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Financial Accounting > 1- Intoduction to Accounting > Flashcards

1- Intoduction to Accounting Flashcards

1
Q

Define Financial Reporting

A

Way of recording/analysing/summarising transactions of a business.

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2
Q

Financial Accounting

A
  • historic information
  • principal function for to satisfy stakeholders needs
  • report on financial performance/position
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3
Q

Management Accounting

A
  • historic/current/predicted data
  • for managers at company
  • help plan budgets, plans, cash flows
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4
Q

Statement of Profit or Loss

A
  • income generated
  • expenditure incurred
  • over a given period
  • annual published statement
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5
Q

Form of Statement of Profit or Loss

A

Trading Account
- Sales - Cost of Sales = Gross Profit
Other Income
Expenses - indirect costs, running business

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6
Q

Revenue

A

income generated by operations of business for a period of time
-also sales

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7
Q

Expenses- simple definition

A

Costs of running business for a period of time

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8
Q

Income

A
  • Increase in asset/decrease in liability
  • result in increase in equity
  • not include contributions from holders of equity claim
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9
Q

Expenses- complex definition

A
  • decrease in asset/increase in liability
  • result in decrease in equity
  • not include distributions to holders of equity
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10
Q

Statement of Financial Position

A

List of all
- Assets owned
- Liabilities Owed
as at a particular date

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11
Q

Asset

A

present economic resource controlled by entity as result of past events

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12
Q

Asset examples

A
  • factories
  • office buildings
  • lorries
  • plant and machinery
  • computer equipment
  • cash
  • goods held awaiting sale
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13
Q

Liabilities

A

present obligation of the entity to transfer economic resource as a result of past events
- debts of business

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14
Q

Liabilities examples

A
  • amounts owed to suppliers
  • owed to bank
  • bank overdraft
  • amounts owed to tax authorities
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15
Q

Capital

A

amount invested in business by owner that business owes back
- special kind of liability

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16
Q

Equity

A

In Limited Company capital takes form of shares
Residual Interest in assets of the entity after deducting all liabilities

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17
Q

Form of Statement of Financial Position

A
  • As at one date
  • Assets - current/non-current
    Current Assets in order of liquidity
  • Capital
  • Liabilities - current/non-current
    Assets vs Liabilities must balance
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18
Q

Assets - Liabilities =

A

Capital/ Net Assets

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19
Q

What financial info would Investors be interested in?

A
  • risk
  • profitability
  • dividends
  • future prospects
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20
Q

What financial info would Employees be interested in?

A
  • long term growth
  • job security
  • pay rise
  • bonus
    pension benefit
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21
Q

What financial info would Lenders be interested in?

A
  • will they be repaid?
  • future prospects
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22
Q

What financial info would Suppliers be interested in?

A
  • payments on time
  • paid at all
  • credit terms and how to set
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23
Q

What financial info would Customers be interested in?

A
  • can company continue to supply
  • value for money
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24
Q

What financial info would Government + Agencies be interested in?

A
  • statistics
  • size of company/employees
  • foreign trade
  • corporation income tax
  • sales tax
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25
Q

What financial info would The Public be interested in?

A
  • environmental impact
  • job opportunities
  • products/services offered
26
Q

Sole Trader

A
  • owned/ run by one individual
  • can employ people
  • business/personal affairs identical for legal/tax purposes
27
Q

Sole Trader Advantages (3)

A
  • limited paperwork/cost to establish
  • owner has complete control and entitled to profits/assets
  • no reporting obligations
28
Q

Sole Trader Disadvantages (4)

A
  • owner liable for all debts (including all personal property)
  • often reliance on overdrafts/savings for capital
  • may have long working hours/less benefits
  • death of owner could cease business
29
Q

Partnership

A
  • arrangement between individuals to carry out business in common view
  • partnership agreement
  • partners liable for debts
30
Q

Limited Liability Partnership (LLP)

A
  • partners not liable for debts
31
Q

Partnership Advantages (6)

A
  • no reporting obligations (unless LLP)
  • more capital as more people
  • increased skillset
  • share of responsibility
  • share of rick/loss
  • no company tax, partners taxed personally
32
Q

Partnership Disadvantages (5)

A
  • jointly liable for debts
  • partnership agreements set up costs
  • illness/death of partner could cease
  • slower decisions
  • 1 partner leaves, partnership must be dissolved and re-set up
33
Q

