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86 Cards in this Set
- Front
- Back
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The Conceptual Framework identifies two fundamental qualitative characteristics of financial statements. What are they?
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1) Relevance 2) Faithful representation |
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Define 'substance over form'
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transactions must be presented according to their economic substance rather than their legal form.
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The Conceptual Framework identifies four enhancing qualitative characteristics:
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1) Comparability 2) Understandability 3) Timeliness 4) Verifiability |
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Define 'asset'
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- resource defined by the entity - as a result of past events - from which future economic benefits are expected to flow to the entity |
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Define 'liability'
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- to transfer economic benefits - as a result of past transactions or events |
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Define 'equity interest'
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residual amount found by deducting all liabilities of an entity from all of the entity's assets |
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Define 'income'
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- an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities |
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Define 'expenses'
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- transactions that result in decreases in equity, other than those relating to distributions to equity participants |
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An asset will only be recognised if:
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- it is probable that future economic benefits will flow to the entity - it has a cost or value that can be measured reliably |
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A liability will only be recognised if:
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- the outflow of economic benefits can be measured reliably |
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Income is recognised in the P&L when:
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- it can be measure reliably |
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Expenses are recognised in the P&L when:
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- it can be measured reliably |
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name 3 inherent limitations in financial statements
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- aggregation of information - backward looking - excludes non-financial information |
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A complete set of financial statements comprises:
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-SOCI -SOCE -SOCF - Accounting policies and explanatory notes |
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how are assets treated in the financial statements if the entity is no longer deemed to be a going concern?
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- all assets and liabilities classified as current |
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define total comprehensive income
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the realised profit or loss for the period plus other comprehensive income (revaluation surplus) |
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What are the initial journals to perform a revaluation?
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Dr Cost (to MV) Dr Accumulated Depreciation (remove all todate) Cr Revaluation Surplus (difference between CA and FV |
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What are the four column headings in the SOCE?
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- Share Premium - Revaluation Surplus - Retained Earnings |
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Do ordinary dividends proposed or declared in the period create liability?
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NO as the directors may still revoke the dividend before it is paid |
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When are ordinary dividends accounted for?
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Once they have been approved by the shareholders at a general meeting |
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What is the journal for ordinary dividends? |
Cr Cash |
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On what basis are preference dividends accounted for?
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Accruals |
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What is the journal for a redeemable preference dividend?
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Cr Dividend Payable/Cash |
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What is the journal for an irredeemable preference share?
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Cr Dividend Payable/Cash |
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How is a bank overdraft treated in the statement of cash flows?
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a bank overdraft is repayable on demand so is treated as a negative cash balance |
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Items of PPE are recognised in the SFP when:
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- the cost of the item can be measured reliably |
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Are duties and non-refundable taxes included in the initial cost of PPE?
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Yes |
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Are the costs to dismantle and remove the asset and restore site at the end of the useful life allowed to be capitalised?
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If there is an obligation to do so then yes, but this must be capitalised at the present value of the initial estimate. |
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How is incidental income treated?
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treated as other income in the P&L NOT deducted from cost of the asset |
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When does the capitalisation of an asset under construction begin?
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- expenditure on asset being incurred - borrowing costs being incurred - activities to prepare asset for use/sale in progress |
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When does the capitalisation of an asset under construction end?
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when substantially all activities necessary to prepare the asset for sale/use are complete
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what is the journal to offset the increased depreciation charges post-revaluation?
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Dr Revaluation Surplus Cr Retained Earnings |
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what is the journal for a downward revaluation where the asset has not previously been revalued upwards?
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Cr CA of asset |
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what is the journal for a downward revaluation where the asset has previously been revalued upwards?
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Dr P&L (balancing figure if needed) Cr CA of asset |
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PPE Impairment has occurred if:
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CA > RA |
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PPE Recoverable amount is the greater of: |
- value in use = PV of future cash flows |
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what is the double entry for impairment of an asset valued using cost model?
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Dr P&L Cr CA of asset |
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what is the double entry for impairment of an asset valued using the revaluation model?
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Dr P&L (balancing figure if needed) Cr CA of asset |
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how do you measure an asset classified as held for sale?
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lower of CA and FV less costs to sell |
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define intangible asset
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an intangible asset is an identifiable non-monetary asset without physical substance |
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how are research costs accounted for?
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written off to the P&L as incurred |
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how are development costs accounted for?
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all development costs on the project must be capitalised
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how do you amortise an asset with a finite life?
