1. Revisions of Financial Statement

Question 1

What is Accounting?

Answer 1

A series of processes and techniques used to identify, measure and communicate economic information which users find helpful in making informed decision

Question 2

What are the 3 main contents of an annual report?

Answer 2

• Narrative information
• Auditor’s report
• The financial statements

Question 3

What are the 5 main things financial statements in an annual report are comprised of?

Answer 3

• Statement of financial position/balance sheet
• Statement of comprehensive income
• Statement of changes in equity
• Statement of cash flows
• Notes to the accounts

Question 4

What are the 4 main reasons why we need financial reporting?

Answer 4

• To provide information for investment decisions
• To provide protection for creditors
• To ensure that the directors are accountable to the owners
• To ensure that the company fulfils its ‘public’ duty

Question 5

Give 5 key accounting concepts

Answer 5

• Accruals
• Going concern
• Consistency
• Historical cost
• Prudence

Question 6

What does Matching mean in accounting?

Answer 6

All costs and revenues associated with a particular sale should be recognized together in the income statement when the sale takes place

Question 7

What distinguishes financial accounting from a simple record of cash transactions?

Answer 7

Financial accounting aims to measure business transactions at the time they take place, rather than when cash changes hands

Question 8

What are the 4 main ways in which cash basis functions?

Answer 8

• Revenue recognised when incoming cash flows occur
• Expenses recognised when outgoing cash flows occur
• No mutual links of expenses and revenues
• No measure of profitability feasible

Question 9

What are the 3 main ways in which accrual basis functions?

Answer 9

• Expenses and revenue are recognized when they are used
• Linked to matching principle
• Measure of profitability of economic activities during an accounting period

Question 10

Describe the concept of Going Concern

Answer 10

In preparing financial statements it is assumed that the company will continue in business for the foreseeable future

Question 11

Describe the concept of Consistency

Answer 11

Same accounting principles should be applied from one year to another and, within the same year, in relation to similar transactions. If changes are necessary, they should be explained in the notes to the accounts

Question 12

Describe the Historical cost concept

Answer 12

A recording and measurement rule that relates to the practice of valuing assets at their original acquisition cost

Question 13

Describe the concept of prudence

Answer 13

The user of the accounts is entitled to assume that the accounts portray a cautious view of the financial position and profits

Question 14

What is the general equation for the statement of financial position?

Answer 14

Assets = Liabilities + Equity

Question 15

What do statements of comprehensive income and cash flows explain?

Answer 15

They explain how changes in net worth come about

Question 16

What is the income statement/profit & loss account?

Answer 16

A record of transactions over the past accounting period

Question 17

What is depreciation?

Answer 17

The measure of wearing out, consumption or other reduction in the useful economic life of a fixed asset/noncurrent asset whether arising from use, effluxion of time or obsolescence through technical or market changes

Question 18

Where is annual depreciation charged?

Answer 18

To the income statement/profit & loss account

Question 19

Where is accumulated depreciation charged?

Answer 19

It is deducted from the non-current asset cost in the Statement of Financial Position

Question 20

What are the 2 main methods of depreciation?

Answer 20

• Straight line method

- Reducing balance method