Allmänt Flashcards
Cite two different definitions of accounting
(1) Accounting is the language of business.
(2) Accounting is concerned with
collecting, analyzing & communicating
financial information
Which four step process is shown as a summary of accounting?
- Information identification
- Information recording
- Information analysis
- Information reporting
In which six domains do financial accounting and management accounting differ from one another?
- Nature of the reports produced
- Level of detail
- The existence of regulations
- Reporting interval
- Time orientation
- Range and quality of information
Define “salvage value”
The estimated value that an asset will realize upon its sale at the end of its useful life.
What does the cash flow statement do?
It Shows the entity’s cash flows (inflows and outflows) during a specific period
What does the statement of profit or loss (Income statement) show?
It shows the entity’s net income (profit /loss) during a specific period
What does the statement of financial position (Balance sheet) show?
Shows the entity’s assets and how they have been financed (shareholders’ equity and liabilities) at a given point in time
What is the impact of “high value
of an asset”?
-> low expenses -> high profit for the year
What is the impact of “low value
of an asset”?
-> high expenses -> low profit for the year
What is a current asset?
An assets that the entity…
…expects to realize, sell or consume in its normal
operating cycle
…holds primarily for the purpose of trading
…expects to realize within twelve months after the
reporting period.
OR: the asset is cash or a cash equivalent
What is a non-current asset?
Assets held for use in production or supply of goods or services, for rental to others, or for administrative purposes; and expected to be used during more than one period (definition of PPE)
Which four properties should accounting information possess?
Accounting information should possess: • Relevance • Reliability • Comparability • Understandability
What is the threshold of materiality?
Material = significant. We should ask whether its omission or misrepresentation in the accounting reports would really alter the decisions that users make. If so, it has crossed the threshold of materiality.
For what reason is some accounting information sometimes not produced?
Because a particular item of accounting information should only be produced if the costs of providing it are less than the benefits, or value, to be derived from its use.
Which six properties in total should characterize accounting information?
- Relevant
- Reliable
- Comparable
- Understandable
- Material (past the “materiality threshold”)
- Worth the cost associated with retrieving the information
Who is management accounting aimed at?
Managers
Who is financial accounting aimed at?
All other users (stakeholders) except for managers
Apart from the six differences cited in the book, how do management accounting and financial accounting differ from one another?
Management accounting reports are more likely to produce reports that contain information of a non-financial nature, such as physical volume of inventories, number of sales orders received, number of new products launched, physical output per employee and so on.
Financial accounting places greater emphasis on the use of objective, verifiable evidence when preparing reports. (management accounting reports may use information that is less objective and verifiable)
Which are the three arrangements for business ownership?
- Sole proprietorship
- Partnership
- Limited company
What is sole proprietorship?
Sole proprietorship, as the name suggests, is where an individual is the sole owner of a business.
What is a partnership?
A partnership exists where at least two individuals carry on a business together with the intention of making a profit. Partnerships have much in common with sole-proprietor businesses.
What is a limited company?
Limited companies can range in size from quite small to very large; the number of individuals who subscribe capital and become the owners may be unlimited, which provides the opportunity to create a very large-scale business. The liability of owners, however, is limited (hence ‘limited’ company), which means that those individuals subscribing capital to the company are liable only for debts incurred by the company up to the amount that they have agreed to invest.
Name three accounting-related requirements placed on limited companies
Part of the regulatory framework requires annual financial reports to be made available to owners and lenders, and usually an annual general meeting of the owners has to be held to approve the reports.
In addition, a copy of the annual financial reports must be lodged with the Registrar of Companies for public inspection. In this way, the financial affairs of a limited company enter the public domain.
With the exception of small companies, there is also a requirement for the annual financial reports
to be subject to an audit.
What are the three major tasks of a company board?
The board is charged with three major tasks:
- setting the overall direction and strategy for the business
- monitoring and controlling its activities
- communicating with owners and others connected with the business
What is the main objective of a business, within the scope of the accounting book?
A business is created to enhance the wealth of its owners.
how has financial accounting changed lately?
Financial accounting has improved its framework of rules and there has been greater international harmonisation of accounting rules.
How has management accounting changed lately?
Management accounting has become more outward looking and new methods for managing costs have emerged.
Who appoints the company board?
The owners (shareholders)
What is the purpose of producing accounting information?
The purpose of providing accounting information is to enable users to make more informed decisions and judgements about the organisation concerned. Unless it fulfills this objective, there is no point in providing it.
Financial accounting statements tend to reflect past events. In view of this, how can they be of any assistance to a user in making a decision when decisions, by their very nature, can only be made about future actions?
Since we can never be sure what is going to happen in the future, the best that we can do is to make judgements on the basis of past experience. Thus information concerning flows of cash and of wealth in the recent past is likely to be a useful source on which to base judgements about possible future outcomes.
What is commoditization?
In business literature, commoditization is defined as the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers.
What is often referred to as “the final accounts of the business”?
The financial statements (income statement, statement of cash flows and statement of financial position) are often referred to as the final accounts of the business.
What is the short definition of an asset?
An asset is essentially a resource held by the business.
Which characteristics must an item have to be considered an asset?
- A probable future benefit (future monetary value) must exist
- The business must have the right to control the resource.
