Chapter 1 Introduction to accounting

Question 1

Give example of a trading and service business

Answer 1

trading: bookshops, supermarkets, furniture shop and bakery
service: tuition centre, law firm, barber shop, cleaning company

Question 1

Explain the difference between trading and service businesses?

Answer 1

a trading business buy goods from suppliers and sell goods to customers while a service business provides services to its customer

Question 2

Explain the role of accounting

Answer 2

The role of accounting is to provide accounting information for stakeholders to make informed decisions on the management of resources and performance of business

Question 3

State the roles of accountants

Answer 3

• Accountants act as stewards of businesses who are responsible for managing the resources of the business on behalf of the owner

-They set up an accounting information system (AIS) to collate, record and organise and report accounting information so that owners and other stakeholders can make decisions regarding the management of resources and the performance of businesses.

Question 4

Explain integrity

Answer 4

Integrity is being straightforward and honest in all professional and business relationship

Question 5

Explain objectivity

Answer 5

Objectivity is not letting bias, conflict of interest or undue influence of others to override professional judgement

Question 6

.Explain the importance of having integrity and objectivity in preparing and presenting accounting information

Answer 6

-As accountants provide information to stakeholders for decision-making purposes, the information needs to be truthful and accurate. Accountants who do not have integrity and is not objective may provide inaccurate or false information that mislead users to make poor decisions. Thus, it is important for accountants to have integrity and is objective.

Question 7

Ownership and capital contribution of sole proprietorship

Answer 7

owned by run by one person who contributes capital to set up the business

Question 8

ownership and capital contribution of limited liability partnership

Answer 8

owned by two or more partners who contribute capital to set up the business

Question 9

ownership and capital contribution of private limited company

Answer 9

owned by 50 or less shareholders who invest in the business by buying shares in the business

Question 10

access to funds of sole proprietorship

Answer 10

sole proprietorship is set up by using owner personal funds. Bank and other lenders are less willing to lend money to the business due to the lack of personal assets to serve as collaterals

Question 11

access to funds of limited liability partnership

Answer 11

LLP has access to a larger pool of funds due to contribution from the partners. Banks and other lenders are more willing to lend money to LLP due to more sources of personal assets available to serve as collaterals

Question 12

access to funds of private limited company

Answer 12

PLC may issue shares to raise funds. Banks and other lenders are more willing to lend money to PLC as there are more business assets to serve as collaterals

Question 13

risks of sole proprietorship

Answer 13

owner is personally liable for all debts and losses incurred by the business. he is obliged to pay them using his personal assets

Question 14

risks of limited liability partnership

Answer 14

partners are not personally liable for the debts and losses incurred by the business unless it is due to the wrongful action of the partner

Question 15

risks of private limited company

Answer 15

shareholders have limited liability and are not personally liable for the debts and losses incurred by the business. They will only lose the amount they invested

Question 16

level of control over business in sole proprietorship

Answer 16

owner has total control and full decision making power over the running of the business. Owner may hire professionals to help in the business

Question 17

level of control over business in limited liability partnership

Answer 17

control over the running of the business is shared among the partners, partners may hire professional to help in the business

Question 18

level of control over business in PLC

Answer 18

shareholder have no control over the running of the business unless they are part of the management team, company hire professionals to manage the business on behalf of the shareholders

Question 19

lifespan of SP

Answer 19

business exists as long owner is alive and want to continue operation

Question 20

lifespan of LLP

Answer 20

Partnership continue to exist until it is wound up or struck off

Question 21

lifespan of PLC

Answer 21

company continues to exist until it is wound up or struck off

Question 22

transferability of ownership of SP

Answer 22

ownership of the SP can be transferred to any willing party after notifying the relevant authorities

Question 23

transferability of ownership of LLP

Answer 23

any addition or withdrawal of partners will have to be agreed upon by all partners and with the authorities informed

Question 24

transferability of ownership of PLC

Answer 24

ownership of the PLC can be transferred through shares transfers with stamp duties payable to authorities

