Chapter 1

Question 1

accounting

Answer 1

The art of classifying, recording and summarising events and transactions of a financial nature in monetary terms for the purposes of reporting and evaluating the results of those financial events with a view to making economic decisions.

Question 2

purpose of accounting

Answer 2

The purpose of accounting and its end product (the financial statements and/or management reports), is to provide relevant and reliable financial information about an entity, which will:
* Be useful for making economic decisions.
* Be seen by interested parties as updated and useful financial information, i.e. it serves as a way of communication.

Question 3

Type of business activities

Answer 3

Service business
Trading business
Manufacturing business/concern
Extractive

Question 4

service business

Answer 4

Render a service to clients on cash and credit basis (eg. electrician, dentist)

Question 5

trading business

Answer 5

Buy and sell inventory(stock) to customers on cash and credit basis with intention to make profit ( retailers + wholesalers)

Question 6

manufacturing business

Answer 6

Convert raw materials into final products (eg. brickmaker, factory)

Question 7

extractive business

Answer 7

mining

Question 8

wholesaler vs retailer

Answer 8

manufacturing concern sells manufactured goods to trading orgs or individual customers → wholesaler.
Shop buys from the wholesaler and sells to customers → retailer

Question 9

Sole proprietor

Answer 9

1 owner/ natural person
Easy to form
Limited investment required to start → finance from owners/ banks
Few legal formalities → only license to trade
Owner personally liable for debts of business (private & personal assets liquidated)
No perpetual succession or auditing of records
Limited scope for growth
Registration w SARS for PAYE, Unemployment Insurance, Skills Development Levy & Workmen’s Compensation Commissioner

Question 10

partnership

Answer 10

2-20 partners
Easy to form w/ minimal effort & capital investment
More capital( assets, skills, cash, outsiders)
Regulated by legal partnership agreement (profit sharing ratio, partner duties etc)
No auditing of records/results or perpetual succession
Limited scope for growth/expansion
Partners held jointly & severally liable for debts in same proportion in which they share in profits

Question 11

companies

Answer 11

Business owned by shareholders (can be few or thousands)
Managed by not owners

Question 12

profit vs not for profit company

Answer 12

Profit company : formed w/ aim of making profit (Public (limited), Private (Pty) Ltd, State owned companies (SOC), Personal liability companies (incorporated) replacing partnerships
Non-profit company : as stated, legal entity but requires more expensive to set up

Question 13

public companies

Answer 13

Limited/Ltd
Finance from owners or outsiders
Min. of 1 shareholder
perpetual succession
shares freely transferrable
managed by board of directors, must have min. 3 directors
board must have chairman and chief exec officer
requires full audit
reports prepared in compliance w IFRS
complicated and expensive

Question 14

perpetual succession

Answer 14

continuation of a corporation’s existence despite death, bankruptcy, change in membership

Question 15

NRV

Answer 15

Net realisable value
(Fair value less cost of sales)
Net price the asset could be sold for on the market less the cost of sales

Question 16

relevance

Answer 16

Showing all info that is useful/ can make an impact on decision making

Question 17

entity principle

Answer 17

Personal financial affairs of the owner are never intermingled with those of the business for which the accounting is being performed. The financial affairs of the business and the owner are kept separate.

Question 18

accrual basis

Answer 18

Income only recorded when earned irrespective when cash has been received. expenses recorded when incurred irrespective when cash has been received/paid

Question 19

trade payables vs accrued expenses

Answer 19

trade payables- inventory you still need to pay for, on trade/stock items
accrued expense- not a trade item, for everything else

Question 20

private companies

Answer 20

Pty Ltd
Finance from owners+outsiders
shareholders liability limited to amount originally invested
managed by board of directors
does not require a full statutory audit of accounting record
financial info only available to shareholders
shares not freely transferable. cant offer shares to the general public
more expensive to form

Question 21

state owned companies

Answer 21

SOE Ltd
Finance from owners + outsiders
min. 1 shareholder
perpetual succession
managed by board of directors
shares freely transferable
requires full statutory audit of accounting records

Question 22

personal liability companies

Answer 22

Incorporated/ Inc
deemed to be a private company unless its Memorandum of Incorporation states it is
individuals can be held liable for debts of personal liability company
perpetual succession

