fundamentals of financial accounting

Fundamentals of Financial Accounting Certificate level | Subject BA3 CIMA official revision cards FUNDAMENTALS OF FINANCIAL ACCOUNTING British library cataloguing-in-publication data A catalogue record for this book is available from the British Library Published by:Kaplan Publishing UK Unit The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ ISBN 978-1-78740-183-9 © Kaplan Financial Limited, 2018 Printed and bound in Great Britain The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties Please consult your appropriate professional adviser as necessary Kaplan Publishing Limited, all other Kaplan group companies, the International Accounting Standards Board, and the IFRS Foundation expressly disclaim all liability to 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entries for specific transactions •• Prepare manufacturing accounts •• Prepare financial statements for a single entity •• Interpretation of financial statements This document references IFRS® Standards and IAS® Standards, which are authored by the International Accounting Standards Board (the Board), and published in the 2016 IFRS Standards Red Book overview fundamentals of financial accounting RevisionCards FUNDAMENTALS OF FINANCIAL ACCOUNTING Accounting Principles, concepts and regulations – 10% Interpretation of financial statements Recording Accounting Transactions – 50% Fundamentals of financial accounting Analysis of Financial Statements – 10% Non-current assets Preparation of Accounts for Single Entities – 30% Incomplete records and nonprofit making organisations 10 Adjustments to the trial balance Preparing financial statements accounting principles, concepts and regulations fundamentals of financial accounting RevisionCards FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Legislation Regulatory framework Accounting Standards User groups Accounting records Accounting principles, concepts and regulations 12 Underlying assumptions Principles and Concepts Financial Accounting vs Management Accounting Accounting codes Integrated report Elements The Accounting Equation FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Assets Liabilities Income Expenses Equity User groups Codes Financial Accounting vs Management Accounting Accruals Going concern 13 Underlying assumptions Qualitative characteristics Elements Principles and Concepts Policies and estimates Historic cost convention The Accounting Equation Accounting records Integrated Report FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Going concern Accruals Policies and estimates Underlying assumptions Fundamental Enhancing 14 Qualitative characteristics Historic cost convention FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations The Conceptual Framework for Financial Reporting splits qualitative characteristics into two categories: (i) Fundamental qualitative characteristics • Relevance; • Faithful representation (ii) Enhancing qualitative characteristics • Comparability; • Verifiability; • Timeliness; • Understandability 15 FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Underlying assumptions Accruals Income and expenditure should be matched to the period in which it relates rather than when cash is received or paid 16 Going concern concept A business will continue for the foreseeable future FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Accounting policies Accounting policies are the principles bases, conventions, rules and practices applied by an entity which specify how the effects of transactions and other events are reflected in the financial statements 17 Accounting estimates When preparing financial statements, inherent uncertainties result in estimates having to be made and subsequently, these estimates may need to be revised A common accounting estimate is the estimated useful life of an asset FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations The elements of financial statements Assets – An asset is a resource controlled by the enterprise as a result of a past event and from which economic benefits are expected to flow to the enterprise Liability – A liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources from the enterprise Equity – Equity is the residual interest in the assets of the enterprise after deducting all its liabilities Also referred to as capital Income – Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants Expenses – Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence’s of liabilities that result in decreases in equity, other than those relating to distributions to equity participants 18 FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Recognition of the elements of financial statements Measurement of the elements of financial statements In order to recognise items in the statement of financial position or statement of profit or loss, the following criteria should be satisfied: Measurement is the process of determining the monetary amounts at which the elements of financial statements are to be recognised and carried in the statement of financial position and statement of profit or loss •• It meets the definition of an element of financial statements •• It is probable that any future economic benefit associated with the item will flow to or from the enterprise •• The item has a cost or value that can be measured with reliability 19 There are a number of different ways of measuring the elements including: Historical cost Current cost Realisable (settlement) value Present value FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Historic cost convention Framework for Integrated Reporting The historic cost convention is an accounting technique that values an asset for