Question 25

Advantages of SP

Answer 25

-owner has total control and full decision making power over the running of the business
-relatively quick and easy to set up as there are minimal administrative duties to adhere to
-ownership of the SP can be transferred to any willing party after notifying the relevant authorities

Question 26

Disadvantages of SP

Answer 26

-owner has to use personal funds as banks and other lenders are less willing to lend money to the business due to the lack of personal assets to serve as collaterals
-owner is personally liable for all debts and losses incurred by the business. He is obliged to pay them using his personal assets

Question 27

Advantages of PLC

Answer 27

-PLC may issue shares to raise funds. Banks and other lenders are more willing to lend money to PLC as there are more business assets to serve as collaterals
-shareholders have limited liability and are not personally liable for the debts and losses incurred by the business. They will only lose the amount they invested

Question 28

Disadvantages of PLC

Answer 28

-More complicated and costly to start a company. It has to comply with more rules and regulations
-Sometimes disputes will arise between directors and shareholders as their ideas of what is best for the company vary
-There is also a risk (since companies can buy shares) that a takeover might occur this way

Question 29

Why owner and stakeholders want accounting information?

Answer 29

-Contributes capital to the business and expect profit distribution in return
-Whether to continue to invest in the business or sell the business, depending on the risks and returns related to the business

Question 30

Why employees want accounting information?

Answer 30

-Whether to continue working at the business based on the stability and future prospect of the business

Question 31

Why government want accounting information?

Answer 31

-to decide the amount of tax payable by the business and whether the business complies with the tax regulations

Question 32

Why bank/lenders want accounting information?

Answer 32

-to decide whether to grant loans to the business, depending on the business ability to repay the loan principal and pay interest

Question 33

Why managers want accounting information?

Answer 33

-to decide on ways to improve the performance of the business

Question 34

Why suppliers want accounting information?

Answer 34

-to decide whether to sell to the business on credit, depending on its ability to pay

Question 35

Why customers want accounting information?

Answer 35

-to decide whether to continue buying from the business, depending on the ability of the business to provide goods after sales service and if it would continue operating in the future

Question 36

Why competitors want accounting information?

Answer 36

-to decide whether they are comparable to the business and how to improve their own performance

Question 37

Define accounting entity

Answer 37

-Business and owner are treated as two distinct and separate entities. All transactions are recorded from the point of view of the business. Only business transactions affecting the business are recorded in the business books.

Question 38

Define Monetary

Answer 38

-Only business transactions that can be measured in monetary terms are recorded.

Question 39

Define Going Concern

Answer 39

-A business is assumed to have an indefinite economic life unless there is credible evidence that it may close down

Question 40

Define Accounting Period

Answer 40

-The life of a business is divided into regular time intervals to allow financial statements to be prepared at fixed periods eg.monthly, quarterly, yearly

Question 41

Define Historical Cost

Answer 41

-Transactions should be recorded at their original cost

Question 42

Define Objectivity

Answer 42

-Accounting information recorded must be supported by reliable and verifiable evidence so that financial statements will be free from opinions and biases

Question 43

Define Consistency

Answer 43

-Once an accounting method is chosen, business should use this same accounting method for all the current and future financial periods to enable meaningful comparison across periods.

Question 44

Define Matching

Answer 44

-Expenses incurred must be matched against income earned in the same period to determine the profit for that period

Question 45

Define Revenue Recognition

Answer 45

-Revenue is recorded as earned when goods have been delivered or services have been provided

Question 46

Define Accrual basis of accounting

Answer 46

-Business activities that have occurred, regardless of whether cash is paid or received, should be recorded in the relevant accounting period.

Question 47

Define Prudence

Answer 47

-Assets and profits should not be overstated while liabilities and losses should be not understated.

Question 48

Define Materiality

Answer 48

-If a transaction or an item is not material. It does not make a difference to decision-making, then the business need not record it in accordance with the accounting principles and guidelines.