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amortise over useful life starting when asset is available for use. |
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How do you amortise an asset with an indefinite life?
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do not amortise - instead test for impairment annually, review UEL at the end of each period and begin amortising if the asset now has a finite life |
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what are the 8 journals to account for a finance lease?
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DR NCA CR Finance Lease Liability Dr Depreciation expense Cr Accumulated Depreciation Dr Finance Lease Liability Cr Cash Dr Finance Charge Cr Finance Lease Liability |
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What is the order of headings in the lease liability table in arrears? |
B/f, Interest, Payment, c/f |
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What is the order of headings in the lease liability table in advance?
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B/f, Payment, Balance, Interest, c/f |
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how is the total finance charge calculated in relation to leases?
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Amount borrowed (lower of FV/PVMLP) X = total finance charge |
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how is a SOD fraction calculated?
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n = number of interest-bearing periods |
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How do you treat a profit on disposal during a sale & leaseback?
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defer the profit and amortise over the lease term
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As part of a sale and leaseback transaction, what happens if SALE PROCEEDS < FAIR VALUE?
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recognise loss immediately if future lease rentals are at market rate |
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As part of a sale and leaseback transaction, what happens if SALE PROCEEDS = FAIR VALUE?
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recognise profit immediately
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As part of a sale and leaseback transaction, what happens if SALE PROCEEDS > FAIR VALUE?
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take profit based on FV immediately defer excess profit over period for which asset is used. |
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define 'equity instrument'
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any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities |
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Redeemable preference shares are classified as
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liabilities |
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Irredeemable preference shares are classified as
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equity unless there is a mandatory obligation to pay a dividend, in which case = liability |
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how are dividends of redeemable preference shares accounted for?
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finance costs in the P&L |
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how are dividends of irredeemable preference shares accounted for?
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taken through RE in SOCE (unless mandatory dividend, then treated as finance cost) |
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at what value is a financial asset measured at?
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cash paid to acquire plus transaction costs
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at what value is a financial liability measured at?
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net proceeds received less transaction costs
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how is the liability element of a compound instrument calculated?
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calculate PV of future cash flows using interest rate of equivalent bond with no conversion option as discount rate |
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what is the journal for the issue of treasury shares?
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Cr Cash |
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define provision
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when should a provision be recognised?
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it is probable that an outflow of economic benefits will be required to settle the obligation a reliable estimate can be made of the amount of the obligation |
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what is the journal to account for the creation of a provision?
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Cr Provision |
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what is the journal to derecognise a provision if it no longer meets the recognition criteria?
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Cr P&L |
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what is the journal to increase a provision?
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Cr Provision |
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what is the journal to decrease a provision? |
Cr Expense |
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what is the journal when a provision is used?
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Dr Provision Cr Cash |
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what happens to the excess if the amount paid is less than the provision?
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recognised in the P&L |
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what is an onerous contract?
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a contract where the unavoidable costs of meeting the obligations under the contract exceed the benefits expected to be received under it |
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how do you calculate the unavoidable costs of a potentially onerous contract?
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lower of cost of fulfilling the contract and any compensation or penalties arising from failure to fulfil it |
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how do you treat the cost of an onerous contract?
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a provision should be recognised in the P&L and reduced yearly by payments made |
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in what circumstances can you create a provision for restructuring costs?
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only if a detailed, formal and approved plan exists and the plan has been announced to those affected |
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if an uncertain liability is described as 'possible', how should it be treated?
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disclosed as a contingent liability |
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if an uncertain liability is described as 'probable', how should it be treated?
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provided for |
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if an uncertain asset is described as 'probable', how should it be treated?
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disclosed as a contingent asset |
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if an uncertain asset is described as 'virtually certain' how should it be treated?
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recognised |
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What is the double entry to recognise a virtually certain asset?
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Cr P&L (other income) |
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how is revenue from services measured?
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measured according to the stage of completion |
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if it is not possible to reliably measure the stage of completion of services rendered, how is revenue measured?
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when does the original seller recognise the revenue from a consignment sale/sale and return?
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original seller only recognises the sale when the buyer sells them on
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when is the revenue from a magazine subscription recognised?
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revenue is recognised on a straight-line basis over the period in which the publications are despatched
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when is the revenue from servicing fees included in the price of the product recognised?
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revenue in relation to the servicing should be deferred and recognised over the servicing period
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when is the revenue from tuition fees recognised?
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as and when the tuition is provide
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