified audit report, which indicates that the financial statements are free from material misstatements. However, if there are some issues or uncertainties, a qualified audit report is accepted. This opinion expresses that the statements are reliable except for specific identified areas.

An audit report is qualified when the auditor finds a material misstatement or uncertainty in the financial statements. This usually involves specific issues related to accounting policies, transactions, or disclosures.

An unqualified audit report is generally considered better because it signifies the financial statements are free from material misstatements and can be relied upon for decision-making. A qualified report raises concerns and may raise questions about the company's trustworthiness.

It reflects the accumulated profits from prior years after dividends have been paid out to shareholders.

No, Retained Earnings represent the accumulated profits, not necessarily the actual cash available.

Profit for the year is the company's earnings during the current year, while Retained Earnings reflect the accumulated earnings from all previous years that have been kept within the company.

A legal process initiated by a creditor to force a company into liquidation when a debt remains unpaid for three weeks after its due date.

A person or entity who has lent money or provided goods or services to another and is owed payment.

The process of closing down a company, selling its assets, and distributing the proceeds to creditors and shareholders.

The date on which a debt is officially scheduled to be paid.

A debt that has not been paid by the due date.

This accounting standard outlines how companies should report changes in accounting policies and corrections of errors.

Retrospective reporting ensures that the financial statements reflect the correct accounting for past periods, offering a consistent view for users.

These activities are presented on a gross basis in accordance with IAS 7, meaning every individual cash flow is shown, not just a net amount.

This International Accounting Standard (IAS) provides guidance on presenting a company's cash flows, highlighting how cash is generated and used.

Net refers to the difference between inflows and outflows, while gross shows each individual inflow and outflow separately.

This standard requires companies to classify cash flows into three categories: operating, investing, and financing. Each category reveals different aspects of a company's financial activities.

Transactions between entities that are related due to control, significant influence, or a key management position. This includes family members.

IAS 24 requires disclosing related-party transactions if they involve control, significant influence, or a key management position.

Control exists when one entity has the power to direct the financial and operating policies of another entity, typically through ownership of more than 50% of voting shares.

Significant influence is the ability to participate in the financial and operating policy decisions of another entity, but without control. This can include holding a substantial stake in the entity.

Key management personnel include individuals who have significant authority and responsibility for planning, directing, and controlling an entity's activities.

Under IAS 2, inventory should be measured at the lower of cost or net realizable value (NRV). This means the inventory is valued at either its original cost or its estimated selling price minus any costs associated with the sale, whichever is lower.

NRV is the estimated selling price of inventory in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. This is used in conjunction with inventory costing to determine the lower of cost or NRV.

The lower of cost or NRV is used to ensure that inventory isn't overvalued on the balance sheet. This is because if inventory has lost value, it shouldn't be reported at a higher amount than it can be sold for.

FIFO stands for 'first-in, first-out'. It assumes that the oldest inventory items are sold first. This method helps to match the most recent costs to the most recent revenues.

IAS 2 doesn't require inventory to be measured at replacement cost. This is because using replacement cost would result in fluctuations in inventory value based on current market prices, which can make financial statements difficult to compare over time.

Financial Reporting Standard 104 (FRS 104) outlines mandatory inclusions in interim financial reports, which are provided between annual reports. These reports are condensed versions of full financial statements, covering a shorter time period.

Interim financial reports under FRS 104 contain 'condensed' statements, which means they are simplified versions of the full financial statements, focusing on essential information.

FRS 104 establishes a minimum set of information that must be included in interim financial reports, ensuring a consistent and comprehensive picture of the company's financial performance.

Interim reports can include either full or abridged financial statements, depending on the company's specific circumstances and requirements. Full statements provide complete detail, while abridged statements focus on key highlights.

The five mandatory components specified by FRS 104 are the statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows, and explanatory notes. These provide a comprehensive overview of the company's financial status.

A UK accounting standard used when IFRS, FRS 101, or FRS 105 do not apply.

A set of accounting principles and rules developed specifically for a particular region or country such as the UK. They ensure consistency and comparability in accounting.

This standard applies when you are not following IFRS, FRS 101, or FRS 105, and primarily applies in the UK.

FRS is specific to a certain region (like the UK), while IFRS is a global standard, used by many countries.

FRS 102 is specifically designed for entities that are not constituted as companies and are not profit-oriented.

FRS 102 is not specifically designed for sole traders.

FRS 102 is not specifically designed for small private limited companies.

FRS 102 is designed for entities not constituted as companies and not profit-oriented, which includes charities.

FRS 102 is designed for entities not constituted as companies and not profit-oriented, which includes non-profit organizations.

Operational expenditure refers to the expenses incurred in running a business on a day-to-day basis. These are ongoing costs needed to keep the business functioning, like salaries, rent, utilities, and supplies.

Capital expenditure represents investments in long-term assets that are expected to benefit the business for more than one year. Examples include purchasing equipment, buildings, or land.

Examples of Opex include salaries, rent, utilities, insurance, marketing expenses, and office supplies. These costs are recurring and necessary to support the regular operations of the business.

An expense is considered CapEx if it involves acquiring an asset that will be used for more than one year. This means the asset will provide benefits to the business over an extended period.

Opex refers to ongoing expenses needed to run the business day-to-day, while CapEx involves investing in assets that will provide benefits for a longer duration. Opex is recurring, while CapEx is a one-time or infrequent investment.