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Accounting 1 > Introduction > Flashcards

Introduction Flashcards

1
Q

define accounting

A

past events are summarized into numerical information which is then presented to managers and other interested parties for decision making and control purposes

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2
Q

what does “past events are summarised” in the definition of accounting mena

A

gathering data and summarised what happened in the past and predict what will happen in the future

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3
Q

what does the “numerical information” mean in the definition of accounting

A

eg currency, results, averages

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4
Q

function of accounting

A

control outcomes and activities to enable you to account for actions and your use of resources to achieve accountability to those who entrusted you with resources and power

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5
Q

examples of decisions made using accounting information

A 
production levels
product/service cost
selling prices
staff needed to meet budgeted sales target
staffing costs and income generated 
financing expenses
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6
Q

what is revenue

A

money from all sales made

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7
Q

what are the qualities expected of accounting information

A 
relevance
faithful representation
comparability
verifiability 
timeliness
understandability
materiality
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8
Q

what is meant by the relevance quality

A

financial information must be relevant to users’ decision making needs ie no irrelevant information

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9
Q

in relation to relevance, how do you tell if the information is relevant

A

if it has predictive value and it has confirmatory value

only material information should be used

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10
Q

what is confirmatory value

A

the previous predictions have been correct

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11
Q

who decides what material information is relevant

A

company

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12
Q

what is meant by the faithful representation quality

A 
the information is:
complete
neutral and un biased
free from error
reliable
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13
Q

what does free from error mean in faithful representation

A

accounts don’t have to be 100% accurate but estimates can sometimes be made eg on utilities (heat, lighting) and then can be adjusted later for accuracy including a note in the financial statement

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14
Q

what is meant by the comparibilty quality

A

information should be comparable over time so accounts should be prepared the same every year

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15
Q

why is comparability important

A

similarities and differences are readily apparent

eg between competitors

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16
Q

how can comparability be improved

A

through consistency i.e. using the same accounting treatments for the same types of item, from period to period

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17
Q

what does IFRS stand for

A

international financial reporting standards

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18
Q

what is meant by the verifiability quality

A

independent, knowledgeable observers agree that the information is of faithful representation eg auditors

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19
Q

what does the job of an auditor include

A

checking that financial statements are correct

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20
Q

examples of the big 5 auditors

A 
Earnest and Young (EY)
Grant Thornton
Deloitte
PwC
KPMG
21
Q

what is meant by the timeliness quality

A

information should be available to users in time for it to be capable of influencing decisions

if left too long, the usefulness of information declines

22
Q

what does a plc stand for

A

public limited company

23
Q

what is an independence note

A

note signed by auditor to confirm independence

24
Q

what type of companies don’t have to produce annual reports at the end of each year

A

ltd

25
Q

what is meant by the understandability quality

A

that the information is understood by those at who it is aimed

26
Q

why does understandability not mean simplicity and excluding complex infromation

A

because excluding this complex information means that the information will not be faithfully represented or complete

27
Q

what is assumed of financial report users

A

reasonable knowledge of business and economic activities so they can make sense of the reports

28
Q

what is meant by the materiality quality

A

if it could influence decisions it must be reported and if information would not influence decisions it should be omitted as it could cause clutter and interfere with users’ ability to make decision

29
Q

what is IASB

A

international accounting standards board

30
Q

what is the cost/benefit of financial reporting

A

it is expensive and timely to collect, process and verify financial information but the benefits of providing it outwieght the costs of obtaining it

31
Q

who are the main users of financial reports and information

A 
investors
customers
suppliers
lenders
government
competitors
the public
employees
management
32
Q

why are investors interested in using financial reports

A

as they are interested in buying shares/ownership if they are potential investors and buying more or selling theirs if they are existing investors

33
Q

why are customers interested in using financial reports

A

should they continue to use this company, will the entity survive

34
Q

why are suppliers interested in using financial reports

A

will they be paid in the future

if the company expands, will they have the capabilities to expand with them

35
Q

why are lenders interested in using financial reports

A

want to know if they will be repaid +interest

36
Q

why are governments interested in using financial reports

A

want to get taxes

the company contributes to society

37
Q

why are competitors interested in using financial reports

A

want to know best how to compete or maybe they should leave the market

to benchmark thwir own performance

38
Q

why are the public interested in using financial reports

A

want to know will this company still continue to provide jobs and contribute to society

39
Q

why are employees interested in using financial reports

A

want to know how stable the company is and how secure their job is

maybe they’ll want to demand more reward for their work if the company is doing particularly well

40
Q

why are management interested in using financial reports

A

to analyse and make decisions

41
Q

why might conflict exists between user of the financial report

A

eg lenders and owners may have conflict because funds lended may not have been spent on what was agreed

42
Q

what is management accounting

A

accounting that seeks the needs of managers decision making

43
Q

what is financial accounting

A

accounting that meets the need to a variety of user

44
Q

what are the main differences between management accounting and financial accounting

A 
nature of reports
level of detail
regulations
reporting interval
time orientation
range and quality of information
45
Q

how do levels of detail differ between financial and management accounting

A

financial = broad view as used for a wide variety of purposes

management = more detail into decision making

46
Q

how do regulations differ between financial and management accounting

A

management reports are for internal use only so are only designed for the need of the individual manager/situation

financial reports must follow a specific content and format standards under IASB and IFRS

47
Q

how do reporting intervals differ between financial and management accounting

A

financial must be made either annually or sometimes biannually

there are no required reporting intervals for management accounting as they are made as required

48
Q

how does time orientation differ between financial and management accounting

A

financial accounting is backward looking, analysing past events and predicting based on that

management accountign looks at both past and present performance

49
Q

how does the range of information differ between financial and management accounting

A

financial accounting has objective info with verifiable information

management can be more subjective and include information of non financial information such as sales orders, new product launches etc

Accounting 1 (10 decks)

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