Terminology & Concepts UNITS 1-5 Flashcards
(145 cards)
0
Q
Transaction
A
Any sort of occurrence that has a financial effect
1
Q
Bookkeeping
A
The process of recording transactions in the financial records of a business activity
2
Q
Accounting
A
A process that identifies, organises, classifies, records, summarises and communicates information about economic events, usually in monetary terms
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Q
Who does accounting communicates to?
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All parties interested in the business such as owners, managers, shareholders and governmental bodies.
4
Q
What is an accounting period?
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Also known as financial period, is the period of time for which financial results are prepared. This is different for financial and mangerial accounting
5
Q
What is the accounting reference date?
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Also knows and the closing date, is the date on which an annual accounting period ends. In the UK this can be any date
6
Q
What is an income statement?
A
Also known as Profit & Loss account, it shows the costs deducted from total income to calculate the profit and loss for an entity of a financial period
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Q
Which are the main financial statements, also called set of accounts ?
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Income statement Balance sheet Cash flow statement
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Q
What does MIS stand for ?
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Management information system, which provides information to manage the business efficiently and support the decision making process. AIS is one important component of MIS
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Q
What does AIS stand for?
A
Accounting Information System, which processes accounting data and turns them into informal, in the form of financial statements or management accounts. Also used to define accounting specific software.
10
Q
What are the reasons for and objectives of accounting ?
A
Stewardship - an obligation on the business stewards to produce financial information related to the resources they control but not own Accountability - for the stewards who will need to show they are acting responsibly and that are able to justify their actions and decisions Planning and decision making - how to allocate and use resources Control - monitoring activities and operations shows wether operation are proceeding according to plan
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What are the main characteristics of financial accounting ?
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Production of the financial reports by managers Report on the stewardship of resources Helps interested parties make decisions Prepared annually and sometimes at regular intervals Legally required, regulated and conventionalised Gives information about past performance
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What are the main characteristics of managerial accounting ?
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Production of information used by managers to plan and control activities Internal to the company Normally prepared on a mostly basis Not legally required or regulated Comparative and up to date
13
Q
Define profit
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When total income exceeds total costs. For non profit organisations is called surplus
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Define loss
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When total costs exceed total income. For non profit organisation is called deficit
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What are assets ?
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Assets are resources controlled by a business as a result of past events and from which future economic benefits are expected to flow to the business
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Q
What are the differences between tangible and intangible assets ?
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Tangible assest have a physical form (buildings, machinery, vehicles) while intangible assets don’t (patents, trademarks, copyrights)
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What are non-current assets ?
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Also called fixed assets, they are for long term use, generally for more than one year. Capital expenditures that have been capitalised appear as non current assets
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Define Costs
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A cost is an expenditure on goods and services required to carry out the operations of an entity. Sometimes, when not directly involved in generating sales they are called expenditure
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Define Current Assets
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Current assets are assets which remain with the business only a short time or change over time (cash, raw materials, inventory, receivables)
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What are trade receivables ?
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Also called receivables, they are sums of money owed by customers rom whom a business has sold goods or services. Sometimes also called trade debtors
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What are trade payables ?
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Also called payables or trade creditors, are sums of money owed to persons or entities who/which have supplied foods of services to a business.
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What are liabilities ?
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Liabilities are present obligations of a business arising from past events, the settlement of which is expected to result in a outflow from the business of resources embodying economic benefit.
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What are non current liabilities ?
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Also called long term liabilities, these are sums of money owed which are due for payment more than a year after the end of an accounting period
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Define current liabilities
Sums of money owed by a business to others which are payable within a year or less at the end of an accounting period
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What is a horizontal format ?
A format of presenting balance sheets in which all assets are listed on the left hand side and liabilities and capital are painted on the right hand side
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What are the vertical format and the net asset approach ?
Formats to present balance sheets. In the vertical format assets are shown in the top half and capital and liabilities in the bottom half. In the net asset approach, the top half shows assets less liabilities to derive net assets, which is then the same as total capital shown in the bottom half. Opinion vary wether non current liabilities should be treated as capital and not as liabilities
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What is capital ?
The money, resources or assets put into the business by owners, also called owner's interest or equity
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What is a cash flow statement ?
A statement which shows the inflows and outflows of cash and cash equivalent (everything easily convertible to known amounts of cash usually within a three months period) over a business financial period
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Define Business
An entity designed to provide goods and/or services to consumers
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How can business organisations be classified ?
Reference to their primary activity Reference to their legal form Reference to their profit aims Reference to ownership and control
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What does SIC stand for ?
Standard Industrial Classification, used by the London Stock Exchange to determine the main activity of a company by assigning the same numerical code to companies which provide the same goods/services
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What is a Balance Sheet ?
