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AC100 > Lecture 1.2-1.4 > Flashcards

Lecture 1.2-1.4 Flashcards

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1
Q

What are the 2 types of summary statements that can be provided from a company?

A

Financial accounting statement

Managerial Accounting statement

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2
Q

What are the main 2 differences in the financial and managerial accounting statement?

A

Financial accounting statements are standardised ( e.g. M&S financial statements look the same as Sainsburys)
whereas Managerial Accounting statements are customised ( each company have have there own format.)

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3
Q

Who are the Financial Accounting statements external users?

A 
Investors 
Creditors
Customers 
Regulators
Competitors
Consultants
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4
Q

Why are Creditors (banks, also bonds) interested in Financial Accounting statements?

A

They are interested in seeing whether the firm will be able to repay debt. They give loans and buy loans or debentures.

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5
Q

Why are Customers interested in Financial Accounting statements?

A

They are interested in the stability and reputation of a company, also if he is a large customer e.g. shoe manufacturer being a customer of a Clark supplier

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6
Q

Why are Regulators interested in Financial Accounting statements?

A

Competition regulators make sure firms are not engaging in any anti-competitive practices. Also Tax authorities ( they want to know how well the firm is performing to collect taxes)

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7
Q

Who overseas the whole financial sector?

A

Financial council authority, they make sure that firms are reporting properly or involved in any frauds.

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8
Q

Why are competitors interested in Financial Accounting statements?

A

As it is hard to get private information from the company, so you have to look at public information e.g. pepsi looking at Financial statements of Coke.

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9
Q

Why are consultants interested in Financial Accounting statements?

A

Help make strategic decisions

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10
Q

Who are the Managerial Accounting statements internal users?

A

Marketing team
Management
HR

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11
Q

Why are the Human resources team interested in Managerial statements?

A

They would see if the company can afford to give its employees a wage increase.

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12
Q

What are the differences between FA and MA in terms of purpose?

A

FA- communication of financial position

MA- decision making.

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13
Q

What are the differences between FA and MA, in terms of the level of detail produced?

A

FA - Reports provide users with a broad overview of the position and performance of an entity for the period.

MA- Reports provide considerable detail to managers to help them with particular operating decisions ( e.g. introduce a new product)

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14
Q

What is an entitiy?

A

A business entity is an organization that’s formed to conduct business.

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15
Q

What are the differences between FA and MA, in terms of the existence of regulation?

A

FA - Subject to accounting regulation ( GAAP/SFRS)

MA - none

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16
Q

What does listing mean?

A

You are available on a stock exchange and people can trade on that particular company ( you can buy and sell shares) e.g. Hong Kong Stock exchange and London stock exchange.

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17
Q

What is an Index?

A

is a group of companies which are tracked.

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18
Q

Who is responsible for Financial reporting?

A

Management
Audit committee
Auditors

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19
Q

How is Management responsible for Financial reporting?

A

Creation of financial reports

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20
Q

How is the Auditing committee responsible for Financial reporting?

A

Oversight of the management process

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21
Q

How are Auditors responsible for Financial reporting?

A

Experts opinion on whether the reports present a true and fair view of the company and prepared in accordance to IFRS.

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22
Q

What are the Financial reporting Council

A

is an independent regulator in the UK and Ireland, responsible for regulating auditors, accountants and actuaries, and setting the UK’s Corporate Governance and Stewardship Codes. (oversight body)

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23
Q

What are the 4 financial statements required?

A

Balance sheet
Income statement
Cash flow statement
Statement of changes in equity

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24
Q

What is a balance sheet?

