Chapter 1

Question 1

What two elements does Accounting consist of?

Answer 1

• Recording: Transactions must be recorded as they occur in order to provide up-to-date information for management
• Summarising: The transactions for a period are summarised in order to provide information about the company to interested parties

Question 2

What is the purpose of a statement of profit or loss?

Answer 2

To reflect the performance of a business over a period of time. To show the amount of profit or loss that the business has made during the last accounting period

Question 3

What is the purpose of a Statement of Financial Position?

Answer 3

To show the total value of the net assets of the business at a point in time

Question 4

What differs under the UK GAAP?

Answer 4

Rather than than the Statement of Profit or Loss, those using the UK GAAP use a Profit and Loss Account and the SOFP will be a Balance Sheet

Question 5

What is a sole trader?

Answer 5

A business owned and operated by one person who is fully and personally liable for any losses that the business might make (unlimited liability)

Question 6

What is a partnership?

Answer 6

A business owned jointly by a number of partners where each partner is jointly and severally liable for any losses that the business might make (unlimited liability)

Question 7

What is ‘unlimited liability’?

Answer 7

When the proprietor is personally liable for debts or money owed (their personal assets are on the line)

Question 8

What is a company?

Answer 8

The following characteristics:

• owned by shareholders or members
• there can be any number of shareholders
• shareholders elect the directors to run the business
• almost always have limited liability
• this means that the shareholders will not be personally liable for any losses the company incurs
• their liability is limited to the nominal value of the shares that they own - their shares may become worthless, but they will not be forced to make good losses
• the company is a completely separate legal entity from its owners, the shareholders

Question 9

What is a statement of financial position?

Answer 9

A statement of financial position is a list of the assets and liabilities of the business. It is a snapshot of the business at a particular point in time

Question 10

What are assets?

Answer 10

Assets are items that the business owns (or controls) or is entitled to

Question 11

What are liabilities?

Answer 11

Liabilities are items that the business owes

Question 12

What is a ‘trade receivable’?

Answer 12

Customers who owe money from goods or services already provided (usually 30 days credit)

Question 13

What is equity?

Answer 13

The money shareholders have put into the business that can be broken down into capital and reserves (capital).

Question 14

What is a statement of profit or loss?

Answer 14

A statement of profit or loss shows the revenue and the expenses of a business for the accounting period. It shows the business performance over that period of time.

Question 15

What is the difference between revenue and cost of sales?

Answer 15

Revenue is the sales of goods that the business has supplied

The cost of sales is how much it cost to outsource or manufacture the products

Question 16

What is gross profit?

Answer 16

The revenue take away the cost of sales

Question 17

How do you incur capital expenditure? Where do you record this?

Answer 17

• Through the acquisition of long-term assets (i.e., those which will be kept in the business for more than one year)
• To improve or enhance the earning capacity of long-term assets
• This is recorded in the SOFP within Non-current assets

Question 18

How do you incur Revenue expenditure? Where is this recorded?

Answer 18

• For trade purposes including purchases of raw materials or items for resale, expenditure on wages and salaries, selling and distribution expenses, administrative expenses and finance costs
• or, to maintain the existing earning capacity of long-term assets - also repairs or maintenance that enable it to be used as originally intended
• Such expenditure is recorded in the statement of profit or loss

Question 19

What are the five fundamental principles of professional ethics that accountants must adhere to, as outlined by the IESBA Code of Ethics? What else must an accountant consider?

Answer 19

• Integrity
• Objectivity
• Professional competence and due care
• Confidentiality
• Professional Behaviour

Must also consider the ‘spirit’ of the guidance

Question 20

Who does the ICAEW Code of Ethics apply to?

Answer 20

• ICAEW members
• ICAEW students
• affiliates, employees of member firms and member firms themselves

Question 21

What are the IESBA and the ICAEW codes based on?

Answer 21

The IESBA and ICAEW codes are principles based and not a set of rules.