Chapter One

Question 1

What is accounting?

Answer 1

Accounting is concerned with collecting, analysing and communicating financial information

Question 2

What is the purpose of accounting ?

Answer 2

to help user decision making

Question 3

Who are the users of accounting?

Answer 3

1. owners
2. managers
3. government
4. Community representatives
5. employees
6. customers
7. competitors
8. investment analysis
9. lenders
10. suppliers

Question 4

What are the fundamental qualities of accounting ?

Answer 4

1. Relevance

2. Faithful representation

Question 5

What does relevance mean in terms of accounting ?

Answer 5

The information should make a difference

Predict future events and confirm past

Question 6

What does faithful representation mean in terms of accounting ?

Answer 6

It should represent what it’s meant to

Question 7

What three things are needed with faithful representation ?

Answer 7

Neutral
Complete
Free from error

Question 8

What are all of the qualities of accounting ?

Answer 8

relevance 
faithful representation
verifibility 
timeliness
comparability 
understandability

Question 9

What are the four steps of the accounting information system?

Answer 9

1. information identification
2. information recording
3. information analysis
4. information reporting

Question 10

What is management accounting ?

Answer 10

Management accounting seeks to meet the needs of managers

Question 11

what is financial accounting ?

Answer 11

financial accounting seeks to meet the needs of the other users

Question 12

What does comparability mean ?

Answer 12

The information needs to allow businesses to make comparisons easily

Question 13

What does verifiability mean?

Answer 13

Ensures that the accounting information portrays what it is supposed to

Question 14

What does timeliness mean ?

Answer 14

This means that the information should be made available to users in good timing to enable good decision making for the users

Question 15

What does understandability mean?

Answer 15

This means that the information should be presented as clearly and consisely as possible

Question 16

What is financial management ?

Answer 16

This is closely associated with acquiring and deploying short term and long term finance required by a business

Question 17

Which quality is materiality closely linked to ?

Answer 17

Relevance

Question 18

What is cost of sales ?

Answer 18

This is the cost price of the goods sold

Question 19

What does profit from operations mean ?

Answer 19

This is the profit made from trading, buying, making and selling

Question 20

What happens to the profit for the year from the income statement ?

Answer 20

It is transferred into the statement of changes in equity

Question 21

What is involved in the changes in equity statement ?

Answer 21

1. Share capital

2. Retained earnings

Question 22

What is the statement of financial position ?

Answer 22

It is a snapshot of the company at a given date

Question 23

What is the order of the statement of financial position ?

Answer 23

1. Non-current Assets
2. Current assets
3. Equity and liabilities
4. Capital and reserves
5. Non-current liabilities
6. current liabilities

Question 24

What is the purpose of notes to accounts ?

Answer 24

this is where most of the detailed information is listed. However, sole traders and partnerships won’t have as much detail in their notes to the accounts because they are not governed by legal disclosure rules compared to limited companies which are.

Question 25

What happens if some of the qualities of accounting aren't present in financial statements ?

Answer 25

The auditors report with state this

Question 26

What are the differences between financial accounts and management accounts ?

Answer 26

1. Financial accounts look backwards while managment accounts look forwards and backwards 2. financial accounts are primarily prepared for the owners while management accounts are mainly prepared for the directors/managers

Question 27

what does GAAP mean ?

Answer 27

Generally accepted accounting principles | It represents the large gap between the rules and regulations related to limited ocmpanies and sole traders etc.

Question 28

What are the differences between management accounting and financial accounting ?

Answer 28

MA - specific purpose, often very detailed, unregulated, reporting intervals are as short as required, based on future and past, contains financial and non-financial info. FA - general purpose, broad overview, regulated, reporting intervals are annual or bi-annual, based on past, contains financial info.

Question 29

what do non-current assets with finite lives mean for a business ?

Answer 29

They provide benefits for the business for a limited period of time

Question 30

What do non-current assets with indefinite lives mean for a business ?

Answer 30

They provide benefits for the business for a foreseeable time limit

Question 31

net book value / written down value =

Answer 31

carrying amount

Question 32

What is a fair value ?

Answer 32

This is the price that a product could be sold for in the current market.

Question 33

Equation for the profit/loss for the period ?

Answer 33

total revenue - total expenses incurred in generating revenue

Question 34

What is gross profit ?

Answer 34

this is the profit made from buying and selling goods without taking any revenues or expenses associated with the business into account

Question 35

What is the equation for gross profit?

Answer 35

Revenue - cost of sales = gross profit

Question 36

What does operating profit mean?

Answer 36

This represents the wealth generated during the period from the normal activities of the business

Question 37

What is the equation for operating profit ?

Answer 37

Operating profit = gross profit - operating expenses

Question 38

How do we find out the profit for the period ?

Answer 38

operating profit + non operating income (interest receivable) - interest payables = profit for the period

Question 39

What is the matching convention?

Answer 39

This means that expenses should be should be noted in financial statements in the same accounting period that the revenue for the product is received