Accounting Topic 1 (Introduction & Revision)

Question 1

financial reporting

Answer 1

• reporting to the outside world
• standardised (through accounting standards) & heavily regulated

Question 2

4 things reporting to the outside world involves?

Answer 2

1. financial performance -> income stment
2. financial position -> balance sheet/SOFP
3. generation of cash
4. changes in financial position

Question 3

what does standardised and heavily regulated involve

Answer 3

1. no room for creativity
2. international financial reporting standards/US GAPP or local GAAP

Question 4

Standards

Answer 4

1. International accounting standards board (IASB) = sets international financial reporting standards (IFRS)
2. adopted previous International Accounting Standards (IAS)
3. standard tells us how any transaction should be reported in the financial statements

Question 5

2 Accounting types

Answer 5

1. financial (performance of company, communicate info to stakeholders)
2. management

Question 6

Risk decisions

Answer 6

different risk levels - based on different needs
risk appetite affects decisions
to achieve capital gains

Question 7

management accounting

Answer 7

• provide info = used by managers inside org (decision making and previous feedback)
• no external users = more freedom
• accounting standards help with decision making

Question 8

3 benefits of management accounting not having external users?

Answer 8

1. report as often as required in any format required
2. can make estimates and assumptions
3. no rules

Question 9

Balance sheet/Statement of financial position

Answer 9

1. Assets
2. Liabilities
3. Equity

• state affairs on particular date
• every transaction changes it
• business is continuous
• cut off transactions at end of year important to ensure profit is reported in correct period
• only transactions that are completed prior to year end should be included

Question 10

types of assets

Answer 10

1. current -> generate economic benefits over the next 12 months = cash, trade receivables, stock/inventory
2. non current = property planned equipment, good will, share holdings, machinery, land , equipment

Question 11

types of liabilities

Answer 11

1. non current = mortgages, debentures, loans, pensions
2. current

Question 12

income statement

Answer 12

sales/revenue
cost of sales
expenses (trade payables, overdraft, CL)
other income
tax
interest

Question 13

asset

Answer 13

resource = future economic benefit at BS date
sold on balance sheet/statement of financial position

Question 14

expenses

Answer 14

resources used up at reporting date
income statement

Question 15

equity

Answer 15

resources provided to the company by the investors
what investors own (assets - liabilities)

• capital provided and invested in company’s net assets
• owed by company to investor
• capital returned to investors when company is wound up

Question 16

net assets

Answer 16

assets - liabilities = equity

Question 17

3 resources provided to the company by the investors ?

Answer 17

1. share capital
2. share premium
3. retained earnings

Question 18

share capital

Answer 18

number of shares x nominal value of shares

Question 19

share premium

Answer 19

excess of proceeds from share issue over nominal value of shares

Question 20

retained earnings

Answer 20

accumulated earnings since existence

• profit earned & retained within & reinvested
• not distributed to investors (can be in future)

Question 21

2 main financial statements

Answer 21

1. Income statement for the year ended = income and expenses, gains and losses
2. statement of financial position (BS) as at - on specific day
   = assets, liabilities, equity

Question 22

other financial statements

Answer 22

1. statement of cash flows for the year ended (IAS7)
2. statement of changes in equity for the year ended -> contributions in equity and distributions out (dividends)
3. statement of profit or loss and other comprehensive income

Question 23

statement of profit or loss and other comprehensive income

Answer 23

1. total comprehensive income (TCI)
   - profit for year + other comprehensive income
2. can be shown with income statement or separately from income statement
   - revenue to profit for the year
   - profit for the year to TCI

Question 24

statement of cash flows

Answer 24

cash is king, no cash no operations

• investors must understand where cash is generated from (operations/financing) and what used for - IAS7
• operating
• investing
  -financing