Topic 1: Environment of Accounting Flashcards
(43 cards)
What is the Accounting Assumptions and Doctrines?
Rules and guidelines that accountants follow when recording, reporting and interpreting financial information.
What is the monetary assumption?
The Dollar is the basic unit of accounting.
What are some advantages of using the monetary assumption?
- Can be added, subtracted, multiplied and divided
- Allows us to make comparisons between different firms and years
What are some limitations of using the monetary assumption?
- Over time, the value of the dollar is not consistent
- Many non-financial aspects that cannot be reported in dollar terms - Quality of Staff, Location of the business
What are objective values?
Verifiable evidence/proof is available
Examples: Receipts/invoices
What are subjective values?
Estimation is made to the value of an item
Examples: Reputation, doubtful doubts, depreciation
What is qualitative information?
Information that can’t be put into $ terms
Examples - location, competitors
What is quantitative information?
Aspects that can be put into $ terms
Examples - reports, banks, motor vehicles
What is an entity?
Something that exists in its own right
What does the Accounting Entity Assumption assume?
Assumes that the business is considered a separate reporting entity from its owners and all other entities.
*Is the same for all businesses - sole-traders, partnerships and companies
What is the Legal Entity assumption?
Looks at who is responsible for the debts of the business
Who are sole-traders?
Business is owned and run by one person
Owner has unlimited liability
What are business partnerships?
Business is run and owned by 2-20 people, where profit is divided
Owners have unlimited liability
What are companies?
Legal entity existing under law in its own right.
Owners: Shareholders - limited liability (not responsible for debts), can lose initial investment.
Management: Board of Directors
What does Ltd refer to?
Refers to limited liability of companies
* Implies business is a company
What are retained profits and what is its purpose?
Retained Profit is company profit that is held back from distribution to shareholders.
Purpose: To increase productivity/expand for the future (increase profits)
What does Earnings Yield Ratio Measure?
Measures the company’s performance
Calculates return generated on the whole profit figure
* 2 Decimal Places
What is the Dividend Yield Ratio and what does it measure?
measures the actual return for the shareholder for their investment in the company.
- Takes retained profits into account
- 2 Decimal Places
How is the Earnings Yield Ratio Calculated?
Earnings per ordinary Share:
Net Profit for ordinary shareholders / No. of Ordinary Shares = $
Earnings Yield:
$ / Market Price per Ordinary Share = %
How is the Dividend Yield Ratio Calculated?
Dividend per Ordinary Share:
Total Ordinary Dividend / No. of Ordinary Shares = $
Dividend Yield:
$ / Market Price per Ordinary Share = %
What is the primary role of accountants?
To make managers and users informed and therefore responsible for effective decision making in respect to the resources of the business
Who are internal users?
Those with direct financial interest in the business and make decisions which ensure the smooth running and profitability of the business.
Examples: Owners/Partners, Board of Directors, Managers (Within the business)
Who are external users?
Those with indirect financial interest and make decisions to maximise their own personal interests.
Examples: Current/Potential Investors, Employees, Banks (outside the business)
Are accountants Internal or External users? Why/Why not?
Neither Internal or External users because they do not make decisions for the business.
Only give recommendations.
