ICAB PL Financial Accounting & Reporting flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Accrual basis of accounting

Recording revenue when the performance obligation is satisfied and expenses when incurred, regardless of cash timing. It produces matching of costs with the income they helped generate.

Going concern assumption

Financial statements are prepared on the basis that the entity will continue operating for the foreseeable future, at least twelve months, without intention or need to liquidate or cease trading.

Trial balance purpose

A list of all ledger balances at a date, used to verify that total debits equal total credits. It detects arithmetic and posting errors but not errors of principle or omission.

Straight-line depreciation formula

Annual charge equals cost less estimated residual value, divided by useful life in years. The same amount is charged each period while the asset is held.

Reducing balance depreciation

Each period's charge equals the opening carrying amount multiplied by a fixed percentage rate, giving higher charges early and lower charges later over the asset's life.

Lower of cost and NRV

Inventory is measured at the lower of cost and net realisable value, where NRV is estimated selling price less costs to complete and sell. Write-downs go to profit or loss.

Bank reconciliation adjusted balance

Adjusted bank statement balance equals statement balance plus deposits in transit less unpresented cheques, corrected for bank errors; it should then agree with the adjusted cash book balance.

Suspense account use

A temporary account holding the difference on a trial balance when total debits and credits disagree. It is cleared once the underlying errors are located and corrected.

Gross profit margin

Gross profit divided by revenue, expressed as a percentage. It measures profitability after cost of sales and is used to compare performance across periods or entities.

Current ratio

Current assets divided by current liabilities. It indicates short-term liquidity, showing how many times current obligations could be settled from assets expected to convert to cash.

Working capital cycle

Inventory days plus receivable days less payable days. It measures the number of days cash is tied up between paying suppliers and collecting from customers.

Bond discount amortisation

The discount is spread over the bond's life, increasing interest expense above the cash coupon. Straight-line divides total discount by the number of interest periods.

Statement of cash flows indirect method

Starts with profit before tax, adds back non-cash charges, adjusts for working capital changes, then deducts tax and interest paid to derive net cash from operating activities.

Errors of principle

A transaction recorded in the wrong class of account, such as capital expenditure charged to repairs. It keeps the trial balance balanced but misstates profit and assets.

Partnership profit sharing

In the absence of a partnership agreement, profits and losses are shared equally. Salaries, interest on capital and interest on drawings require express agreement.

Sole trader capital account

Opening capital plus capital introduced plus profit, less drawings and losses, equals closing capital. It links the statement of financial position to the period's performance.

Conceptual Framework objective

Financial reporting provides information about an entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to it.

Fundamental qualitative characteristics

Relevance and faithful representation. Relevance requires predictive value, confirmatory value or materiality; faithful representation requires completeness, neutrality and freedom from material error.

Enhancing qualitative characteristics

Comparability, verifiability, timeliness and understandability. They increase the usefulness of information that is already relevant and faithfully represented, but cannot rescue deficient information.

Elements of financial statements

Assets are present economic resources controlled from past events; liabilities are present obligations to transfer resources; equity is the residual interest; income and expenses arise from changes in those.

IFRS 15 five-step model

Identify the contract, identify performance obligations, determine the transaction price, allocate it to obligations, and recognise revenue when or as each obligation is satisfied.

Performance obligation satisfied over time

Revenue is recognised over time when the customer receives and consumes benefits as work proceeds, or the asset created has no alternative use and payment is enforceable.

IFRS 16 lease liability measurement

Initially measured at the present value of lease payments not paid, discounted using the interest rate implicit in the lease or the lessee's incremental borrowing rate.

Right-of-use asset

Recognised by a lessee at the amount of the lease liability plus initial direct costs, prepayments and estimated restoration costs, less lease incentives received.

IAS 37 provision recognition

A provision is recognised when a present obligation from a past event exists, an outflow of resources is probable, and the amount can be reliably estimated. Otherwise it is contingent.

IAS 36 recoverable amount

The higher of fair value less costs of disposal and value in use. An impairment loss arises when the carrying amount of an asset or cash-generating unit exceeds this amount.

IAS 12 deferred tax

Tax calculated on temporary differences between carrying amounts and tax bases, using enacted or substantively enacted rates, recognised as a liability or asset in the statement of financial position.

IAS 21 closing rate

The spot exchange rate at the reporting date. Monetary items are retranslated at it, with differences recognised in profit or loss for the period.

IAS 10 adjusting events

Events after the reporting period that provide evidence of conditions existing at the end of the reporting period. They require adjustment of the amounts recognised in the financial statements.

IAS 7 operating activities

The principal revenue-producing activities of the entity. Cash flows may be presented by the direct method, showing gross receipts and payments, or the indirect method.

IAS 2 inventory cost

Cost comprises purchase price, import duties, transport and conversion costs, less trade discounts. Abnormal waste and storage costs, unless necessary in production, are excluded.

IAS 1 fair presentation

Financial statements must present fairly the financial position, performance and cash flows, applying IFRS with additional disclosure when compliance alone would be misleading.