2.4 Intro to accounting

Question 1

What is accounting?

Answer 1

The collecting and recording of financial data to produce and report financial information

Question 2

What is financial data?

Answer 2

The raw facts and figures (source documents) upon which financial information is based

Question 3

What is financial information?

Answer 3

the financial data that has been sorted, classified and summarised into a more useable and understandable form (reports)

Question 4

What is the purpose of accounting?

Answer 4

To assist business owners and other users of it with planning and decision-making

Question 5

What is revenue?

Answer 5

What the business has earned from its customers for performing a service or selling a good

Question 6

What is expense?

Answer 6

What it has cost the business to provide those services or sell that good

Question 7

What is a cash receipt?

Answer 7

Cash coming in to the business

Question 8

What is a cash payment?

Answer 8

Cash going out the business

Question 9

What parties may be interested in a businesses financial information?

Answer 9

• Accounts Receivable and other customers, who may wish to know about the firm’s continuing ability to provide them with inventory.
• Accounts Payable and other suppliers, who may wish to know about the firm’s ability to repay what it owes them.
• Banks and other financial institutions, which will certainly want to know about the firm’s current levels of debt and their ability to repay before providing them with any additional finance.
• Employees, who may wish to know about the firm’s long-term viability, and their own long-term employment prospects, or its ability to afford improvements in wages and conditions.
• Prospective owners, who may wish to know about the firm’s financial structure and earnings performance, and its assets and liabilities to determine the firm’s worth.
• The Australian Tax Office (ATO), which will require financial information for taxation purposes.

Question 10

What is a stakeholder?

Answer 10

A person or organisation that has an interest in the performance of the business and can affect operations or be affected by them

Question 11

What are the 4 types of business operations?

Answer 11

• Trading (aka merchandising or retail)
• Service
• Manufacturing
• Mixed business

Question 12

What is a trading business?

Answer 12

A business that purchases finished goods for the sole purpose of resale. Inventory is purchased at a cost price, and then sold to consumers at a marked-up selling price

Question 13

What is a service business?

Answer 13

A business that performs a service for the customer so in fact what is being sold is the time, labour and expertise of the business. There is no physical exchange of goods

Question 14

What is a manufacturing business?

Answer 14

A business that actually produces the goods it sells, using a production process (which could be on an assembly line) to transform raw materials into a finished product

Question 15

What is a mixed business?

Answer 15

In certain cases, a business will combine one or more types of operation. For example, hairdressers not only perform a service (cutting your hair) but also sell a variety of haircare products

Question 16

What is the accounting process?

Answer 16

The process of turning financial data into financial information.
- Source documents
- Records
- Reports
- Advice

Question 17

What is a profit?

Answer 17

When a business earns greater profit than revenue

Question 18

What is a cash surplus?

Answer 18

An excess of cash receipts over cash payments, leading to an increase in a positive bank balance or decrease in a bank overdraft

Question 19

What is a cash deficit?

Answer 19

An excess of cash payments over cash receipts, leading to a decrease in a positive bank balance or an increase in a bank overdraft

Question 20

What is a cash flow statement?

Answer 20

To report on cash inflows (cash received) and cash outflows (cash paid), separately identifying cash flows relating to Operating activities, Investing activities and Financing activities

Question 21

What is an asset?

Answer 21

a present economic resource controlled by the business as a result of past events that has the potential to produce future economic benefits.

Question 22

What is a liability?

Answer 22

a present obligation of a business to transfer an economic resource as a result of past events.

Question 23

What are non-current and current assets?

Answer 23

• reasonably expected provide an inflow of future economic benefits within 12 months.
• not held for resale and is expected to provide an inflow of future economic benefits for more than 12 months

Question 24

What are current and non-current liabilities?

Answer 24

• expected to be settled within 12 months.
• not required to be settled within 12 months.

Question 25

What is owners equity?

Answer 25

the residual interest in the assets of the entity after deducting all its liabilities.

Question 26

What is the accounting equation?

Answer 26

Assets = Liabilities + Owners Equity

Question 27

What is a balance sheet?

Answer 27

details the firm’s financial position at a particular point in time by reporting assets, liabilities, and owner’s equity
- only ever accurate on the day it is prepared.