Question 23

primary users of accounting info

Answer 23

• owners, shareholders and stakeholders interested in profitability of entity
  -creditors to assess ability of company to repay debts
  -commercial banks to assess ability of company to repay interest and capital
  -management to determine if assets have been correctly managed to increase shareholder wealth

Question 24

secondary users of accounting info

Answer 24

-auditors to establish if firm is a going concern + financial statements fairly represent published position and performance of company
-academics+research analysts to evaluate risk profiles of companies for investment opportunities
-employees- decide whether they are paid enough and if there is growth potential for them in the business
-government- examine statement of comprehensive income and statement of financial position to ensure business to pay correct tax
-trade unions
-environmentalists
-asset managers
-customers

Question 25

internal financial statements

Answer 25

Prepared for internal users such as management of business entity. Provide useful financial info to assist them in achieving goals & carry out responsibilities. → MANAGEMENT ACCOUNTING (internal reporting)

Question 26

management accounting

Answer 26

cost accounting that deals with collection, allocation & control of cost of producing specific goods or services; preparation of plans or budgets of future operation costs and income; decision making.

Question 27

external financial statements

Answer 27

Info NOT directly related to most intimate aspects of accounting records of business entity. For external users (shareholders, prospective investors, suppliers, bankers, SARS, auditors, academics and research analysts, employees, trade unions) → FINANCIAL ACCOUNTING One set of financial statements prepared and made available to all external users Prepared in accordance with International Financial Reporting Standards (IFRS)

Question 28

financial accounting

Answer 28

Recording of all transactions of the business (bookkeeping). ; classification and summary of info; Reporting results to management and other stakeholders on a regular basis; Analysis of the info to detect areas of financial weakness that require attention.

Question 29

objectives of annual financial statements

Answer 29

Provide useful financial info about financial position, performance & changes in financial position of entity to a wide range of users in making economic decisions. Do not provide all info but also provide info of Corporate Social Responsibility & Corporate Governance. Largely portray past events Results of stewardship of management.

Question 30

accounting system

Answer 30

INPUT: daily monetary transactions recorded on source docs between entity and external parties (Identifying, measuring, data capture) PROCESS: Recording, classifying, summarising (A=E+L), specialised journals, trial balance, year-end adjustments, annual financial statements (AFS) OUTPUT: (Reporting, evaluating & analysing, comparing) Statement of Comprehensive Income, Statement of Financial Position, Statement of Cash Flows, Statement of Changes in Equity. Also directors report, auditors report.

Question 31

statement of comprehensive income

Answer 31

income statement Measures financial performance of business over one period of time. Matches all income earned w/ all expenses incurred from business operations → calculate net profit (or loss) for period

Question 32

statement of financial position

Answer 32

balance sheet Financial position of entity: What it owns (assets), owes (liabilities) and claim owners have against residual assets (equity) at point in time. Shows where business obtained its finance from equity (owner's funds) and liabilities (external finance) and how they were invested in diff assets (c & nc) to increase owner's wealth.

Question 33

statement of cash flows

Answer 33

cash flow statement Total cash inflows (cash receipts) and total cash flows (cash payments) during a financial year. 3 distinct categories : Operating, Investing, Financing activities → each w/ own set of cash inflows and cash outflows

Question 34

statement of changes in equity

Answer 34

Reconciles all opening equity balances (@ beginning of year) & closing equity balances (@ end of year) appearing on Statement of Financial Position (Balance sheet).

Question 35

Double-entry/duality principle

Answer 35

Determines that the financial situation of an enterprise is represented in terms of the basic accounting equation. Every transaction concluded by the enterprise has a twofold influence on the equation, causing it to balance continuously →credit entry for each corr. debit entry.

Question 36

cost principle

Answer 36

Assets are reflected at cost- accountants do not attempt to reflect assets at real/market values. Advantage- cost is determined objectively

Question 37

historic cost principle

Answer 37

Assets and liabilities measured @ their og transaction value. Asset- fair/market value of what is given in exchange (usually cash) for the asset at its initial acquisition (amount for which an asset could be exchanged). Liability- current cash equivalent received in exchange for assuming the liability.

Question 38

replacement value

Answer 38

Determine present cost of replacing an asset w/ one in a similar condition.