A

It is a tabular sheet of balances of assets, liabilities, and equity

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25
What is an Income statement?
Revenue - Expenses, Profitability of a company
26
What is a cash flow statement?
A cash flow statement is simply a statement of cash generation and its use categorized under different activities.
27
What is a statement of changes in equity?
It is a statement showing the capital investment by stockholders and the retained earnings of the company.
28
What do accountings say that about the role of accounting?
They say they have a dual role allowing users to make better economic decisions.
29
What is the dual role of financial statements?
1) Stewardship ( confirms the past) | 2) Predictive ( predicting the future)
30
What are 3 types of entity in which accounting is used in ?
Sole proprietorship Partnerships Limited company
31
Do sole proprietorship have legal requirements to produce accounting info?
No, however the worker must produce accounting information for taxation authority.
32
What is a Partnership?
Owned by two or more people, and quite small in terms of size ( but can be large) and the partners have unlimited liability ( depends on the agreement)
33
In a partnership how can profits be determined and whether you would like to dissolve a partnership?
Through agreement of contract.
34
What is a limited company?
Businesses who they issue shares and the amount who can have shares in business can be huge e.g. 100000 investors in a company e.g. M&S. They have limited liability.
35
In exchange for a limited liability what do companies have to produce?
They have to produce detailed financial statements.
36
What type of Entity is EY and John Lewis?
Partnership
37
What are the characteristics that makes accounting information useful?
1) Relevance 2) Faithful representation 3) Comparability 4) Verifiable 5) Timelessness 6) Understandability
38
What does Relevance mean as a characteristic of Accounting?
Information that has the ability to influence decisions of past and predict future ( predict next year and this year profit)
39
What does Faithful representation mean as a characteristic of Accounting?
Gives a fair picture and completeness ( providing all info needed. It also provides no bias e.g. if a firm says it has $100,000 sales but it actually has $120,000 sales ( this is a violation of faithful representation)
40
What does Comparability mean as a characteristic of Accounting?
This implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. e.g. two companies have same method of deprecation
41
What does Verifiable mean as a characteristic of Accounting?
Assurance that the information represents faithfully what it is supposed to represent, verifiable info tends to be supported by evidence e.g enron.
42
What does Timelessness mean as a characteristic of Accounting?
Information available in time to be capable of influencing decisions e.g. interim report wasn't given 6 months after the end of the period, the info loses its capacity to influence users decision.
43
What does Understandability mean as a characteristic of Accounting?
Information expressed as clearly as possible, it is understood by users
44
Which of the following accounting characteristics is violated : A firm ABC technologies decides to use straight line depreciation method while the rest of its firms use accelerated depreciation method?
Faithful representation ( Use different methods to hide, however this also depends on situation from beginning)
45
Which of the following accounting characteristics was violated A corporation does not reveal that they are defendants in a law suit that started in Jan until the year end?
1) Relevance - this important info for users 2) Faithful representation - didn't reveal the truth 3) Timeliness
46
What does Accounting conventions mean?
These are used around the world, conventions are the generally accepted rules that accountants tend to follow when preparing financial statements.
47
What are 9 conventions of Accounting?
1) Going concern 2) Business entity 3) Historical convention 4) Fair value convention 5) Prudenance 6) Dual aspect 7) Money measurement 8) Accruals basis of accounting 9) Matching
48
What does Going concern mean?
Financial statements are prepared on the assumption that the business will continue operations for the foreseeable future.
49
What does Historical cost convention mean?
You note down the asset at the historical cost you get it for or acquisition cost. e.g. LSE assets or a building, you don't write down market value.
50
What does Fair value convention mean?
You write the asset reported at market value e.g. because of inflation and increase in real estate market, this would increase, so on fair value it will show an increase.
51
How do you know whether to use fair value or Historical cost convention
The law for certain assets tells you to use what convention, but sometimes with certain assets you are free to choice.
52
What is the problem of fair value?
1) Prices tend to fluctuate a lot, so you won't have a consistent reflection. 2) Also not everything has fair value, some things are not easily tradeable in the market. Also e.g. highly specialised hospital equipment have no market for this.
53
What is a benefit of fair value?
You have more relevant info, so if you wanted to sell company today, you will be able to know what you get today, as assets and liabilities are at market value.
54
What is Prudenance as an Accounting convention?
Actual and anticipated losses are noted down immediately but not future gains, meaning you are playing safe, as you are not overstating profits. ( profits are only recognised when they actually arise)
55
Give an example of Prudence?
Marks and spencer's, holds dresses for a particular designer, who has suddenly fallen out of favour, the company realises it cannot sell it at the original cost, they have to give a discount, you have to note this down.
56
What does the dual affect mean?
Each transaction has two aspects, both which affect company's position e.g. buying a car will increase the value of an asset ( car) but reduces the value of an asset called money.
57
What does Money management mean as an Accounting convention?
A resource can be included only if it is measurable in money terms e.g. LSE has several noble prize winners, you can't write these as assets, there is no monetary value.
58
WHAT DOES Accruals basis of accounting?
You don't track cash, you track transactions. What you track is revenue when earned and costs when incurred
59
What does is an example of Accruals basis of accounting?
e.g. selling someone a textbook, Person B says he will give the money after 10 days. However person A will note down sell of textbook as sales revenue ( you track the actual transaction not cash). Also for expenses, I note it down right away, i don't wait for payment from whom I have taken service from.
60
What does Matching principle mean as a basis of accounting?
This is when you match the expense to the revenue its generated.
61
Give an example of the matching principles?
A firm that pays its staff 2% of the sales it generates e.g. the staff sold £300,000 worth of goods, so the amount that has to be paid is 2% of this £3000000, which is £6000. It actually paid £5000, this means that even though cash has been paid for £5000, this £6000 helped generate revenue, so £6000 will be the expense.
62
What do you think are the main advantages of a partnership compared to a sole-propertiorship?
1) Sharing the burden of ownership | 2) The ability to raise capital, this is beyond the capacity of a single individual.
63
What do you think are the main disadvantages of a partnership compared to a sole-propertiorship?
1) The risks of sharing ownership of a business with unsuitable individuals. 2) The limits placed on individual decision making that a partnership will impose.
64
What are the differences between FA and MA, in terms of Reporting interval?
FA - usually annually or quarterly | MA - as needed and as ongoing

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