1. Financial Accounting

Question 1

accounting

Answer 1

The process of:

• identifying
• measuring
• communicating

economic information to allow for informed judgements and decisions.

Question 2

What are the four basic assumptions accountants make?

Answer 2

1) economic entity
2) accounting period
3) monetary unit
4) going concern

Question 3

economic entity assumption

Answer 3

The assumption that the financial activities of a business can be separated from the financial activities of the business’ owner(s).

Question 4

accounting period assumption

Answer 4

The assumption that economic information can be meaningfully collected and communicated over short periods of time.

Question 5

monetary unit assumption

Answer 5

An assumption that the dollar is the most effective means to communicate economic activity.

Question 6

going concern assumption

Answer 6

The assumption that a company will continue to operate into the foreseeable future.

Question 7

income statement

(also known as…)

Answer 7

profit and loss statement

Reports a company’s revenues and expenses over a specific period of time and the resulting profit or loss.

Question 8

revenue

Answer 8

An increase in resources resulting from the sale of goods or the provision of services.

Question 9

revenue recognition principle

Answer 9

The principle that revenue should be recorded when a resource has been earned and not just when the cash is received.

Question 10

expense

Answer 10

A decrease in resources resulting from the operation of a business.

Question 11

matching principle

Answer 11

The principle that expenses should be recorded in the period resources are used to generate revenues.

Question 12

Key Formula

income statement

Answer 12

Revenues – Expenses = Net Profit or Net Loss

(or Income, more formally, Total Comprehensive Income)

Question 13

asset

Answer 13

An economic resource that is objectively measurable, results from a prior transaction and will provide future economic benefit.

Question 14

cost principle

(also known as…)

Answer 14

historical cost principle

The principle that assets should be recorded and reported at the cost paid to acquire them.

Question 15

liability

Answer 15

An obligation of a business that results from a past transaction and will require the sacrifice of economic resources at a future date.

Question 16

equity

Answer 16

The difference between a business’ assets and liabilities, representing the share of assets that is claimed by the business’ owner(s).

Question 17

contributed capital

Answer 17

The resources that investors contribute to a business in exchange for ownership interest.

Question 18

dividends

Answer 18

Profits that are distributed to owners.

(usually called drawings if the business is not a company)

Question 19

retained earnings

Answer 19

Profits that are kept in the business.

Question 20

What does a balance sheet show?

(also known as…)

Answer 20

statement of financial position

The financial statement that shows a business’ assets, liabilities and equity at a specific point in time.

Question 21

Key Formula

accounting equation

(also known as…)

Answer 21

balance sheet equation

Assets = Liabilities + Equity

Question 22

statement of changes in equity

Answer 22

A financial statement that reports the change in a business’ equity over a specific period of time.

(contributed equity, reserves and retained earnings)

Question 23

Key Formula

statement of changes in equity

(the retained earnings part)

Answer 23

Retained Earnings, Beginning Balance

+/– Net Profit / Loss

– Dividends

= Retained Earnings, Ending Balance

Question 24

What are the three steps involved in preparing a financial statement for any business?

Answer 24

The income statement must be prepared first, followed by the statement of changes in equity and then the balance sheet.

Question 25

cash flow statement

Answer 25

A financial statement that reports a business’ sources and uses of cash over a specific period of time.

Question 26

Give examples of financing, investing and operating activities.

Answer 26

financing activities

generating and repaying cash from creditors and investors

investing activities

the buying and selling of revenue-generating assets

operating activities

the purchase of supplies, the payment of employees and the sale of products

Question 27

Key Formula

cash flow statement

Answer 27

Cash Flows Provided (Used) by Operating Activities

+/– Cash Flows Provided (Used) by Investing Activities

+/– Cash Flows Provided (Used) by Financing Activities

= Net Increase (Decrease) in Cash

+ Cash at the beginning

= Cash at the end

Question 28

relevance

Answer 28

The capacity of accounting information to affect decisions.

Question 29

materiality

Answer 29

The threshold at which a financial item begins to affect decision-making.

Question 30

faithful representation

Answer 30

Financial information that is presented in a way that is:

• complete
• neutral
• free from error.

Question 31

comparability

Answer 31

The ability to use accounting information to be:

weighed against or contrasted to the financial activities of different businesses.

Question 32

verifiability

Answer 32

When information allows different independent observers to arrive at:

the same or similar outcomes.

Question 33

timeliness

Answer 33

When information is provided quickly enough that the user can take action.

Question 34

understandability

Answer 34

The ability of accounting information to be
comprehensible to those who have a:

‘reasonable understanding of business and economic activities and accounting and a willingness to study the information with reasonable diligence’.

Question 35

Conceptual Framework for Financial Reporting

Answer 35

The

• characteristics
• objectives
• concepts

that guide the way in which accounting is carried out.