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Ac102 Section A Notes

Accounting Notes > Elements of Financial Accounting (AC102) Notes

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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

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