A statement of the total assets and liabilities of an entity at a particular date, usually the last day of an accounting period. Total assets will always equal total liabilities. Also called statement of financial position.
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What are the differences in a company legal form given by ?
By the way a particular business organisation raises finances, the nature of its activities, it size, how it pays taxes and the legal and accounting regulations it must abide by
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What are sole traders characteristics ?
Owned by one person Finances are own or raised Personal liability Tend to me small No legal requirement to have an audit and no specific format required Called sole practitioner if offer is purely service based
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What are the characteristics of GENERAL partnerships ?
Two or more persons invest and work together An agreement is often written up but no need to have a document as oral agreement is fine Governed by Partnership Act 1890 Partners personally liable and have joint and several responsibility for debts Majority vote is sufficient in decision making except for maters deemed extraordinary
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What are the characteristics of Limited Liability Partnerships or LLCs ?
Liability of partners is restricted to the amount of capital they invested Personal assets are not at risk Governed by Limited Liability Partnership Act 2000 (England, Wales and Scotland) and 2002 (Northern Ireland)
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What are the characteristics of Limited Partnerships ?
Similar to general but also includes limited partners Limited partners only liable in proportion to their registered investment No management authority Very rare as LLPs are available
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What regulations govern partnerships ?
Partnership act 1890 Limited partnership act 1907 Limited liability partnership act 2000 Limited liability partnership act 2002 (NI)
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Define company
A particular form of corporate body which has specific legal meaning denoting people acting together in a particular way, usually to make profit but not exclusively
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What are the characteristics of Chartered Companies ?
Created by royal charter from the crown Nowadays only granted to non profit charitable and educational companies
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What are statutory companies ?
Companies established by a UK act of Parliament for public purposes
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What are registered companies?
Companies registered by a government delegates public official, like the Registrar of Companies, who has authority granted by the parliament to incorporate bodies, on application, following certain specified steps
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What are the characteristics of a company limited by shares ?
Shareholders contribute to the capital on shrewd units called shares Shares can be of nominal value, also called par of paper value, or non par value Shareholders liability to creditors is limited to the capita invested It has legal personality Can be private or public
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What is a nominal value share ?
Also called par or paper value, it the minimal value under which a share can't be issues. Decided when a company is incorporated
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When are non par value shares issues ?
When the overall value of the capita to be raised is stated but the value of individual shares is determined by the directors. Non allowed in the UK
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What is share premium ?
The positive difference paid by a shareholder for a share and its nominal value. Must be recorded separately in a share premium account.
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What are the characteristics of private limited companies ?
Can only issue shares privately Doesn't have to disclose as much information as public companies Required to have suffix LTD or INC
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What are the characteristics of public companies ?
Can issue shares to the general public Legally obliged to disclose information about its operations and activities Must use the suffix PLC
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What are companies limited by guarantee ?
In UK, Australia and Irwland they are alternatives types of corporations used primarily for non profit organisations that require a legal personality. Does not usually have share capital Guarantors guarantee a nominal amount if the company has inadequate funds upon cessation of business Clubs, memberships organisation, unions and associations
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What are the characteristics of community interest companies ?
They operate for the benefit of the community and not the owners Can be limited by shares or guarantee Asset lock prevents assets and profits being distributed in unlawful manner Can't support political activities hence can't be a charity though charities can apply for subsidiaries CICS
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What are CICs ?
Community interest companies
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What are the characteristics of unlimited companies ?
Does not offer shareholders limited liability Conceptually a partnership Doesn't have to make disclosure public and private companies do Used when the company doesn't trade, where limited liability is not permitted, need for secrecy
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What regulations govern companies ?
Those linked to Companies Act 2006 Financial Reporting Standards International Financial Reporting Standards
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What do FRSs and IFRs stand for ?
Financial reporting standards International Financial Reporting Standards
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What are unincorporated associations and their characteristics ?
Associations of persons who are not incorporated or in a partnership They have no profit motive They look after the particular interests of their members Raise money by levying joining fees Subject to no regulations governing the production of financial statements
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What are the characteristics of trusts ?
Formal arrangement set up by a trust deed Assets of money are transferred by a settlor for trustees to manage for the benefit of one or more beneficiaries Non active business entities
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What are the characteristics of branches and divisions ?
They are subsidiary parts of a larger entity They are not separate legal entities Financial result audited with those of the larger body
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When do groups of companies exist ?
When a company, referees to as a parent company, own a share of one or more companies. A parent company is always a holding company by not vice versa
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What do the terms associated and subsidiary companies refer to ?
When a parent company controls another company if ownership is more than 50% then the other company is called subsidiary. If less than 50% then is called associated or simply and investment.
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What are the classifications by legal form ?
Sole trader Partnerships Companies Unincorporated associations Trust Branches Divisions Group of companies Holdings
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What do NFPs and NPOs stand for ?
