01 - Basic Definitions

Question 1

1. Transactions are recorded and analysed in…
2. after that these transactions are posted to…
3. then, they are summarised in…

Answer 1

1. the books of prime entry
2. ledger accounts
3. financial reports (financial statements

Question 2

Definition: Statement of financial position
1.
2.
3.

Answer 2

• balance sheet
• a statement that shows the assets and liabilities owed by the business at a certain date
• like a snapshot of the financial position

Question 3

Definition: Income Statement

1.
2.
3.

Answer 3

• profit and loss account
• record of the income earned and expenses incurred over a period of time
• like a video of the revenue and expense flows

Question 4

Definition: Cash Flow Statement
1.
2.

Answer 4

• a record of the movement of cash over a period of time
• video of cash flows in and out

Question 5

Who are the main users of financial information?

1.
2.
3.
4.
5.

Answer 5

I C C O M E L S G
- owners
- customers
- competitiors
- managers
- employees and their representatives
- lenders
- government
- suppliers
- community representatives
- investment anaylsts

Question 6

Whats the General purpose of a financial statement?
Whats a specific purpose of a financial statement?
Who are the primary users?
What risk arises between user groups?

Answer 6

• General: if financial statement can be designed that is useful to more than one user group
• Specific: each user group has specific information needs
• owners and long-term lenders are primary users
• always risk of collisions between user groups

Question 7

What is the Agency theory?

1.
2.
3.

Answer 7

• describes relationship between owner (principal) and manager (agent)
• inherent conflict between their interests
• could be resolved by: managers required to give information to owners on regular basis, so their decisions can be monitored

Question 8

What are the two sets / branches of accounts that organisations prepare for users?
1.
2.

Answer 8

1. financial accounting - for external users
2. management accounting - for internal users

Question 9

Other sources of which you can gain insight on financial position of a business

1.
2.
3.
4.
5.
6.

Answer 9

• public announcements by business
• competitive environment within business operates
• capital markets
• information gatherin agencies
• newspaper (especially in start up world)
• economic wide industry reports

Question 10

What two qualities must accounting information have to be decision useful?
1.
2.

And three other qualities that enhance its usefulness:
3.
4.
5.

Answer 10

1. relevant (predict value, confirmatory value)
2. faithfully represented (neutral, complete, freedom of error)
3. produced on timely manner
4. comparable
5. understandable

Question 11

What kind of information might be gleaned from alternative sources like newspapers?

What has to be kept in mind here?

1.
2.
3.
4.

Answer 11

• new products or services being offered
• competitive environment within the business operates
• impact of technology
• best used in conjunction with accounting information for clearer, larger picture