1 Flashcards
What is accounting?
The ‘language’ of business
Collecting, analysing and communicating financial information for the purpose of making informed decisions
As such it is an information system
Conceptual framework (CF)
A set of principles used to develop more detailed accounting practices
An economic resource
arising from past events, which is
presently controlled, and
from which future economic benefits are expected to flow
Assets are classified as
Non-current assets (fixed assets) are held for the long term, usually purchased in order to facilitate income generation within the business.
Current assets generally have a life span of less than 12 months.
Classification of liabilities
Current liabilities due for payment within 1 year of the financial statements date.
Non-current liabilities (long-term liabilities) due for payment after more than 1 year from the financial statements date.
What is Equity
The residual interest (wealth) in the assets of the entity after deducting all its liabilities.
Assets – Liabilities = Equity
Funds contributed to the business by the owner of business
The owner of a business can be a sole trader, a partnership, shareholders, even another company
The business is ALWAYS treated as a separate entity
Drawings - when owner takes some capital for personal use, the amount will be deducted from the equity (sole trader or partnership)
Reserves or retained earnings - the profit generated from capital by the business will be added to original capital
The ownership interest may be increased by:
Earning revenue.
New capital contributed by the owner.
The ownership interest may be decreased by:
Incurring expenses.
Capital withdrawn by the owner.
Gross Profit
Gross profit = rev - cogs
Operating Profit
gross profit, less the other expenses (overheads)
ACCRUALS
When expense for the period is more than the cash paid during the period
PREPAYMENTS
When the amount paid during the period is more than the full expense for the period - PREPAYMENTS
Straight line method
C – RV = £ ?
L
Reducing balance method
Takes a constant % of the (reducing) net book value (NBV)
Assets
Assets =
Equity + Liabilities
net cash flow
Cash in – cash out = net cash flow
Capital at start of year
(Non-current assets + Current assets) - (Current liabilities - Non-current liabilities) plus/minus Capital contributed / withdrawn + Profit of the period;
Assets (accounting)
Ownership interest + Liabilities
Define Operating, Investing, and Financing
activities in the Statement of Cash Flows.
Operating activities involve day-to-day
business operations, investing activities relate
to asset investments, and financing activities
pertain to funding sources.
How are cash receipts and cash payments
different from profit in the Statement of Cash
Flows?
Cash receipts and payments directly impact
cash balance, while profit is a broader
measure of financial performance.
How does capital expenditure differ from
revenue expenditure in terms of financial
statement impact?
Capital expenditure affects the statement of
financial position, while revenue expenditure
impacts the income statement.
Describe the going concern principle in
accounting
It is the assumption that the business will
continue operating into the foreseeable
future.
Define accruals (matching) principle in
accounting
It recognizes the effect of transactions and
events when they occur, not just when cash is
exchanged. Expenses are matched with
revenues in the period they are incurred.
How does the principle of consistency apply
in accounting?
It ensures that similar transactions and
events are measured and presented
consistently within an entity in each
accounting period and from one period to the
next.
prudence principle in
accounting entails?
It involves being cautious in estimates under
uncertainty, ensuring gains and assets are
not overstated, and losses and liabilities are
not understated.
Describe the business entity principle in
accounting.
It involves treating the business and its
owners as separate entities for accounting
purposes.
Explain the historic cost principle in
accounting.
It is a method of valuing assets and liabilities
based on their original cost without adjusting
for changing prices.
What does the dual aspect principle state in
accounting?
It asserts that each transaction has two
aspects or effects that impact the statement
of financial position.
Describe the three key questions - Ps - in
financial analysis.
The key questions are Position (accumulated
wealth), Performance (creating wealth), and
Prospect (staying in business), focusing on
the state of wealth, wealth creation over time,
and cash availability.
Define ratio analysis in financial statements.
Ratio analysis is a method of analyzing
financial statements to evaluate a company’s
performance by expressing relationships
between figures, comparing with
benchmarks, and interpreting the results
How does ratio analysis help in assessing
company performance?
Ratio analysis helps in evaluating how well a
business is run to generate revenue, control
costs, and produce a profit, providing insights
into profitability, liquidity, investment, and
gearing.