Not for profit organisations Non profit organisations
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What is the best prima facie evidence of a company's existence ?
Assets of the balance sheet
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What are interim financial statements ?
Statements issues every three or six months by companies traded on the stock exchange to inform investors and financial markets about what is happening with the company
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What are profit warnings ?
Warning issued by public companies when profits are not expected to be in line with forecasts
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What is the stakeholder theory ?
Term given to a wider attempt to keep interest of all stakeholders in mind without focusing on one group in particular
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What are investors interested in knowing ?
Security of investment Profit levels Liquidity Cash flow Financial solvency and profits shown in balance sheet Past profits
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What are customers interest in ?
Whether a business will able to continue supplying them with goods/services in the future If the business is regularly making profit for long term solvency
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What are suppliers interested in?
That they will be paid Business financial health Solvency and cash liquidity in balance sheet No overdraft or large loans
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What are lenders interested in ?
That loans will be rapid and the interest will be paid when due Profitability and solvency If assets used to secure loans that assets are retained
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What is the government interested in ?
Income statements as starting point to it tax Data about performance, job creation and investments made in local communities
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What are competitors interested in ?
That want to compare their performance with that of rivals
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What is the public interested in ?
The effect of a business on all levels of society
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What are employees interest in ?
Security of their jobs Raises, pensions and potential redundancies Long term survival of a business Directors salaries and benefits
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What are managers interested in ?
All financial account information Information for budgeting, panning, decision making and control
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What political and legal factors affect accounting ?
Company law Tax law Wether a country adopts common or codified law
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What macroeconomic factors affect accounting ?
Governmental macroeconomic objectives : control of growth control of inflation and deflation adequate levels of employment controlling balance of payments
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What does controlling the balance of payments mean ?
Making sure that imports do not significantly exceed exports, and vice versa. If imports greatly export export a trade deficit arises and it must be financed
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Which are the two policies governments may pursue to keep an economy viable ?
Fiscal policy Monetary policy
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What are the main characteristics of a fiscal policy ?
It concerns a government taxation and spending plan Used to ensure balanced budgets Taxation must be able to meet spending needs
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What are the main characteristics of a fiscal policy ?
It refers to the management of the economy's money supply (total amount of money on the economy) Involves measures to increase of decrease supply of money in an economy Affect interest rates, reserve requirements for banks and trade in open and foreign exchange markets
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What social factors affect accounting ?
Demographics Changes in attitude, values and lifestyles Changes in taste and fashion Disposable income Levels of education and health
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How is technology affecting accounting ?
New working patterns New production patterns Complete changes in some fields (banking and insurance) New techniques and software allows grater control, speed, efficiently
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What types of markets exist ?
Financial market Capital market Money market
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What are the characteristics of a Financial Market ?
Refers to a market where financial assets, including currencies, are traded It will deal with non currency financial assets (shares, bonds, loan stock)
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What are the characteristics of a capital market ?
Is a market for trading on long term financial assets and contracts The stock exchanges are capital markets
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What are the characteristics of a money market ?
Is market where currencies and short term financial contacts/assets are traded Concerns currency, short term loans, bills of exchange, trade bills and treasury bills Transactions take place mostly between financial institutions
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What is direct financing ?
The raising of equity end debt capital from investors via means of shred and debentures
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What is indirect financing ?
When a company raised money by borrowing it form a bank or financial institution
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Why do accountants need to understand financial and capital markets ?
Because they are often involved in the raising of finances and capital introduced. These needs to be accounted and disclosed following the given governmental regulations
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Who can "meet" in financial markets ?
Borrowers and lenders
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How many types of financial market are there ?
Two, primary and secondary
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What is a primary financial market ?
A market that deals in new issue of finance
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What is a secondary financial market ?
A market that deals in trading in "second hand" or "pre-owned" financial assets. It doesn't provide new funds
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What type of financial market is a stock exchange and why ?
A secondary market because shares can be traded only after a company has been listed in a separate exercise
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What is a stock exchange ?
A market to for trading certain types of shared and debt securities
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What stock markets are present in the UK ?
The London Stock Exchange (dealing in publics sector stock and international bonds) The Alternative Investment Market, an arm of the LSE, dealing with shares of smaller companies unwilling on unready for the LSE Over The Counter Market, a market in which financial assets are traded other than through a formal stock exchange. Mostly done by large institutional investors
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What does LSE stand for ?
London Stock Exchange
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What does AIM stand for ?
Alternative Investment Market
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What does OTC stand for ?
Over the counter market
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What are institutional investors ?
Organisations, such as banks, insurance companies or pension funds that trade in large volume of securities
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What are open ended investment companies ?
Investment business that operate open end trusts, a form of unit trust investment whereby managers are permitted to vary the investments held without informing the unit holders
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What does OEICs stand for ?
