Accounting Documents and Systems

Question 1

2 fundamental characteristics of the conceptual framework

Answer 1

Relevance and faithful representation

Question 2

Four enhancing characteristics of the conceptual framework

Answer 2

Verifiability, timeliness, understandability, comparability

Question 3

What is materiality

Answer 3

Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of financial statements

Question 4

What is going concern

Answer 4

The entity is viewed as continuing in operation for the foreseeable future (at least the next 12 months). It is assumed that the entity has neither the intention nor the necessity of liquidation or of ceasing to trade

Question 5

How is an entity valued when it is not a going concern

Answer 5

At its break-up value - amount it would sell for (net-realisable value) if they were sold off individually and the business were broken up

Question 6

5 elements of a financial statement

Answer 6

Assets, liabilities, income, expenses and capital

Question 7

What are net assets

Answer 7

Assets less liabilities

Question 8

What is income

Answer 8

Increases in assets or decreases in liabilities that result in increases in equity (capital)

Question 9

What is capital

Answer 9

The amount an entity owes to its owner

Question 10

What is the accrual basis

Answer 10

Items are recognised as assets, liabilities, equity, income and expenses (the elements of a financial statement) when they satisfy the definitions and recognition criteria for those elements in the conceptual framework

Question 11

According to the accrual basis…

Answer 11

When computing profit, income earned must be matched against the expenditure incurred in earning it

Question 12

What is the historical cost convention

Answer 12

Transactions are recorded at their cost when they occurred

Question 13

What’s bad about using historical cost in times of rising prices

Answer 13

It leads to asset values being too low and profits too high

Question 14

What is the role of ISSB (International Sustainability Standards Board)?

Answer 14

Developing sustainability-related non-financial disclosures

Question 15

What should underpin the judgements that accountants make

Answer 15

Ethical considerations

Question 16

What is the IFAC Code of Ethics

Answer 16

Integrity, objectivity, confidentiality, professional competence and due care, professional behaviour

Chartered accountants are expected to demonstrate the highest standards of professional conduct and to take into consideration public interest and maintain the reputation of the accounting profession. This guidance applies to all ICAEW members, students, affiliates, employees of member firms and the firms themselves.

Question 17

What is the accounting equation?

Answer 17

Assets = capital + liabilities

Question 18

What does the accounting equation express?

Answer 18

The statement of financial position as an equation

Question 19

What is the balance sheet equation

Answer 19

An entity’s assets will at all times equal its liabilities plus capital

Question 20

More complicated accounting equation

Answer 20

Assets = capital + profit - drawings + liabilities

Question 21

In relation to the business of a sole trader, what does the government and its agencies need to be able to do?

Answer 21

Establish levels of tax revenue and produce national statistics

Question 22

Characteristics of relevance

Answer 22

Assist users in evaluating past and predicting future events, materiality, confirmatory and predictive value

Question 23

Characteristics of faithful representation

Answer 23

Neutral, free from error, complete

Question 24

According to the conceptual framework of financial reporting, information on what areas can help users identify the reporting entity’s financial strengths and weaknesses?

Answer 24

The resources it controls and the claims on an entity’s resource ( the liabilities )

Question 25

A specific disclosure requirement of an IFRS standard need not be satisfied if…

Answer 25

The information is immaterial

Question 26

What is a source document

Answer 26

What we use to record transactions

Question 27

What are the source documents

Answer 27

Invoices, credit notes, VAT, bank transaction report (statement), payroll, petty cash book

Question 28

What are other documents that aren’t source documents

Answer 28

Delivery notes, goods received notes, debit notes, other documents

Question 29

What does the petty cash book record

Answer 29

The movement of physical cash kept on the premises in and out of the petty cash tin

Question 30

What controls petty cash

Answer 30

The imprest system

Question 31

What is the imprest system

Answer 31

It acts as an accounting control by having a set amount of petty cash

Question 32

What is payroll

Answer 32

The record of wages and salaries cost

Question 33

What does gross pay consist of

Answer 33

PAYE income tax, employees’ national insurance contributions, employers national insurance contributions, employees pension contributions, net pay (amount paid to employees)

Question 34

What are some additional costs for the employer

Answer 34

Employer’s pension contributions and employer’s NI contributions

Question 35

In gross pay, what is paid to HMRC

Answer 35

PAYE income tax and Employees’ national insurance

Question 36

Total payroll cost =

Answer 36

Gross pay + Employer NI + employer pension contribution

Question 37

What is standing data

Answer 37

Reference data that does not normally change

Question 38

2 different ways transactions are processed

Answer 38

Real-time processing, and batch processing

Question 39

Advantages of cloud accounting

Answer 39

The data and software are up to date, it is accessible from multiple locations, more than one person can access financial and customer details, not expensive

Question 40

Disadvantages of cloud accounting

Answer 40

Increased cyber risks from hacking, lack of control of security