Statement of Financial Position purposes at the price paid for the asset at the time of its acquisition i.e its historical cost This applies to both non-current assets, such as buildings or vehicles, or current assets such as inventory One of the weaknesses of historical cost reporting is that it reports transactions and events that have already occurred Whilst this information is useful, users of financial statements are often more interested in what may happen in the future By their nature, historical costs are out of date and might not reflect the current value of the asset to the organisation 20 The Integrated Reporting Framework establishes ‘guiding principles’ and ‘content elements’ that govern the overall content of an integrated report This will help organisations to report their value creation in ways that are understandable and useful to the users FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Who uses financial statements? User groups: •• •• •• •• •• •• •• •• •• 21 xisting and potential shareholders E Existing and potential lenders Employees Analysts Customers Suppliers Government General public Management FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations What is the difference between financial and management accounting? Financial accounting is generally: •• External rather than internal information •• P roduced on an annual basis, although large companies will produce half-yearly and sometimes quarterly information •• Subject to precise layouts and legislation •• Summarised to produce useful information to users Management accounting is generally: •• Processing of information to facilitate planning, control and decision making •• Internal rather than external information 22 FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Separate entity concept – For accounting purposes the business is treated as a separate entity from the owner(s) of it Thus the accounting information reflects the activities of the business only The accounting equation states: Assets = Capital + Liabilities This fundamental statement forms the basis for the preparation of accounting records and financial statements 23 FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations The need for accounting records Accounting records are used to record transactions entered into by a business This information can then be used to meet a range of needs such as preparation of management/financial accounts, legal obligations or purely just to help management more easily locate information Types of accounting records: •• Sales – Quotation, sales order, goods dispatched note, sales invoice, etc •• Purchases – Quotation, purchase order, goods received note, purchase invoice, etc •• Payroll – Payslips, PAYE records, NI records, etc 24 FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Accounting Standards Regulatory Framework Legislation 25 FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Regulatory Framework There is a need for regulation to ensure that the financial statements can be relied upon by users Regulation promotes consistency and so helps users when interpreting statements Elements of regulation are: •• Local law •• Local accounting standards •• International accounting standards •• Conceptual frameworks •• Requirements of international bodies 26 FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Exam questions  Which of the following are aims of bookkeeping? (A) maintain ledger accounts for every transaction (B) produce a trial balance (C) provide financial information to users of such information (D) maintain the books of prime entry The main aim of financial accounting is to: (A) calculate the profit (B) provide management with budgets (C) present the financial results of the organisation by means of recognised financial statements (D) record cash inflow and cash outflow 27 Which ONE of the following statements is TRUE with regard to the distinction between financial statements and management accounts? (A) Financial statements are primarily for external users and management accounts are primarily for internal users (B) Financial statements are more accurate than management accounts (C) Financial statements are produced annually and management accounts are produced monthly (D) Financial statements are audited by an external auditor and but management accounts are not audited FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Exam questions Match the following users with their information requirements Investors A P  rofit levels and tax liability and statistics Lenders B Firm’s ability to pay wages, cash resources, future prospects, pay pensions Employees C Data re carbon emissions Environmental D Firm’s ability to pay lobbyists interest lobbyists and repay loans, the value of secured assets Government E Performance, departments profitability, departments dividends 28 5 Which of the following is NOT an enhancing qualitative characteristic? (A) Comparability (B) Timeliness (C) Relevance (D) Understandability FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Solutions to exam questions A, B, D C A IE, 2D, 3B, 4C, 5A C 29 ... Red Book overview fundamentals of financial accounting RevisionCards FUNDAMENTALS OF FINANCIAL ACCOUNTING Accounting Principles, concepts and regulations – 10% Interpretation of financial statements... participants 18 FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Recognition of the elements of financial statements Measurement of the elements of financial statements... etc 24 FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting principles, concepts and regulations Accounting Standards Regulatory Framework Legislation 25 FUNDAMENTALS OF FINANCIAL ACCOUNTING – Accounting