Answer 39

g

Question 40

present economic value

Answer 40

Determine present value of all future cash inflows less all future cash outflows due to use of machinery.

Question 41

cash basis

Answer 41

All transactions are recorded in books when cash received or paid out. Generally used by NPOs

Question 42

matching concept

Answer 42

income and costs are accrued and matched with one another in the income statement and for a period to which they relate

Question 43

consistency concept

Answer 43

there is consistency in the accounting treatment of like items within each accounting period and from one period to the next consistency concept is to ensure comparability of financial statements

Question 44

qualitative characteristics

Answer 44

Attributes that make the info provided in financial statements useful to users. TWO FUNDAMENTAL qualitative characteristics : Relevance and faithful representation

Question 45

relevance

Answer 45

Capacity of info to make a difference in economic decision making by helping users to form predictions about the outcomes of past, present & future events or to confirm/correct prior expectations. Info relevant because of its nature and materiality and ability to influence economic decisions of users by helping them to make accurate decisions about the future financial status of the enterprise (predictive value) & confirm the accuracy of decisions already taken (feedback value)

Question 46

faithful representation

Answer 46

The annual financial statements must be a true and fair reflection of the financial effects of the transactions relating to items appearing on the financial statements. The financial info must depict the economic substance of the transaction. To be a faithful representation it must comply w/ Completeness (full disclosure principle) Need to provide all info that could change decision made by users Free from material error Omission/misinformation that could influence economic decisions made by users. Neutrality Free from bias

Question 47

enhancing qualitative characteristics

Answer 47

comparability - users of financial statements must be able to compare financial statements of an enterprise over a period of time to identify trends, and compare w/ different firms to evaluate relative position Verifiability Implies that a different person would generally agree with the way in which the financial effects of a transaction have been represented. Timeliness Info made available before it loses capacity to influence decisions, should be presented asap after financial year end. Understandability Info classified, characterised & presented clearly and concisely, not oversimplified. Assumed users must be financial literate & diligent

Question 48

asset

Answer 48

a resource controlled by the enterprise as a result of a past event and from which future economic benefits are expected to flow to the enterprise. Its use/sale is expected to result in an inflow of future economic benefits. + Dr, - Cr

Question 49

future economic benefits

Answer 49

Potential to contribute, directly or indirectly, to the flow of cash and cash equivalents to the enterprise. May also take form of convertibility into cash and cash equivalents., or capability to reduce cash outflows. The future economic benefits embodied in an asset may flow to the enterprise in a number of ways: * Used singly or in combination with other assets in the production of goods or services to be sold by the enterprise; * Exchanged for other assets;

Question 50

non-current asset

Answer 50

○ aka fixed assets, acquired to generate income, will not be sold in next 12 months, long-lived resources. ○ Also used in indirect manner for admin(office equipment, computers) or rental to others. ○ Include: * Tangible- Property plant & equipment (PPE) like land, buildings, machinery, office furniture, motor vehicles, computer equipment * Investment property: (land & buildings for rental or capital appreciation * Financial assets: Fixed deposit, investment in other companies for longer than 12 months. Intangible: Copyrights, patents, franchises, goodwill, trademarks.

Question 51

current assets

Answer 51

○ Cash or expected to be realised into cash, sold or consumed during next 12 months. ○ Include: * Inventory, debtors(trade receivables), prepaid expenses, accrued income, cash and cash equivalents(Bank, cash float, petty cash), short term loans

Question 52

liability

Answer 52

LIABILITY: a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. - Legally enforceable claims, which outsiders have against the business - Amounts the business owes to persons other than the owner of the business. - -Dr, +Cr

Question 53

non-current liabilities

Answer 53

○ aka long-term liabilities, repayable in a period longer than 12 months. ○ Eg. Long term loans, debentures, bonds ○ Interest payable on these amounts

Question 54

current liabilities

Answer 54

○ Obligations payable in the near future, within next financial year. ○ Mostly settled out of current assets. ○ Eg. Creditors(trade payables), bank overdraft, expenses & income received in advance, accrued expenses, short term borrowings. ○ Current liabilities are good financial tools- when you buy goods on credit your cash flow increases.

