Week 1 - Introduction

Question 1

What is accounting?

Answer 1

A process of identifying, measuring and communicating RELEVANT economic information (business transactions) about a particular business to a variety of users for decision making.

Question 2

What are business transactions?

Answer 2

External exchange of something of value between two or more entities (one of which being a business or firm).

• They can be reliably measured and recorded
• They affect assets, liabilities and equity

Question 3

Who are the two parties accounting information is designed to meet the needs of?

Answer 3

Internal users (management) = special purpose reports
External users (stakeholders) = general purpose reports

Question 4

Who are external users?

Answer 4

All users other than management. i.e. investors (owners), suppliers and banks, employees, governement authorities (e.g. ATO and ASIC), and customers.

Question 5

What is GAAP?

Answer 5

Generally Accepted Accounting Principles

Question 6

What is financial accounting?

Answer 6

Preparing and presenting financial statements primarily for external parties.
Prepared in accordance with GAAP.

Question 7

What does a financial statement consist of? (4 sections)

Answer 7

Income statement, statement of changes in equity, balance sheet, statement of cash flows

Question 8

What is management accounting?

Answer 8

Preparing internal reports for management to assist decision making.
Not regulated by rules like FA

Question 9

What are the two core activities of management accounting?

Answer 9

Formulating plans and budgets

Providing information used in monitoring and controlling performance

Question 10

What is the timeliness comparison of FA and MA?

Answer 10

FA is a historical picture of past operations.

MA has both historical records and estimates (budgets) of the future.

Question 11

What levels of detail are FA and MA?

Answer 11

FA: Quantitative in nature, concerns the whole entity.
MA: Both quantitative and qualitative. Frequently individual segments, not whole entity.

Question 12

Who are the two major professional accounting bodies in Australia?

Answer 12

The CPA & ICAA (Institute of chartered Accountants in Australia)

Question 13

What are the 3 factors the extent of accounting regulation depend primarily on?

Answer 13

1) Whether financial accounting or management accounting
2) The type of business structure
3) Where a firm is required to produce general purpose reports for a wide range of users.

Question 14

Firms that are required to produce general purpose reports must comply with…?

Answer 14

GAAP and Accounting standards (AASBs) developed by the AASB and professional bodes (ICAA, CPA Australia).

Question 15

What are the 7 regulatory bodies relevant to businesses and the accountant?

Answer 15

Corporations Act 2001, ASIC, ASX, ACCC, RBA, APRA & ATO

Question 16

What does ASIC stand for and do?

Answer 16

Australian Securities and Investments Commission - Enforces company and financial services laws to protect consumers, investors and creditors.

Question 17

What does ASX stand for and what does it do?

Answer 17

Australian Securities Exchange - Major market place in Australia for trading shares, government bonds and other fixed interest securities.
-Ensures companies behave appropriately (no insider trading) & disclose adequate information.

Question 18

What is the ACCC and what does it stand for?

Answer 18

Australian Competition & Consumer Commission - Administers the Trade Practices Act and Prices Surveillance Act, covering: Anti-competitive behaviour, unfair market practices, mergers and acquisitions of companies & product safety and liability.
- (Primary role is consumer protection - e.g. petrol prices and collusion).

Question 19

What is the RBA?

Answer 19

Reserve Bank of Australia - Responsible for the stability of the Australian financial system and setting monetary policy (interest rates).

Question 20

What is APRA?

Answer 20

Australian Prudential Regulation Authority - Ensures financial institutions honour their commitments, and promotes safety of life and general insurance companies and large super funds.

Question 21

What is the ATO?

Answer 21

Australian Taxation Office - Collects taxes and oversees all self managed superannuation funds on behalf of the government.

Question 22

What is an income statement?

Answer 22

Shows the PROFIT earned by the firm. Calculated by subtracting the expenses of the firm (amounts incurred to earn income/outflows), from the income (revenue).

Question 23

What is income?

Answer 23

Typically includes: Revenue, interest and dividends received from investments.

Question 24

What 3 elements does a balance sheet consist of?

Answer 24

Assets (A), Liabilities (L) & Equity/Owners Equity (OE).

Question 25

What is an Asset (A)?

Answer 25

Items of value to the business (items "owned" by the business).

Question 26

What is a Liability (L)?

Answer 26

Amounts "owed" by the business

Question 27

What is Equity/Owners Equity (OE)?

Answer 27

Owner's interest (value) in business (amounts "owed" to the owner/s).

Question 28

What are some examples of assets?

Answer 28

Cash, stock (inventory for sale), accounts (or anything) receivable (debtors), equipment, motor vehicles and furniture.

Question 29

What are some examples of liabilities?

Answer 29

Anything PAYABLE (e.g. accounts payable, insurance payable). Anything "owing" or "accrued."

Question 30

What is the accounting equation?

Answer 30

The three balance sheet items make the equation A = L + OE OR OE = A - L - Also called the balance sheet equation - Always correct (at any point in time).

Question 31

What is capital?

Answer 31

The "start up funds" owners contribute to the business. The business "owes" this to the owner.

Question 32

What are drawings?

Answer 32

When owners withdraw funds owed to them by the business.

Question 33

What are dividends?

Answer 33

In the case of a company, dividends are paid funds owing to them from the business

Question 34

What is a balance sheet?

Answer 34

A statement of assets, liabilities and owners equity, detailing the balance of income and expenditure over the preceding period.

Question 35

What is OE equivalent to?

Answer 35

Capital contributed + Profit (or minus loss) - drawings/dividends

Question 36

What is the link between the income statement and balance sheet?

Answer 36

The profit calculated on the income statement is transferred to owners equity on the balance sheet.

Question 37

What is the correct order of preparation of financial statements?

Answer 37

1. Income Statement 2. Statement of changes to owners equity 3. Balance Sheet 4. Cash Flow Statement

Question 38

What are the two fundamental qualitative characteristics the AASBs require?

Answer 38

Relevance - ability to be used to influence decisions; affected by materiality (information is material if omission or misstatement could influence decision making) Faithful Representation - financial information will be complete, neutral and free from error.

Question 39

What are the four enhancing qualitative characteristics?

Answer 39

Comparability - consistency of measurement and presentation of items Verifiability - the information faithfully represents what it suggests its representing Timeliness - information is available to all stakeholders in time for decision making purposes Understandability - clarity and readability of presentation

Question 40

What are the limitations of accounting information?

Answer 40

Time lag in distribution of information to users Historical information (based on past data) therefore often outdated Subjectivity of some information - considerable choice involved in what items to report and how to report them. Some information may not be disclosed because of a) the cost or b) may provide competitors with sensitive information.