Accounting principles and practices

Question 1

Income statement / statement of profit or loss

Answer 1

Results of company revenues, expenses, tax, and profitability

Question 2

Balance sheet statement

Answer 2

Statement of the financial position of the business at a point in time

Question 3

Cash flow statement

Answer 3

Show sources and uses of cash

Good indicator of liquidity

Question 4

Structure & Sources

Financial vs Management Accounting

Answer 4

Financial - day to day formatted for external audience

Management - day to day + other data formulated for business need

Question 5

Format

Financial vs Management Accounting

Answer 5

Finance - impact across whole organisation

Management - segmented and focused on activities

Question 6

Time periods

Financial vs Management Accounting

Answer 6

Finance - based on historic information and looks backwards

Management - forward looking

Question 7

Legal & regulatory

Financial vs Management Accounting

Answer 7

Finance - accounting standards

Management - no presentation constraints

Question 8

Income

Answer 8

All of the amounts of money earned by the organisation from any source, including sales, rentals, interest payments, and investments.

Income generated from sales (excluding VAT) is sometimes called revenue or turnover.

Question 9

Expenditure

Answer 9

All the amounts of money incurred to pay for goods or services.

Question 10

Profit

Answer 10

Any excess of income over expenditure incurred in running the business that earns that income.

Question 11

Shareholders’ equity

Answer 11

The stake shareholders have in the company. It is calculated as the total value of all the assets in the business less the total value of all the liabilities.

Question 12

Capital and regulatory capital

Answer 12

Equity + long term debt

Regulatory capital is equity + long-term debt that is classified as regulatory capital.

Question 13

Assets

Answer 13

Resources controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

Question 14

Liability

Answer 14

A present obligation arising from past events, the settlement of which is expected to result in an outflow of economic benefits. In other words, a liability is an amount owed by an organisation.

Question 15

Cash

Answer 15

Money that is available to the business and includes money deposited at the bank or cash retained on the premises, e.g. petty cash.

Question 16

Creditor

Answer 16

Any individual or organisation to whom a debt is owed, e.g. a supplier.

Question 17

Debtor

Answer 17

Any organisation or person who owes a debt to a company.

Question 18

Depreciation

Answer 18

Allocating the cost of a tangible or physical asset (e.g. a building or machinery) over its useful life or life expectancy.

Depreciation represents how much of an asset’s value has been used up. Depreciating assets helps companies earn revenue from an asset while expensing a portion of its cost each year the asset is in use. If not taken into account, it can greatly affect profits.

Question 19

Accounting equation

Answer 19

Assets = equity + liabilities

Question 20

Statement of financial position

Answer 20

Statement of net wealth of a business at a particular time

Question 21

Double entry principle

Answer 21

All financial transactions recorded to show the two fold effect of a business both giving and receiving value in each transaction

Question 22

Shareholder equity

Answer 22

Difference between total assets and liabilities

Question 23

Non-current assets

Answer 23

Items of wealth controlled by the business and intended to be kept for more than one year

Question 24

Current assets

Answer 24

Items of wealth controlled by the business and intended to be used within the next 12 months

Question 25

Gross profit

Answer 25

Turnover - cost of sales Value of unsold stock is not included as a cost

Question 26

Finance income

Answer 26

Income from investments

Question 27

Finance costs

Answer 27

Cost of loans

Question 28

Statement of changes in equity

Answer 28

Changes in shareholder equity - required by IFRS Reserves increase by profit and fall by dividends

Question 29

Cash flow statement

Answer 29

Records movements of cash in and of cash out during last financial year Formatted into operating activities investing activities financing activities

Question 30

Cash flow from operating activities

Answer 30

Deals with how much cash the business managed to generate or consume as a direct consequence of its trading activities including tax paid.

Question 31

Cash flows from investment activities

Answer 31

Shows cash inflows and outflows created by investing activities

Question 32

Cash flows from financing activities

Answer 32

Deals with changes to loan and share capital and payment of dividends to shareholders

Question 33

What is the accounting equation?

Answer 33

Assets = Liabilities + Equity.

Question 34

What is double-entry bookkeeping?

Answer 34

Every transaction affects two accounts equally.

Question 35

What is accrual accounting?

Answer 35

Records income and expenses when they occur, not when cash moves.

Question 36

What is the purpose of a cash flow statement?

Answer 36

Shows how cash enters and leaves the business.

Question 37

What is the difference between financial and management accounting?

Answer 37

Financial is for external reporting; management is for internal use.

Question 38

3 financial statements in a company's annual report

Answer 38

Income statement Balance sheet Cash flow statement

Question 39

Internal rate of return

Answer 39

Report produced to show effective interest rate of a project Shows financial viability of future projects

Question 40

What is included in accounts of quoted companies?

Answer 40

Narrative reports from the chairman / CEO Strategic report Financial accounts (balance sheet, income statement, cash flow)

Question 41

Companies Act 2006

Answer 41

Main UK legislation for financial accounts

Question 42

Requirements of Companies Act 2006

Answer 42

Keep adequate accounting records Director duty to prepare accounts Consistent reporting within a group Show a true and fair view

Question 43

Income statement / statement of profit or loss

Answer 43

Result of revenue, expense, tax, profitability during the accounting period

Question 44

Balance sheet / statement of financial position

Answer 44

Financial position at a point in time Lists all assets, liabilities, and equity

Question 45

Cash flow statements

Answer 45

Sources and uses of cash Inflow and outflow to a business