Question 55

income

Answer 55

Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases of equity, other than those relating to contributions from equity participants. Includes both revenue and gains. Revenue includes a variety of different items including sales, fees, dividends and rent. – Gains are not different from revenue but do not usually arise from normal operating activities. An example of a gain, is a profit on the sale of a vehicle Earned when service has been provided or goods delivered, irrespective of whether cash has been received or not

Question 56

working capital

Answer 56

Current assets & current liabilities -Dr, + Cr If current assets > current liabilities: CA- CL = Net Current Assets If current liabilities > current assets: CL-CL = Net Current Liabilities Both called Net Working capital

Question 57

owner's equity

Answer 57

Residual interest in assets of enterprise after deducting all its liabilities Represents book value of owner's interest in business- owners wealth. EQUITY = Assets - Liabilities Owner's equity represented by Share Capital and Retained earnings for a company. Owner's equity represented by Capital and Drawing accounts for a sole trader. Drawings - cash or inventory taken from business by the owners for their persona/private use → reduce owner's equity and assets

Question 58

expenses

Answer 58

Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants Expenses include losses and expenses that arise in the course of the ordinary activities of the enterprise. – Losses as gains may or may not arise from the ordinary activities. An example of a loss, is a loss on the sale of a vehicle.

Question 59

dividends

Answer 59

a distribution of net profit after tax in accordance with the firm’s distribution policy (decision) Total dividend made up of : Interim dividend Final dividend Amount of dividends paid out dependent on potential to grow business in following year Sending out lower dividend sends negative message to shareholders.

Question 60

retained earnings

Answer 60

profit not paid out in dividend

Question 61

asset increase

Answer 61

debited

Question 62

asset decrease

Answer 62

credited

Question 63

liability increase

Answer 63

credit

Question 64

liability decrease

Answer 64

debit

Question 65

owner's equity increase

Answer 65

credit

Question 66

owner's equity decrease

Answer 66

debit

Question 67

owner's equity increase

Answer 67

credit

Question 68

receipt

Answer 68

record cash received in payment of a debt completed in duplicate duplicate kept for further processing

Question 69

cheque

Answer 69

to pay amounts owing/pay for goods/services purchased instructs bank where money has been previously deposited cheque counterfoil

Question 70

cash sales slip

Answer 70

record cash/cheques received for sales of goods/services rendered duplicate kept for further processing

Question 71

depreciation expense

Answer 71

systematic allocation of an asset's cost cost-residual value depreciation - negative asset

Question 72

residual value

Answer 72

est. amount that an entity would currently obtain from the disposal of the asset after deducting the estimated costs of disposal, if the asset were already of the age and condition expected at end of its useful life

Question 73

accrued expenses

Answer 73

expenses incurred during current financial year before being paid in cash/ transaction not recorded current liability

Question 74

accrued income

Answer 74

revenues earned for services performed/goods delivered in current financial year but cash has not been received yet current asset

Question 75

accruals

Answer 75

cash inflow/outflow comes after recognition of income/expenses

Question 76

income received in advance

Answer 76

current liability business received cash in advance in current period for goods/services only to be delivered in following financial period when cash is received- debit bank, credit income account

Question 77

stationary on hand

Answer 77

current asset stationary purchases during the year either on cash or credit basis, stationary expense account is debited, bank/trade payables credited

Question 77

prepaid expense

Answer 77

current asset cash outflow occurs before recognition of expense payment of expense in current financial period but benefit will only be used the next financial year

Question 79

capital transactions fx

Answer 79

debit bank (+A) credit capital (+OE)

Question 80

acquisition of asset , paid immediately

Answer 80

debit (eg motor vehicles) +A credit bank -A

Question 81

acquisition of asset , pay later

Answer 81

debit asset (eg motor vehicles) +A credit accounts payable +L then record payment later debit accounts payable -L credit bank -A

Question 83

payment received immediately

Answer 83

Debit Bank +A credit revenue OE+

Question 84

payment , received later

Answer 84

Debit accounts receivable +A credit revenue OE+ later Debit Bank +A credit accounts receivables A-

Question 85

expense

Answer 85

debit expense (eg computer repair) OE- credit Bank A-

Question 86

entity makes later payment

Answer 86

Debit Expense eg (computer repair) -OE credit account payable (+L) later debit Accounts payable -L credit bank , -A

Question 87

bad debts

Answer 87

Debit bad debts (-E) credit trade receivables (-A)