- The benefit must arise from some past transaction or event.
- The asset must be capable of measurement in monetary terms.
NOTE: all four of these conditions must apply
What is a tangible asset?
Assets (such as inventories) that have a physical substance and can be touched are referred to as tangible assets.
What is an intangible asset?
Assets (such as patents) that have no physical substance but which, nevertheless, provide expected future benefits are referred to as intangible assets.
What is equity?
Equity represents the claim of the owner(s) against the business. This claim is sometimes referred to as the owner’s capital.
What are liabilities?
Liabilities represent the claims of all individuals and organisations, apart from the owner(s).
What is the only way a liability can be settled?
When a liability is settled it can only be through an outflow of assets (usually cash).
What is the simple formula for assets at the end of a period?
Assets (at the end of the period) = Equity (amount at the start of the period) + Profit (or − Loss) (for the period) + Liabilities (at the end of the period)
Which statement of financial position items are cumulative?
All of them
What is the short definition of a current asset?
Current assets are basically assets that are held for the short term.
Which conditions must an asset meet to be regarded as a current asset?
- they are held for sale or consumption during the business’s normal operating cycle
- they are expected to be sold within the next year
- they are held principally for trading
- they are cash, or near cash such as easily marketable, short-term investments
What is a non-current asset?
Non-current assets (also called fixed assets) are simply assets that do not meet the definition of current assets. They tend to be held for long-term operations.
Name six examples of assets which may be seen as non-current
Examples of assets that may be defined as being non-current are: • property • furniture • motor vehicles • computers • computer software • reference books.
What is the short definition of a current liability?
Current liabilities are basically amounts due for settlement in the short term.
Which conditions can a liability meet to be regarded as a current liability?
To be more precise, they are liabilities that meet any of the following conditions
- they are expected to be settled within the business’s normal operating cycle
- they are held principally for trading purposes
- they are due to be settled within a year after the date of the relevant statement of financial position
- there is no right to defer settlement beyond a year after the date of the relevant statement of financial position
What is a non-current liability?
Non-current liabilities represent amounts due that do not meet the definition of current liabilities and so represent longer-term liabilities.
In what order are assets typically listed?
Within each category of asset, items are listed in reverse order of liquidity (nearness to cash).
When does the accounting year end and begin in the UK?
In the UK, businesses are free to choose their accounting year.
What does the Business entity convention imply?
The business and its owner(s) are treated as being quite separate and distinct. The business entity convention must be distinguished from the legal position that may exist between businesses and their owners.
What does the Historic cost convention imply?
The historic cost convention holds that the value of assets shown on the statement of financial position should be based on their acquisition cost (that is, historic cost).
Name two ways to derive a current value
Two ways of deriving a current value are to find out…
…how much would have to be paid to buy vans of a similar type and condition; or
…how much a motor van dealer would pay for the vans, were the business to sell them.
What is the upside of reporting historic costs?
Reporting in this way reduces the need for judgements, as the amount paid for a particular asset is usually a matter of demonstrable fact.
What does the Prudence convention imply?
The prudence convention holds that caution should be exercised when making account- ing judgements. This means that liabilities and losses should not be understated while assets and profits should not be overstated.
How are losses and gains treated in different ways, in accordance with the prudence convention?
All losses are recorded at once and in full; this refers to both actual losses and expected losses. Profits, on the other hand, are recognised only when they actually arise.
Why was the prudence convention developed?
The prudence convention evolved to counteract the excessive optimism of some managers and owners and is designed to prevent an overstatement of financial position.
What has happened to usage of the prudence convention over the past few years?
In recent years, the prudence convention has weakened its grip on accounting and has become a less dominant force.
What does the Going concern convention imply?
The going concern convention holds that the financial statements should be prepared on the assumption that the business will continue operations for the foreseeable future, unless this is known not to be true. In other words, it is assumed that there is no intention, or need, to sell off the non-current assets of the business.
Why is the Going concern convention important?
The convention is important because the market (sale) value of many non-current assets is often low in relation to the values at which they appear in the statement of financial position.
What does the dual aspect convention assert?
The dual aspect convention asserts that each transaction has two aspects, both of which will affect the statement of financial position.
Which are the five key accounting conventions?
• Business entity convention • Historic cost convention • Prudence convention • Going concern convention • Dual aspect convention
What is an arms-lenght transaction?
An ‘arm’s-length’ transaction is one that is undertaken between two unconnected parties.
How is a non-current intangible asset (e.g. goodwill) handled when a business i acquired?
If goodwill is acquired when taking over another business, or if a business acquires a particular product brand from another business, these items will be separately identified and a price agreed for them.
How is the value of a non-current intangible asset usually measured in an arms-length transaction?
Usually, the valuation will be based on estimates of future earnings from holding the asset
What risk does high inflation pose to statements of financial position?
High rates of inflation can result in statements of financial position which are prepared on a historic cost basis reflecting figures for assets that were much lower than if current values were employed.
What do tangible non-current assets normally consist of?
Tangible non-current assets normally consist of property, plant and equipment.
How are PPE described in the book?
As the ‘tools’ used by the business to generate wealth, that is, they are used to produce or supply goods and services or for administration purposes.
