13. Accounting and finance functions within business

Question 1

What is accounting?

Answer 1

Accounting is the systematic recording, reporting and analysis of financial transactions within a business.

Question 2

What is financial accounting?

Answer 2

Concerned with the production of annual financial statements

Question 3

What are the books of prime entry? (5)

Answer 3

• The purchase day book: lists invoices from suppliers of purchases.
• The sales day book: lists invoices issued to customers.
• The cash book: lists receipts into and payments out of the bank account.
• The petty cash book: records small sundry payments of cash.
• The journal: keeps a proper record of non-routine accounting adjustments made by senior accounts staff.

Question 4

What are the main types of financial statements? (3)

Answer 4

• The statement of profit and loss: details income and costs.
• The statement of financial position: details the assets (business resources) and liabilities (money owed to third parties). This statement also shows the stake owners have in their business. This is sometimes also referred to as capital or owner’s equity.
• The statement of cash flows: summarises the cash receipts and payments for the ear. This helps to show whether a company is solvent (has sufficient cash) and where the cash has been spent in the year period.

Question 5

Who is required to use external auditors to ensure their reports are true and fair?

Answer 5

Large and public-quoted companies

Question 6

What is integrated reporting?

Answer 6

Combining the three main statements into one large document.

Question 7

According to the Integrated Reporting Framework, what are the types of capital? (6)

Answer 7

• Financial capital: shares, bonds, banknotes etc.
• Manufactured capital: material goods or fixed assets.
• Intellectual capital: employee knowledge, business training.
• Human capital: employee health, skill and motivation.
• Social and relationship capital: communities, businesses, trade unions.
• Natural capital: renewable and non-renewable resources.

Question 8

The IIRC:

• stands for what?
• was formed in?
• aims to?

Answer 8

The INTERNATIONAL INTEGRATED REPORTING COUNCIL was formed in AUG 2010 and aims to CREATE A GLOBALLY ACCEPTED IRF.

Question 9

What are the guideline principles of the IIRC? (7)

Answer 9

Guideline principles: 
•	Strategic focus and future orientation
•	Connectivity of information
•	Stakeholder relationships
•	Materiality
•	Conciseness
•	Reliability and completeness
•	Consistency and comparability

Question 10

What are the content elements of the IIRC? (8)

Answer 10

Content elements:
•	Organisational overview and external environment
•	Governance
•	Business model
•	Risks and opportunities
•	Strategy and resource allocation
•	Performance
•	Outlook
•	Basis of preparation and presentation

Question 11

What is management accounting concerned with?

Answer 11

Measuring, analysing, interpreting and communicating information to management in a form which is easy for them to understand.

Question 12

What are the main management reports? (3)

Answer 12

• Cost schedules
• Budgets
• Variance reports

Question 13

What is a cost schedule?
What else is it known as?

What decisions can it influence? (4)

Answer 13

Lists expenses of making units of a product. Sometimes referred to as a standard cost card.

Decisions:
•	Pricing decisions
•	Break-even analysis
•	Key factor analysis
•	Investment appraisal

Question 14

Budgets are used for… (6)

Answer 14

• Co-ordination
• Responsibility
• Utilisation
• Motivation
• Planning
• Evaluation
• Telling

Question 15

What is a variance report?
What should management accountants use them for?
What are the three responses?

Answer 15

A variance report compares the budget to the actual results achieved for the budget period and identifies any significant differences.
Management accountants need to understand why variance has occurred, and then do one of the following:
• Prevent the variance from occurring in the future
• Adopt the change to repeat favourable variance
• Bring results back to achieve budgeted targets

Question 16

Treasury management is…

Answer 16

the corporate handling of all financial matters.

Question 17

What are the key roles of the treasury? (5)

Answer 17

• Working capital management
• Cash management
• Financing
• Foreign currency
• Tax

Question 18

What is working capital?

How is it calculated?

Answer 18

Working capital is the capital available for conducting the day-to-day operations of an organisation.

It is calculated as the excess of current assets over current liabilities.

Question 19

Advantages of using debt as a form of finance (3)

Answer 19

• Interest payments can count as tax deductions: dividend payments made to shareholders, are not.
• Raising debt will not effect ownership of the organisation.
• Debts tend to be cheaper than equity, as they can be secured against assets of the company.

Question 20

Advantages of using equity as a source of finance (2)

Answer 20

• Dividends can be suspended if profits are low, interest cannot be.
• Doesn’t require security.

Question 21

What is the difference between tax avoidance and tax evasion?

Answer 21

Tax avoidance is the legal use of the rules of the tax regime to one’s own advantage in order to reduce the amount of tax paid to the government.
Tax evasion is the use of illegal means to reduce one’s tax liability.