2 - Introduction to accounting

Question 1

What is an accounting system?

Answer 1

The process used to identify, measure, record, and retain information about a business’s activities so that the business can prepare its financial statements.

Question 2

What are two branches of accounting?

Answer 2

1. Management accounting

2. Financial accounting

Question 3

What is management accounting?

Answer 3

Managerial accounting is the practice of identifying, measuring, analyzing, interpreting, and communicating financial information to managers for the pursuit of an organization’s goals. It varies from financial accounting because the intended purpose of managerial accounting is to assist users internal to the company in making well-informed business decisions.

Question 4

What is financial accounting?

Answer 4

Financial accounting is a specific branch of accounting involving a process of recording, summarizing, and reporting the myriad of transactions resulting from business operations over a period of time. These transactions are summarized in the preparation of financial statements, including the balance sheet, income statement, and cash flow statement, that record the company’s operating performance over a specified period.

Question 5

What are internal users?

Answer 5

Managers within a business who use information about the business for decision making.

Question 6

What is planning?

Answer 6

Management activity that establishes a business’s goals and the means of achieving these goals.

Question 7

What is operating?

Answer 7

Management activity that enables a business to conduct its business according to its plan.

Question 8

What is evaluating?

Answer 8

Management activity that measures a business’s actual operations and progress against standards or benchmarks.

Question 9

What is budgeting?

Answer 9

Process of quantifying managers’ plans and showing the impact of these plans on a business’s operating activities.

Question 10

What is cost analysis, or cost accounting?

Answer 10

Process of determining and evaluating the costs of specific products or activities of a business.

Question 11

What are external users?

Answer 11

Individuals outside of a business who use the business’s information for decision making.

Question 12

What are Generally Accepted Accounting Principles (GAAPs)?

Answer 12

Currently accepted principles, procedures, and practices that are used for financial accounting in many countries of the world, including Australia.

Question 13

What is profit?

Answer 13

Difference between the total revenues of a business and the total costs (expenses) of the business during a specific time period.

Question 14

What are financial statements?

Answer 14

Accounting reports used to summarise and communicate financial information about a business.

Question 15

What are income statements?

Answer 15

The income statement, often called the profit and loss statement, shows the revenues, costs, and expenses over a period which is typically a fiscal quarter or a fiscal year. The income statement tells investors whether a company is generating a profit or loss. Also, the income statement provides valuable information about revenue, sales, and expenses.

Question 16

What is net income?

Answer 16

Excess of a business’s revenues over its expenses from providing goods or services to its customers during a specific time period.

Question 17

What is net loss?

Answer 17

Excess of a business’s expenses over its revenues from providing goods or services to its customers during a specific time period.

Question 18

What are statements of changes in owner’s equity?

Answer 18

A summary of the changes in the shareholders’ (owner’s) equity in a company that have occurred during a specific period of time.

Question 19

What is a balance sheet?

Answer 19

The balance sheet shows assets, liabilities, and shareholders’ equity. Total assets should equal the sum of total liabilities and shareholders’ equity. The liabilities section reflects how those assets are financed. Shareholders’ equity is the difference between assets and liabilities, or the money left over for shareholders for the company to repay all its debts.

Question 20

What is a link between an income statement and a balance sheet?

Answer 20

tl:dr Net income from the income statement flows to the balance sheet.

There is a connection between the balance sheet and income statement when double-entry accounting is used.

In essence, increases in revenue and gains as reported on the income statement cause stockholders’ equity to increase on the balance sheet. In addition, increases in expenses and losses as reported on the income statement cause stockholders’ equity to decrease on the income statement.

In addition, the write-down of an asset on the balance sheet causes a loss to appear on the income statement.

Question 21

What is a cash flow statement?

Answer 21

A business’s cash flow statement summarises its cash receipts, cash payments, and net change in cash for a specific time period.

Question 22

What is an annual report?

Answer 22

A document that includes a business’s income statement, balance sheet, and cash flow statement, along with other related financial accounting information.

Question 23

What is sustainability?

Answer 23

The recognition of intergenerational and intragenerational equity, where the meeting of the needs and wants of a person or group now should not compromise the ability of a future person or group to meet their needs and wants.

Question 24

What skills do accountants of the 21st Century require?

Answer 24

They need:

• Judgement
• Knowledge
• Critical analysis and problem solving
• Communication
• Teamwork
• Self-management

Question 25

What is general knowledge?

Answer 25

A category of the businessperson's knowledge base that encompasses knowledge about history and cultures, an ability to interact with people who have dissimilar ideas, and experience in making value judgments.

Question 26

What is organisational and business knowledge?

Answer 26

A category of the businessperson's knowledge base that includes an understanding of the effects of economic, social, cultural, and psychological forces on companies; an understanding of methods and strategies for managing change; and an understanding of how technology helps organisations.

Question 27

What is judgment?

Answer 27

Involves the evaluation of evidence to make a decision, choice, or recommendation. We exercise judgment when we use our critical thinking to decide between two alternatives based on objective facts or data.

Question 28

What information does the accounting system provide to support management activities?

Answer 28

Accounting information helps both external and internal people to make decisions. This is stuff like budgets, cost analyses, and/or cost reports for products/services, etc. This information supports management activities by providing managers with quantitative information about their business to aid them by planning, operating, and evaluating the business's activities.

Question 29

How does accounting support external decision-making?

Answer 29

Accounting information supports external decision-making by providing people outside the business – such as investors, creditors, stockbrokers, financial analysts, bankers, suppliers, labour unions, customers, and governments – with financial statements containing economic information about the performance of the business. It can be stuff like budgets, cost analyses, and/or cost reports for products/services, etc.

Question 30

What roles do ehtics and sustainability play in the business environment?

Answer 30

Accounting information developed by businesses in an ethical environment allows our economy to function efficiently and enables users to direct or allocate resources productively. Adopting an ethical approach to business will also increase the business's chances of sustainability. good environmental management and social responsibility tend to improve long-term profitability rather than reduce it.

Question 31

What skills do accountants of the 21st century require?

Answer 31

- Communication: Speaking, writing, listening, reading, and teamwork. - Interpersonal skills - Personal management skills (time and tasks) - Critical thinking - Judgement

Question 32

How can people learn to think critically?

Answer 32

First by learning new forms and techniques of thinking, and then by practising these techniques to improve their decision-making skills. An awareness of their current thinking provides a starting point for modifying and improving their thinking performance.

Question 33

How can critical thinking help people to make better business decisions?

Answer 33

A systematic method that includes creative and critical thinking is necessary to organise the problem-solving approach and decide on a solution to the problem. Critical thinking helps decision-makers analyse decision alternatives for faulty logic, unsupported assumptions, and emotional appeals.

Question 34

What are the logical stages in problem solving and decision making?

Answer 34

1. Recognise the problem 2. Identify alternatives 3. Evaluate the alternatives 4. Make the decision.

Question 35

What is double entry accounting?

Answer 35

Double entry, a fundamental concept underlying present-day bookkeeping and accounting, states that every financial transaction has equal and opposite effects in at least two different accounts. It is used to satisfy the accounting equation: Assets = Liabilities + Equity