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Flashcards in FSLC Deck (35)
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1

Primary users of financial statements

Government, investors, lenders, other creditors (suppliers), employees, customers, public

2

Fundamental characteristics of financial statements

Relevance- capable of influencing decision making
Faithful representation- complete, neutral and free from error

3

Enhancing qualitative characteristics of financial statements

Comparability- between entities, and one entity between time periods
Verifiability- provides assurance regarding reliability of information
Timeliness- information available within appropriate timescale for decision making
Understandability- information understandable to those who use it

4

Underlying assumption

The entity is a going concern, ie. will continue in operational existence for the foreseeable future (12 months)

If not a going concern need to be prepared on a break up basis, ie. no non current assets or liabilities, assets measured at realisable value

5

Five elements of financial statements

Assets
Liabilities
Equity
Income
Expense

6

Define asset

A resource controlled by the entity as a result of past transaction or events, from which future economic benefits are expected to flow

7

Define liability

A present obligation as a result of past transactions or events, the settlement of which is expected to result in an outflow of economic benefits from the entity

8

Define equity

The residual interest of the business when it cases to trade (and all the assets are sold and liabilities paid)

9

Define income

The increase in economic benefits during an accounting period

10

Define expense

The decrease in economic benefits during an accounting period

11

What three points must be met for an element to be recognised in the financial statements

It meets the definition of the element (asset, liability, income, etc)
It is probable the last the benefits associated with the item will flow to or from the entity
The item can be reliably measured

12

Four possible ways of measuring the elements

Historical cost- assets at price paid to acquire them
Current cost- current purchase price for assets
Realisable value- assets carried at amount that would be obtained from their sale
Present value- assets Carrie day discounted value of future cash inflows the item will generate

13

Five fundamental principles of AAT Code of Professional Ethics

Integrity- straightforward and honest
Objectivity- should not allow bias
Professional competence and due care- ensure professional skill and knowledge is at level required
Confidentiality- only disclose clients information with clients permission or where there is a legal duty to do so
Professional behaviour- comply with relevant laws and regulations, act in a professional manner

14

Threats to objectivity

Self- interest
Advocacy (must remain independent)
Familiarity
Self- review
Intimidation

15

What is a statement of financial position

Summary of all assets and liabilities of the limited company at the accounting end period

16

What is a statement of profit or loss

Summary of income and expenses for a period, usually one year to calculate profit or loss made

17

Two types of limited company

Plc- public limited company
Raise their capital through shares, shares bought and sold through stock exchange

Ltd- private limited company
Shares sold to close family and friends

18

Difference between preparing accounts for a sole trader and a limited company

No legs requirement for a sole trader or partnerships to prepare accounts

Sole traders and partners in a partnership pay income tax on their share on the taxable profits, companies pay corporation tax as they are separate legal entities

Sole traders and partners are free to borrow from the business bank account (drawings), owners are personally liable for these debts

19

Define tangible asset

Assets which have tangible physical form, such as land, buildings and cars

20

Define intangible assets

Assets for that have no physical form, eg patents and licenses

21

Define revenue expenditure

All other expenditure with a business that is not of capital nature. This may include expenditure which maintains but does not improve non current assets

22

Define depreciation

Consumption or usage of a non current asset in the accounting period which is spread over the estimated useful life to the business

23

Formula for straight line depreciation

(Cost- residual value)/ useful life

24

Formula for finishing balance depreciation

Carrying value x %

25

What is IAS 16

Permits the revolution of PPE (not compulsory)

Must revalue all assets within class or category
Revalued assets deprecated over remaining useful economic life
Revalue at regular intervals (3 to 5 years)

26

What’s is IAS 38

Defines intangible assets as an identifiable non-current monetary asset without physical substance

27

When are intangible assets recognised

Meet definition of asset
Are identifiable (capable of being separate from other assets)
Are controlled (able to use)
Reliable measure of cost (internally generated assets not normally recognised)
Future economic benefits

28

Development costs for compulsory captilisation

SECTOR

sufficient resource to complete
Entity will complete development (commercially viable)
Complete project (intention)
Technically feasible
Overall profitable
Reliably measured

29

IAS 36

Impairment of assets

30

Define impairment

A reduction in the recoverable amount of an asset below it’s carrying amount