1 Basic concepts and terminology Flashcards
What is accounting?
The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.
What is the FASB and IASB? What do they do and why?
Financial Accounting Standards Board (regulator of accounts for the US), International Accounting Standards Board (international regulator of accounts, previously IASC).
With globalisation, an increasing in cross-boarder business transactions calls for a more international and standardised approach to accounting.
What is IFRS? Who do they serve?
IFRS- International Financial Reporting Standards. Principles based accounting standards.
It prioritises investors and lenders over other stakeholders.
What is the equation that links assets, liabilities and equity?
Assets = Liabilities + Equity
What is the equation that links profit, revenue and expenses?
Profit = Revenue - Expenses
Why are all three types of financial statements needed?
Cash flow statement needed as not all cash flows change wealth.
Income statement needed as not all changes in wealth involve cash flow.
Balance sheets are needed as cash in only one component of wealth.
What is the accruals principle?
Why do we use it?
Transactions and other events are accounted for in the periods in which they occur, even if the resulting cash receipts and payments occur in a different period.
It helps better assess the entity’s past and future performances.
Define operating, investing and financing cash flows
Operating- as a result of trading activities.
Investing- as a result of long-term assets.
Financing- as a result of long-term finance.
What might the sign (+/-) of a specific cash flow indicate?
Positive operating cash flow indicates that the inflow from business activity exceed outflow of business operation.
Negative investing cash flow indicates business expansion through acquiring long-term assets.
Positive financing cash flow indicates long-term finance is being taken out but the reasons and impact of this is not known.
Define assets, liability and equity
Assets- economic resources controlled by the entity, as a result of past events.
Liabilities- present obligation of the entity to transfer economic resources as a result of past events.
Equity- the residual interest in the assets of the entity after deducting all its liabilities.
Define income, expenses and profit
Income- increases in the economic benefits during the accounting period arising from revenues and other gains
Expenses- decreases in economic benefits during the accounting period, encompassing expenses that arise in the normal course of business and other losses.
What is the difference between current and non-current?
Current- within a year
Non-current- more than one year
What are the 5 account types?
Asset, Liability, Capital, Income, Expense
Debit vs Credit (in terms of assets, liabilities and equity)
Debit:
- increase in an asset
- decrease in a liability
- decrease in equity (expense/loss)
Credit:
- decrease in an asset
- increase in a liability
- increase in equity (income/profit)
Example: The double-entry to record advertising expense that was incurred (but not yet paid) is:
A) DR advertising expense CR cash
B) DR cash CR advertising expense
C) DR advertising expense CR accounts payable
D) DR accounts payable CR advertising expense
C
DR advertising expense CR accounts payable