Limited Liability Company

A
  • business debts and personal debts of shareholders legally separate
  • formed under specific legislation
  • owner is separate from directors
34
Q

Limited Liability Company Legal Requirements on Accounts

A
  • financial accounts to be submitted
  • Larger companies accounts to be audited
  • distribute accounts to shareholders
35
Q

Limited Liability Company Legal Requirements to exist

A
  • register with companies house
  • memorandum of association deposited with registrar of companies
  • at least one director
36
Q

Limited Liability Company Advantages (6)

A
  • no limit on shareholders
  • investment less risky
  • raising finance easier
  • separate legal identity
  • tax rate lower on companies
  • shares transferred easily/ownership
37
Q

Limited Liability Company Disadvantages (4)

A
  • publish financial statements for all to see
  • comply with legal/accounting regulations
  • audits can be time consuming/expensive
  • share issues regulated by law
38
Q

Entities legally not-separate from owners

A
  • Sole trader
  • partnerships
39
Q

Entities legally separate from owners

A
  • LLP
  • Limited Liability Company
40
Q

Entities separate from Owners for Accounting

A
  • All, called the separate entity concept
41
Q

Entities not-separate from Owners for Accounting

A

None

42
Q

Governance Definition

A

Those charged with governance of company are responsible for preparation of financial statements.
Generally the directors

43
Q

Corporate Governance

A

system by which companies are directed/controlled.
Board of directors runs company on behalf of shareholders as owners of company can have a conflict of interest

44
Q

Legal Responsibilities of Directors as per UK Companies Act 2006 (7)

A
  • act within their powers
  • promote success of the company
  • exercise independent judgement
  • exercise reasonable skill, care, diligence
  • avoid conflict of interest
  • not accept benefits from 3rd parties
  • declare interest in any proposed transactions
45
Q

What is a directors main aim?

A

Create wealth for shareholders

46
Q

What 6 things must directors particularly consider?

A
  • long term consequences
  • employee interests
  • good relations with suppliers/customers
  • impact on local community/environment
  • maintain business conduct/good reputation
  • act fairly for all
47
Q

Who are responsible for prep of financial statements?

A

Directors

48
Q

What specifics do directors consider to prepare financial statements?

A
  • in accordance with applicable financial reporting framework
  • internal controls to ensure no error/fraud
  • prevention/detection of fraud
49
Q

What is Going Concern?

A

Directors must report on it in statements
- business will continue for foreseeable future
- no intention of liquidation

50
Q

How does an audit for companies work?

A
  • for larger companies
  • annually against financial statements
  • independent examination
  • findings reported to shareholders
  • helps to assess how well management carrying out stewardship
51
Q

What can happen if there is bad corporate governance in company

A
  • dominance of board by person/small group
  • excessive perks/salaries of directors
  • lack of transparency
  • corruption
  • repetitional damage
52
Q

4 Main Concepts for all ledgers/statements to be prepared with

A
  • Going Concern Concept
  • Accruals/Matching Concept
  • Prudence Concept /Worst case
  • Consistency Concept
53
Q

Accruals/Matching Concept

A
  • revenue/costs must be recognised as earned/incurred
  • not as cash is received/paid
  • only cost of products sold included in period, remaining stock is assets
54
Q

Prudence Concept

A
  • worst case scenario
  • include a degree of caution
  • income/profit/assets not overstated, don’t anticipate before making a sale
  • losses/liabilities not understated, recognises as soon as anticipated
55
Q

Consistency Concept

A
  • Judgement to be used
  • accounting is not exact science
  • similar items given same accounting treatment
  • same treatment from one period to next
56
Q

Offsetting Concept for Statement Preparation

A
  • no offsetting
  • all shown separately not as one figure
57
Q

Materiality Concept for Statement Preparation

A
  • if error is too trivial to affect understanding = immaterial
  • material items = those with greater value than 5% profit
58
Q

Duality Concept for Statement Preparation

A

every transaction has two effects

59
Q

Substance over Form Concept for Statement Preparation

A

-transactions accounted for as per economic substance not legal form
- hire purchase, legally don’t own until final instalment but non-current asset as will own at some point

60
Q
A

Financial Accounting (12 decks)

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