Chapter 1: Introduction to Accounting Flashcards
(27 cards)
What is ‘accounting’?
Accounting is the art of communicating financial information about an organisation to interested parties.
Accounting can be defined as ‘the process of identifying, recording and communicating economic information to permit informed judgements and decisions by users of that information.
What are the two main types of accounting?
- Financial accounting
2. Management accounting
Compare financial and management accounting in terms of their purpose.
(Purpose)
Financial accounting is the production of financial statements for external users for decision-making purposes.
Management accounting is the production of detailed accounts, used by management to control the business and make plans.
How frequently are financial and management accounts prepared?
(Frequency)
Financial accounts: usually annually or semi-annually.
Management accounts: as frequently as is required by management. Real-time reporting is increasingly the norm.
Why are financial and management accounts prepared?
Stimulus
Financial accounts are required by law.
Management accounts are prepared to aid management decision making.
What is the focus of information in financial and management accounts?
(Focus of information)
Financial accounting reflects past performance and current position.
Management accounting includes budgets and forecasts of future activities, as well as reflecting past performance.
What is the framework of financial and management accounting?
(Framework)
Regulatory framework for financial accounting dictates the contents of financial statements.
There is no regulatory framework for management accounting. There may be differences between organisations. Information should be useful to managers.
Who are the users of financial information?
Investors Lenders Suppliers Customers Competitors Employees Government Analysts Public at large
What is the key accounting information for an investor?
- Information about growth, sales, volumes
- Profitability (profit margins, overall level of profit)
- Investment in assets, levels of debt
- Business value
What is the key accounting information for lenders?
- Levels of existing debt
- Cash flows to ascertain availability of cash when loan repayments are due
- Assets against which the lending may be secured
What is the key accounting information for suppliers?
- Cash flow
- Management of working capital
- Terms of trade and payment policies
What is the key accounting information for customers?
- Sales growth
- New product development
- Terms of trade
- Investment in business (e.g., production capacity)
What is the key accounting information for competitors?
- Level of sales (market share)
- Profit margins
- External debt
- Asset growth
What is the key accounting information for employees?
- Sales and profit growth
- Levels of investment in the business
- Overall employment data (numbers employed, wages and salary costs)
- Status and valuation of the company pension schemes/levels of company contributions
Why are government agencies and departments interested in accounting information?
- Tax authorities are interested in profitability for tax purposes
- Local government agencies are interested for the purposes of levying local taxes and rates
- They may require information that supports decisions on grants
What comprises a complete set of financial statements?
- Statement of financial position
- Income statement
- Statement of cash flows
- Statement of changes in equity
- Notes to the financial statements
What is the Statement of financial position?
It lists an organisation’s assets, liabilities, and equity at each reporting date.
N.B. - it presents the financial position of the organisation at a single point in time (the reporting date)
What is the Income statement?
It presents the income earned and expenses incurred by an organisation during a reporting period.
It’s purpose is to calculate whether the organisation made a profit or loss for the reporting period.
What is the Statement of cash flows?
It presents the cash inflow and cash outflows of an organisation during a reporting period.
What is the Statement of changes in equity?
It explains how the equity of an organisation has changed during the year.
What are the 5 elements of financial statements?
Assets Liabilities Owner equity Income Expenses
What are assets?
Assets are economic resources controlled by the organisation that can be put to productive use for the future benefit of the organisation.
Examples are buildings, equipment, machinery, furniture, etc.
What are liabilities?
Liabilities are obligations to third parties that must be settled at some point in the future.
Examples are outstanding bank loans, bank overdrafts and amounts owed to suppliers.
What is owner equity?
Owner equity (or owner capital) is the residual amount of assets attributable to the owners of the business once the liabilities are settled.
