FFMA Week 2 - Measuring and tracking Financial Position

Question 1

FFMA-001: What is the purpose of accounting concepts and conventions?

Answer 1

Accounting concepts and conventions are rules that ensure financial statements are consistent across different organizations, allowing for meaningful comparisons.

Question 2

FFMA-002: Define the money measurement concept in accounting.

Answer 2

The money measurement concept states that only items with an objective monetary value can be included in the accounts, ensuring consistency and comparability in financial statements.

Question 3

FFMA-003: Why can’t a highly valued management team be included in financial accounts?

Answer 3

A management team, despite its potential high value, cannot be included in financial accounts because it does not have an objective money measurement, adhering to the money measurement concept.

Question 4

FFMA-004: What is the accruals or matching concept in accounting?

Answer 4

The accruals or matching concept dictates that expenses should be recorded in the financial year they occur, not when they are paid, to ensure financial statements accurately reflect the period’s activities.

Question 5

FFMA-005: How does the accruals concept apply to expenses like electricity bills?

Answer 5

Under the accruals concept, an electricity bill should be recorded in the financial statements of the year the electricity was used, regardless of when the bill is paid.

Question 6

FFMA-006: What is the principle of prudence in accounting?

Answer 6

The principle of prudence in accounting suggests adopting a cautious and realistic approach, avoiding over-ambitious predictions and ensuring financial statements reflect a careful view of the business’s future.

Question 7

FFMA-007: What is the matching or accruals concept in accounting?

Answer 7

The matching or accruals concept in accounting is a principle where transactions are recorded in the financial year they occur, rather than the year in which they are paid.

Question 8

FFMA-008: What are accruals in accounting?

Answer 8

Accruals in accounting refer to expenses that are recognized in the financial statements of the year they relate to, even if they have not yet been paid by the end of that year.

Question 9

FFMA-009: How is an electricity bill treated in accounts according to the accruals concept?

Answer 9

If an electricity bill arrives after the financial year-end but pertains to that year, it is included as an expense in that year’s accounts under the accruals concept.

Question 10

FFMA-010: What are prepayments in accounting?

Answer 10

Prepayments in accounting are payments made for services or goods in one financial year that relate to a future financial year, and they are accounted for in the year to which they pertain.

It is also an asset because it embodies a future economic benefit

Question 11

FFMA-011: How is rent paid in advance treated in financial accounts?

Answer 11

If rent is paid a year in advance but only part of it pertains to the current financial year, the portion relating to the next year is treated as a prepayment and recorded in the next year’s accounts.

Question 12

FFMA-012: What are current assets in accounting?

Answer 12

Current assets are assets held for short-term purposes, such as for trading, consumption in regular operations, resale, or those that are cash or easily convertible to cash. Common current assets include inventory, trade receivables, cash, prepayments, tax receivables, and other accrued income.

Question 13

FFMA-013: What constitutes non-current assets or fixed assets in accounting?

Answer 13

Non-current assets, also known as fixed assets, are assets held for the long-term, not for resale as part of normal trading activities, and are necessary for operating the business. They can be either tangible or intangible.

Question 14

FFMA-014: What are examples of tangible non-current assets?

Answer 14

Tangible non-current assets include land and buildings, equipment, and vehicles used for operating the business. These are sometimes referred to as PPE (property, plant, and equipment).

Question 15

FFMA-015: How do intangible assets differ in accounting?

Answer 15

Intangible assets are assets without physical substance but provide future economic benefits, controlled and owned by an entity due to past events. They include purchased items like goodwill, licenses, contracts, intellectual property, and internally generated items like research and development, patents, and licenses.

Question 16

FFMA-016: What is goodwill in accounting?

Answer 16

Goodwill in accounting refers to an intangible asset that arises when a business acquires another entity at a price higher than the fair value of its identifiable assets and liabilities. It represents elements such as reputation, brand, or customer relationships.

Question 17

FFMA-017: What does research and development (R&D) entail in accounting?

Answer 17

Research and Development (R&D) in accounting refers to internally generated intangible assets involving innovative activities to develop new products, services, or processes, or to bring significant improvements to existing ones.

Question 18

FFMA-018: What is a claim in the context of business finance?

Answer 18

A claim in business finance refers to a financial obligation of a business to provide cash or other benefits, resulting from past events or transactions. Claims are classified into two categories: equity and liabilities.

Question 19

FFMA-019: How is equity defined for companies?

Answer 19

For companies, equity is defined as the residual interest in the assets of the entity after deducting all its liabilities. This includes funds contributed by shareholders, retained earnings, and other gains and losses, as per the IASB Conceptual Framework.

Question 20

FFMA-020: What is the meaning of equity in non-incorporated businesses?

Answer 20

In non-incorporated businesses, equity represents the claim of owners or partners against the business, which is similar to shareholders’ equity in incorporated businesses.

Question 21

FFMA-021: What does owners’/shareholders’ capital refer to?

Answer 21

Owners’/shareholders’ capital refers to the amount invested by the owners or shareholders in the business. This term is synonymous with equity.

Question 22

FFMA-022: What are the components of equity in a financial statement?

Answer 22

The components of equity in a financial statement include owners’ capital (or shares in a limited company), accumulated profits (or losses), and other reserves.

Question 23

FFMA-023: How is equity viewed in the statement of financial position?

Answer 23

In the statement of financial position, equity is viewed from the perspective that it originates from outside the business, representing a claim by the owners on the business.

Question 24

FFMA-024: How is liability defined in the IASB Conceptual Framework?

Answer 24

Liability is defined as a present obligation of the entity arising from past events, where settlement is expected to result in an outflow of resources embodying economic benefits.

Question 25

FFMA-025: What are liabilities in the context of business finance?

Answer 25

Liabilities are claims by parties other than the owners of the business, creating a financial obligation that requires the transfer of economic resources, usually cash, to settle the claim. Once settled, the claim ceases to exist.

Question 26

FFMA-026: What are current liabilities and how are they characterized?

Answer 26

Current liabilities are obligations expected to be settled within the business’s normal operating cycle or due within a year after the statement of financial position date. They arise from normal trading operations and include trade payables, taxation creditors, accrued expenses, and bank overdrafts.

Question 27

FFMA-027: What are common examples of current liabilities?

Answer 27

Common current liabilities include trade payables (amounts owed to suppliers), taxation creditors (for VAT, PAYE, and corporation tax), accrued expenses (expenses incurred but not yet invoiced), and bank overdrafts.

Question 28

FFMA-028: What are non-current liabilities and how are they different from current liabilities?

Answer 28

Non-current liabilities are claims not included in current liabilities, typically settled over a period longer than one year. The most common form is long-term borrowings, also known as creditors falling due after one year.