Open ended investment companies
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What type of spectators are there ?
Bulls - buys low sells high Bear - short sells Stag - buys shares when there is a new issue
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What is efficient market hypothesis ?
A theory which holds that transactions in financial markets cannot exploit information to generate abnormal returns. There are 3 forms: Strong for efficiency Semi strong efficiency Work form efficiency
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What does EMH stand for ?
Efficient market hypothesis
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When does strong form market efficiency occur ?
When not only all publicly held but also all privately held past and present information is reflected in share prices
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When does semi-strong form market efficiency occur ?
When all publicly held past and present information is reflected in share prices
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When does weak form market efficiency occur ?
Where all past price history is reflected in share prices
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What is the most usual form of market efficiency ?
Semi strong form because private companies don't usually disclose information
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What does FRC stand for ?
Financial Reporting Council An independent body established to promote sound financial reporting
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Who is the primary user of a company's financial accounts ?
Shareholders
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What does ASC stand for and when what did it do ?
Accounting Standard Committee It issued Statements of Standard Accounting Practice
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What are SSAP ?
Statements of standard accounting practice They are expected to be adhered to but non compliance is allowed if adherence results in misleading results
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What is the ASB and where does it come from ?
Accounting Standards Board Replaced the ASC in 1990
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What standards does the ASB produces ?
SSAPs = Standard statements of accounting practice FRSs = Financial reporting standards FRSSEs = financial reporting standards for small enterprises
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What are collectively known as "accounting Standards" ?
SSAPs FRSs FRSSEs They must comply with UK laws and EU directives
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What is the FRRP ?
Financial reporting review panel A panel empowered under civil law to prosecute companies that fail to comply with accounting standards or company law
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What is the IASB ?
International accounting standards board Independent, privately funded body which develops, improves and promotes the use of unified international accounting standards
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What are IFRSs ?
International financial reporting standards They are issues by the IASB
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What accounting theory must be regulated ?
To eliminate creative accounting To set out reliable and widely accepted practices To address complex and long term issues in a pragmatic and concise way
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According to Elliot and Elliot, what were the three stages in the evolution of accounting theory ?
An empirical inductive approach = standards that established the best current practices as normal A deductive approach = dreaded a based on principles deduced from assumptions and based on theoretical economics A conceptual framework based on decision-usefulness = standards need to satisfy cost/benefit criteria and implemented by general consensus based on rationality
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What is the IASB objective of general purpose financial reporting ?
To provide financial information about the entity that is useful to existing and potential investors and other creditors
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What are the IASB framework fundamental qualitative characteristics ?
Relevance Faithful representation
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What are the IASB framework enhancing qualitative characteristics ?
Comparability, verifiability, timeliness and understandability
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What can affect the IASB framework underlying characteristic of relevance ?
Materiality - information is material when its omission would affect or distort the decisions of users Its very nature - when information is required by law
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What are the IASB framework enhancing qualitative characteristics ?
Comparability - with others and over time Verifiability - information represents what it claims it represents Timeliness - to help influence decisions Understandability - for users with reasonable financial knowledge
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What are the underlying assumptions on when ISAB financial statements should be prepared ?
Accrual basis Going concern
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What elements comprise the balance sheet ?
Assets Liabilities Equity
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What elements comprise the income statement ?
Income Expenses
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Define equity
Income is the residual interest in the assets of an entry after deducing all liabilities
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Define income
Increases in economic benefits during an accounting period in the form of inflow or enhancements of assets or decrease in liabilities other than those relating to contributions from equity participants
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Define expenses
Decreases of economic benefits during an accounting period in the form of outflows or depletion of assets or raises in liabilities that result in decreased equity, other than those related distinctions to equity participants
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Which are the concepts of capital maintenance ?
Financial capital maintenance - it accounts for no changes in prices levels. Capital means net asset or equity Real Capital maintenance - takes account or inflation and deflation. Concerns with maintaining owners purchasing power Physical Capital maintenance - recognises a profit only if the assets have the same output over time by considering changes in prices
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Are matching and duality the same thing ?
No Matching is another name for accruals Duality is the base of double entry
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Carriage Inwards ?
Cost of transporting purchases to the factory. In trading account included in cost of goods sold.
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Carriage outwards ?
Cost of getting goods to customers. Included under expenses in the IS
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What are working capital and net working capital ?
Working capital of a business is the total of current assets and current liabilities.
Net working capital = current assets - current liabilities
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Definethe concepts of increasing and decresaing liqiuidity in financial statements
increasing liquidity means that assets and liabilities are presented in aorder dictated by their liquidity.
Increasing = least liquid first
Decreasing = most liquid first
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Describe the Accuountig Cycle
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What are Direct and Indirect Costs ?
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What are the mainpurposes of Control Acocunts ?
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Explain the flow from source data to nominal ledgers
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