Explain the Purpose of Accounting

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Cash flow Statement

Summary of the actual incomings and outgoings of cash in a firm over an accounting period (month, quarter, year).

It answers the questions Where the money came from? and Where it went ? The accounting data is presented usually in three main sections: (1) Operating-activities (sales of goods or services), (2) Investing-activities (sale or purchase of an asset, for example), and (3) Financing-activities (borrowings, or sale of common stock, for example). Together, these sections show the overall (net) change in the firm's cash-flow for the period the statement is prepared. Lenders and potential investors closely examine the cash flow resulting from the operating activities. This section represents after-tax net income plus depreciation and, therefore, the ability of the firm to service its debt and pay dividends. With balance sheet and income statement (profit and loss account), cash flow statement constitutes the critical set of financial information required to manage a business.

(9 marks)

- Explain briefly the role of IFRS Foundation (International Financial Reporting Standards)

The IFRS Foundation is an independent, not-for-profit private sector organisation working in the public interest.

The principal objectives of the IFRS Foundation are:

- to develop a single set of high quality, understandable, enforceable and globally accepted International Financial Reporting Standards (IFRSs) through its standard-setting body, the International Accounting Standards Board (IASB);

- to promote the use and rigorous application of those standards;

- to take account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs); and

- to promote and facilitate adoption of IFRSs, being the standards and interpretations issued by the IASB, through the convergence of national accounting standards and IFRSs.

- The governance and oversight of the activities undertaken by the IFRS Foundation and its standard-setting body rests with its Trustees, who are also responsible for safeguarding the independence of the IASB and ensuring the financing of the organisation. The Trustees are publicly accountable to a Monitoring Board of public authorities.

- The IFRS’s are a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards, which should be rigorously applied.

- They were developed to address the rising number and size of major business fraud cases eg: Worldcom.

(1 mark per valid point up to 4 marks)

(4 marks)

- Explain what is meant by the terms objectivity and subjectivity.

Objectivity – eg: valuing non-current assets at cost. A method that arrives at a value with which everyone can agree, because it is based on factual information. Evidence exists to back up the valuation.

Subjectivity – the use of human judgment / opinion / interpretation. Can therefore be biased. Can be challenged / disputed. Eg: how to arrive at a value for goodwill.

- marks)

- Explain, with examples of how they impact on the recording of financial transactions, five overriding accounting concepts.

- Materiality – do not go into excessive detail for low value, non-important items, not of interest to stakeholders eg: box of envelopes – charge to one period even if lasts for longer

- Going concern – assumes the business will continue to trade indefinitely, ie: it is not expected to fail in the year ahead. Eg: This affects the valuation of non-current assets. Value will fall in the event of business failure as they would need to be sold off as quickly as possible.

- Consistency – once a method of recording a financial transaction has been chosen, it should remain in place to allow for year to year comparisons to be made – eg: depreciation method for a particular category of non-current asset such as vehicles.

- Prudence – caution should be exercised when dealing with uncertainty – eg: bad debts – if there is doubt over whether a customer will pay – the accounts should reflect this.

- Accruals – Revenue and expenditure should be recorded against the period in which it is earned / incurred, regardless of if it has been received / paid. Eg: if the telephone bill has not yet been received for the final quarter of a year, the amount must be estimated and included on the income statement as an expense and the statement of financial position as an accrual (current liability).

- Separate determination – when calculating the value of a group of assets or liabilities, each must be valued individually and then added together. Eg: if a business has more than one vehicle – each one should be valued separately and then added together.

- Substance over form – sometimes the legal status/form of an item can be different to its economic impact on the business (substance) – in accounting it is the real (economic) substance that must be recognized – eg: vehicles bought on hire purchase agreements shown as being owned by the business from the start rather than the end of the hire purchase agreement.

(Any 5 of the below, 1 mark for explanation, 1 mark for example)

(10 marks)

- Name and briefly explain three key International Accounting Standards.

- IAS 1 Presentation of financial statements - The objective of IAS 1 (2007) is to prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with the entity's financial statements of previous periods and with the financial statements of other entities. IAS 1 sets out the overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content.

- IAS 2 Inventories - The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognising an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.

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