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

Structure & Sources

Financial vs Management Accounting

Question 9

Income

Answer 9

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 10

Expenditure

Answer 10

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

Question 11

Profit

Answer 11

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

Question 12

Shareholders’ equity

Answer 12

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 13

Capital and regulatory capital

Answer 13

The capital of a trading company is the sum of the equity and long-term debt used to finance the business. For an insurance company, it is regulatory capital that is important. This is the sum of the equity and long-term debt that is classified as regulatory capital.

Question 14

Assets

Answer 14

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 15

Liability

Answer 15

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 16

Cash

Answer 16

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 17

Creditor

Answer 17

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

Question 18

Debtor

Answer 18

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

Question 19

Depreciation

Answer 19

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 20

Accounting equation

Answer 20

Assets = equity + liabilities

Question 21

Statement of financial position

Answer 21

Statement of net wealth of a business at a particular time

Question 22

Double entry principle

Answer 22

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

Question 23

Shareholder equity

Answer 23

Difference between total assets and liabilities

Question 24

Non-current assets

Answer 24

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

Question 25

Current assets

Answer 25

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

Question 26

Gross profit

Answer 26

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

Question 27

Finance income

Answer 27

Income from investments

Question 28

Finance costs

Answer 28

Cost of loans

Question 29

Statement of changes in equity

Answer 29

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

Question 30

Cash flow statement

Answer 30

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

Question 31

Cash flow from operating activities

Answer 31

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

Question 32

Cash flows from investment activities

Answer 32

Shows cash inflows and outflows created by investing activities

Question 33

Cash flows from financing activities

Answer 33

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