Introduction to Accounting

Question 1

What is accounting?

Answer 1

Accounting is the management of information system that involves the collecting, sorting, classifying and recording of financial data to produce and report financial information to assist business owners in decision making

Question 2

What is financial data?

Answer 2

Financial data is the facts and figures that financial information is based.

Question 3

What is financial information?

Answer 3

Financial information is the financial data that has been sorted, classified and summarised into a more usable and understandable form

Question 4

What are ethical considerations?

Answer 4

Business decisions made by the owner will not only be influenced by financial considerations including those which are social and environmental in nature

Question 5

What is the accounting process?

outline aswell

Answer 5

The process of taking financial data and converting it into financial information in order to be able to make decisions.
Source documents -> records -> reports -> advice

Question 6

What are source documents?

Answer 6

Documents that provide both the evidence that a transaction has occurred and the details of the transaction itself.

Question 7

What is the recording stage?

Answer 7

Sorting, classifying and summarising the data contained in the source documents so that it is more usable

Question 8

What is the reporting stage?

Answer 8

The preparation of financial statements that communicate financial information to the owner.

Question 9

What is the advice stage?

Answer 9

The provision to the owners of a range of options available to their aims/objectives together with recommendations as to the suitability of those aims/objectives

Question 10

What is an asset?

Answer 10

A present economic resource controlled by the entity (as a result of past events) that has the potential to produce future economic benefits.

Question 11

What is a liability?

Answer 11

A present obligation of the entity (as a result of past events) to transfer an economic resource.

Question 12

What is owner’s equity?

Answer 12

The residual interest in the assets of the entity after all its liabilities are deducted.

Question 13

What is the accounting entity assumption?

Answer 13

The assumption that the accounting records of asset, liabilities and business activities of the entity are kept completely separate from those of the owner of the entity as well as from those of other entities.

Question 14

What is a current asset?

Answer 14

A present economic resource controlled by the entity (as a result of past events) that is reasonably expected to be converted to cash, sold or consumed within the next 12 months after the end of the reporting period

Question 15

What is a non-current asset?

Answer 15

A present economic recourse that is controlled by the entity (as a result of past events) that is not held dor resale and is reasonably expected to be used for more than the next 12 months after the end of the reporting period.

Question 16

What is a non-current liability?

Answer 16

A present obligation of the entity (as a result of past events) that are not expected to be settled with a transfer of economic resource within the next 12 months after the end of the reporting period

Question 17

What is a current liability?

Answer 17

A present obligation of the entity (as a result of past events) that are reasonably expected to be settled with a transfer of economic resource withing the next 12 months after the end of the reporting period.

Question 18

What is a balance sheet?

Answer 18

An accounting report that details a firm’s financial position at a particular point in time by reporting its assets, liabilities and owner’s equity.

Question 19

What is a transaction?

Answer 19

An exchange of a good or a service with another party.

Question 20

What is liquidity?

Answer 20

The ability of the business to meet its short term debts as they fall due.

Question 21

What is a working capital ratio and its formula?

Answer 21

Is a liquidity indicator that measures the ratio of current liabilities to current assets to asses the firm’s ability to meet short-term debts

Current assets/current liabilities

Question 22

What is stability?

Answer 22

The ability of a business to meet its debt and continue operation in the long term.

Question 23

What is debt ratio and its formula?

Answer 23

Mesures the porpotion of the firm’s assets that are funded by external sources of finance, a measure on the stability of a business

total liabilities/total assets x100`

Question 24

What are the internal sources of finanance?

Answer 24

Retained profits and capital contribution

Question 25

What are the advantages and disadvantages of capital contribution?

Answer 25

Adv: no set repayment + no interest + owner is willing to wait for profit before expecting a dividend

Dis: limited to the resources of the owner

Question 26

What are the external sources of finance?

Answer 26

Term loan
Trade credit
Bank overdraft

Question 27

What are the advantages and disadvantages of a term loan?

Answer 27

Adv: Can purchase more expensive assets + if secured there is a low interest rate

Dis: Interest is charges + must be paid back in line with contractual terms

Question 28

What are the advantages and disadvantages of trade credit?

Answer 28

Adv: immediate access to goods and sevices + can generate sales before payment required

Dis: can only be used with that supplier + late fees may incur if paying late