accounting booklet 1

Question 1

Define Accounting

Answer 1

Accounting is a management 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

Define Financial data

Answer 2

Is the facts and figures that financial information is based.

Question 3

Define Financial information

Answer 3

Is financial data that has been sorted, classified and summarized into a more usable and understandable form

Question 4

Define what may influence an owners’ decision in a business

Answer 4

Financial considerations including those which are social and environmental in nature

Question 5

Define Ethical conditions

Answer 5

In all consultations and communications, accountants are required to maintain their integrity, objectivity and confidentiality

Question 6

Define the 4 stages of the accounting process

Answer 6

Source documents, records, reports and advice

Question 7

Define source documents

Answer 7

documents that provide both the EVIDENCE that a transaction has occurred and the DETAILS of the transaction itself.

Question 8

Define recording

Answer 8

Sorting, classifying and summarizing the data contained in the source documents so that it is more useable

Question 9

Define reporting

Answer 9

the preparations of financial statements that communicates financial information to the owner

Question 10

Define Advice

Answer 10

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 11

Define the accounting process

Answer 11

The process of taking financial data and converting it into financial information in order to be able to make decisions

Question 12

What makes a source document a receipt?

Answer 12

receipt number
receive from…

Question 13

What makes a source document a cheque butt

Answer 13

Usually for internal business only
looks like a note pad that records the most basic information

Question 14

What makes a source document a invoice

Answer 14

invoice number
terms and conditions suppliers has given to the customer

Question 15

What makes a source document a memo (memorandum)

Answer 15

memo number
(note this is internal/ moving from one part of the business to another)

Question 16

Define the documents that are not a source document but are helpful

Answer 16

Bank statements
Cheque

Question 17

What is the accounting equation?

Answer 17

The fundamental concept in accounting, the equation is always right.

Assets = Liability + Owner’s Equity

Question 18

Definition of Current Asset

Answer 18

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 19

Define Non Current Assets

Answer 19

A present economic resource controlled by the entity (as a result of past events) that is not held for resale and is reasonably expected to be used for more that the next 12 months

Question 20

Define Current Liability

Answer 20

A present obligation of the entity (arising from past events) that are reasonably expected to be settled with a transfer of an economic resource within the next 12 months after the end of the reporting period

Question 21

Define Non-Current liability

Answer 21

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

Question 22

Define owners equity

Answer 22

Residual interest in the asset of the entity after the liabilities are deducted

(represents what the business owes to external parties)

Question 23

Define current

Answer 23

less than 12 months

Question 24

Define non-current

Answer 24

more than 12 months

Question 25

Give examples of assets

Answer 25

A physical resource E.g. a vehicle
A intangible resource E.g. a trade mark

Question 26

Give examples of liabilities

Answer 26

To repay a loan, the business will transfer cash to the bank

An obligation is usually a contractual arrangement
E.g. when a business borrows money from a bank (loan) they will sign a contract when they will pay back money (PRESENT OBLIGATION)

Question 27

Give example of owners equity

Answer 27

E.g withdrawal
capital

or if you own a car worth $20,000 but you owe $5,000 against it, your owner’s equity is $15,000

Question 28

Define Balance sheet

Answer 28

An accounting report that detail’s a firms financial position at a particular point in time by reporting it’s assets, liabilities and owner’s equity

Question 29

State the items that appear in the Balance sheet

Answer 29

ASSETS:
bank, accounts receivable, inventory of supplies

LIABILITIES:
accounts payable, mortgage, bank

Question 30

Define a transaction

Answer 30

An exchange of a good or service with another party

Question 31

What occurs when a transaction has been made?

Answer 31

it changes the “financial position” if the business by making adjustments to items in assets and/or liabilities or owners equity

Question 32

What must remain true after a transaction has occurred?

Answer 32

Every transaction will affects at least two “items” in the accounting equation
After recording these changes, the accounting equation must still balance

Question 33

Define liquidity

Answer 33

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

Question 34

Define Stability

Answer 34

Is the abilities of a business to meet its debts and continue operations in the long term

Question 35

What is the formula for working capital ratio

Answer 35

WCR= current assets/ current liabilities

written as a ratio x:1

Question 36

What does Working capital ratio (WCR) measure

Answer 36

it measures liquidity

Question 37

What are the 2 types of sources of finances

Answer 37

internal and external

Question 38

Define the internal and external sources of finance

Answer 38

INTERNAL:
Capital contribution
Retained profits

EXTERNAL:
Trade credit
Bank overdraft
Term Loan

Question 39

What are advantages and disadvantages of internal sources of finance

Answer 39

Capital advantages
no set repayment structure
no interest
owner(s) willing to wait for a profit before expecting a dividend

Disadvantages
limited to the resource of the owner(s)

Question 40

What are the advantages and disadvantages of external sources of finance trade credit

Answer 40

+ve of trade credit (accounts payable)
immediate access to goods and services, can generate sales before payments are required
-ve can only be used with that supplier, late fees may be incurred if pay too late

Question 41

What are the advantages and disadvantages of external sources of finance Bank overdrafts

Answer 41

+VE OF BANK OVERDRAFT
available immediately faciltiy is established, it’s flexible/can be used ofr seasonal variations in bus
-VE OF BANK OVERDRAFT
high interest, can be recalled at short notice

Question 42

What are the advantages and disadvantages of external sources of finance term loans

Answer 42

+VE of TERM LOANS
can purchase more expensive assets, if secured, lower interest rates
-VE OF TERM LOAN
interest is charged, must be paid back in line with contractual terms

Question 43

What is the formula for Debt ratio?

Answer 43

DR= total liabilities/total assets x 100

Question 44

What does debt ration measure?

Answer 44

it measures the stability of a business

represented as a percentage