Someone recently bought our

students are currently browsing our notes.


Ac102 Section A Notes

Accounting Notes > Elements of Financial Accounting (AC102) Notes

This is an extract of our Ac102 Section A Notes document, which we sell as part of our Elements of Financial Accounting (AC102) Notes collection written by the top tier of London School Of Economics students.

The following is a more accessble plain text extract of the PDF sample above, taken from our Elements of Financial Accounting (AC102) Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

AC102 Notes

DEFINITIONS Capital Allowance: A tax allowance that takes account of the depreciation of certain types of business assets such as plant and machinery and motor vehicles (reduction on taxable income) Consolidated Financial Statements: Financial accounting statements that combine the performance, position and cash flows of a group of companies under common control Intangible Assets: Assets that do not have a physical substance (e.g. patents, goodwill and trade receivables) Tangible Assets: Assets with a physical substance Liabilities: Claims of individuals and organisations, apart from the owner(s) that have arisen from past transactions or events Assets: Resources held by a business that have certain characteristics, such as the ability to provide future benefits Accrued Expense: Expenses that are outstanding at the end of a reporting period Prepaid Expense: Expenses that have been paid in advance at the end of the reporting period Depreciation: A measure of that portion of the cost of a non-current asset that has been consumed during a reporting period Carrying Amount: The difference between the cost of a non-current asset and the accumulated depreciation relating to the asset Impairment Loss: The amount by which the asset value is reduced as a result of having its value assessed as impaired Residual Value: The amount for which a non-current asset is sold when the business has no further use for it Gross Profit: The amount remaining after the cost of sales has been deducted from trading revenue Operating Profit: The profit achieved during a period after all operating expenses have been deducted from revenues from operations Share Premium Account: A capital reserve reflecting any amount, above the nominal value of shares, that is paid for those shares when they are issued by a company Preference Shares: Shares of a company that entitle their owners to the first of any dividend that the company may pay (i.e. if 6% preference shares of PS1 each, preference shareholders entitled to received first 6% ---> 0.06 * number of shares) Accounting Standards: Principle that governs current accounting practice; used as a reference to determine the appropriate treatment of complex transactions (e.g. International Financial Reporting Standards) Undistributable Reserves (Capital Reserves): Reserves that arise from unrealised 'capital' profits or gains rather than from normal realised trading activities (includes share capital, share premium account, capital redemption reserve) QUALITATIVE CHARACTERISTICS Relevance: Information that has ability to influence decisions help predict future events and confirm past ones Faithful Representation: Completeness, neutrality, freedom from error Comparability: Identify changes in business over time, evaluate performance in relation to other businesses Verifiability: Assurance that information represents faithfully what it purports to represent Timeliness: Information available in time to be capable of influence decisions Understandability: Information expressed as clearly and concisely as possible

AC102 Notes

ACCOUNTING CONVENTIONS Going Concern: Financial statements prepared on assumption that the business will continue for foreseeable future Business Entity: For accounting purposes the business does not equal the owner Accrual Basis of Accounting: Revenue and costs are recognised when they are earned or incurred rather than when cash is received Historical Cost: Business resources to be reflected at their acquisition cost Fair Value: Resources to be reported at fair value Prudence: Exercise caution when making accounting judgements so that losses and obligations are not understated and profits and resources are not overstated (greater emphasis on expected losses than profits) Dual Aspect: Each transactions has 2 aspects, both affecting the company's position Money Measurement: A resource will be included in the entity's financial statements if it can be measured reliably in monetary terms Matching: Expenses should be matched to the revenue that they generate FUNCTIONS OF ACCOUNTING

* To collect, analyse and communicate financial information

* To help those using financial information make more informed decisions ACCOUNTING STANDARDS

* IFRS: Transnational accounting rules developed by the IASB which should be followed in preparing published financial statements of listed companies

* Aims to achieve single framework of accounting rules for companies from all member states

* Improves comparability/transparency/harmonisation between countries

* Flexibility - principle based rather than rule based philosophy

* Flexibility allows for possibility of manipulation

* Principle based ---> judgement required by accountant

* Not globally accepted (e.g. US still uses own standards)

* Still susceptible to political/economic influences (e.g. European Union Carve Out - EU removed certain aspects of the IAS 39 hedge accounting rules to ease hedge accounting)

* Assuming all financial reports are uniform due to IFRS regulations can mislead investors CHARACTERISTICS OF STATEMENTS Statement of Financial Position

* Minimum Information: PPE, investment property, intangible assets, financial assets, inventories, trade receivables, cash and cash equivalents, trade payables, provisions, financial liabilities, tax liabilities, issued share capital and reserves (equity)

* Distinction normally made between CA & NCA, CL & NCL

* Shows changes in owner's claim Income Statement

* Minimum Information: Revenue, finance costs, profits or losses arising from discontinued operations, tax expense, profit or loss, each component of other comprehensive income of associated or joint ventures, total comprehensive income

* Further items should be shown if they are relevant to understanding of performance (e.g. cost of flood damage if a flood has destroyed some inventory)

* All material expenses should be separately disclosed (e.g. write down of inventories NPV, disposals, restructuring costs etc.)

* Shows changes in owner's claim

Buy the full version of these notes or essay plans and more in our Elements of Financial Accounting (AC102) Notes.