1: Intro to accounting

Question 1

What is accounting?

Answer 1

Accounting is a way of recording, analysing and summarising transactions of an entity.

Question 2

What are the three main types of business entities?

Answer 2

🞂 Sole traders (e.g. plumber, hairdresser etc) – owned + operated by owner
🞂 Partnerships (general or Limited Liability Partnerships (LLPs)) – 2 or more individuals
🞂 Limited liability companies (Ltd (private) or Plc (public)) - owned by shareholders with limited liability

Question 3

Who are the primary users of financial statements?

Answer 3

Existing and potential investors, lenders and other creditors

Question 4

What is the equation for equity?

Answer 4

Assets - Liabilities = Equity
(Own - Owe = Net worth)

Question 5

What are the 5 code of Ethics fundamental principles?

Answer 5

• Integrity - Straightforward and honest in all professional and business relationships
• Objectivity - No bias or conflict of interest
• Professional competence/due care - provide competent service in accordance with technical and professional standards.
• Confidendiality - Should not disclose private information e.g. insider trading
• Professional behaviour - Complying with relevant laws and regulations

Question 6

Are UK companies legally required to disclose sustainability info?

Answer 6

No but may choose to

Question 7

What will sustainability disclosure standards work alongside?

Answer 7

IFRS standards

Question 8

What are the fundamental qualitative characteristics of financial information

Answer 8

• Relevance
• Faithful representation

Question 9

Explain relevance

Answer 9

Information is relevant if it makes a difference to a user’s decisions, ie if it has:
🞂 Predictive value (used to predict future outcome)
🞂 Confirmatory value (Feedback on previous evolution/estimate)
Relevance is affected by nature and
materiality.

Question 10

Explain Faithful representation

Answer 10

ie : it faithfully represents the transactions and other events it purports to represent. A faithful representation will be:
🞂 Complete
🞂 Neutral/unbiased (supported by
prudence)
🞂 Free from error

Question 11

What are the 4 enhancing qualitative characteristics?

Answer 11

Enhancing qualitative characteristics
🞂 Comparability – from one period to the next and between firms in the same line
of business
🞂 Verifiability – it can be proven (supporting evidence)
🞂 Timeliness – in time to make decisions, old info is less useful.
🞂 Understandability – classified, presented clearly + concisely

Question 12

Explain fair presentation

Answer 12

Financial statements are required to give a true and fair view or present fairly in all material respects the financial results of the entity.

Question 13

Explain going concern

Answer 13

The entity is viewed as continuing in operation for the foreseeable future. It is assumed that the entity has neither the intention nor the necessity of liquidation or ceasing to trade. When an entity is not a going concern it accounts are prepared on a “break up” basis.

Question 14

Explain accruals of accounting

Answer 14

Entities should prepare their financial statements on the basis that transactions are recorded in them, not as the cash is paid or received (cash accounting), but as the income or expenses are earned or incurred in the reporting period to which they relate.

Question 15

Explain Consistency of position

Answer 15

To aid comparability over a period of time and between companies, the presentation and classification of items in the financial statements should stay the same from one period to the next, unless:
🞂 There is a significant change in the nature of the operations or
🞂 A change in presentation is required by an IFRS Standard.

Question 16

What is the business entity concept

Answer 16

Accountants regard a business as a separate entity, distinct from its owners or managers. This concept applies to companies, partnerships and sole‐traders.

Question 17

What is capital expenditure?

Answer 17

-Expenditure which results in the acquisition of long term assets, or an improvement or enhancement of their earning capacity.
-Creates a non‐current asset in the Statement of Financial Position

Question 18

What is revenue expenditure

Answer 18

-expenditure incurred either for trade purposes (purchase of raw materials, wages and salaries, administrative expenses) or to maintain the existingearning capacity of long term assets (repairs and maintenance).
-Creates an expense in the statement of profit or loss.

Question 19

What is capital income

Answer 19

proceeds from the sale of non‐current assets. The profit or loss on sale of the assets is included in the statement of profit or loss in the period that the sale takes place.