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POA sec 3 > Chap 1 Role of Accounting and accounting principles > Flashcards

Chap 1 Role of Accounting and accounting principles Flashcards

1
Q

What is Bookkeeping?

A

It refers only to the recording process of business transactions

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2
Q

What is accounting?

A

It involves recording, summarising, analysing, interpreting and communciation of the financial information

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3
Q

What is the roles of accounting and the accounting information system?

A

Stewardship and Decision making

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4
Q

What is stewardship?

A

To be responsible to provide financial information to help owners make decisions on how to manage the business

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5
Q

What is decision making?

A

Accounting provides financial information to interested parties to help them make decisions relating to business

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6
Q

What is the accounting information system?

A

A system to collect, record and report the financial information

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7
Q

Who are the internal stakeholders?

A

Owners and managers

Employees

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8
Q

Who are the external stakeholders?

A 
Shareholders and investors
Banks, suppliers and lenders
Competitors
Customers
Government
Public
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9
Q

How is accounting information used by Owners and managers for decision making?

A

They need all information to monitor, analyse, control and plan the performance of the company

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10
Q

How is accounting information used by employees for decision making?

A

They want to know the profits and cash to consider the company’s prospects and ability of the company to pay their salaries promptly

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11
Q

How is accounting information used by Shareholders and Investors for decision making?

A

They want to know the profit, assets, liabilities and potential returns on investments to decide on their investment plans

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12
Q

How is accounting information used by Banks, suppliers and lenders for decision making?

A

They want to know the profit, cash and liabilities to evaluate if the business is able to pay the debts and service the interest

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13
Q

How is accounting information used by Competitors for decision making?

A

They want to know the income and profit to compare their performance

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14
Q

How is accounting information used by Customers for decision making?

A

They want to know the profit to evaluate the stability and continuity of the business

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15
Q

How is accounting information used by Government for decision making?

A

They want to know the income and profit for tax purpose

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16
Q

How is accounting information used by Public for decision making?

A

They want to know the income and profit to assess the economic situation

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17
Q

What is a cash transaction?

A

it is for which immediate payment is made

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18
Q

What is a credit transaction?

A

It is for which payment is postponed to a future date

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19
Q

What is the difference between a trading business and a service business

A

A trading business is like a retail shop whilst a service business is like a hair slaoon
The main difference is in financial statements, as a trading business would include records of inventory and the trading portion of the income statement

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20
Q

What are the types of business entities that can be registered?

A

Sole-proprietorship
Partnership
Limited Company

21
Q

Between a sole proprietorship and limited company, which is easier to set up and why?

A

Sole proprietorship, as it is less expensive and one owner makes all the decisions

22
Q

Between a sole proprietorship and limited company, which is easier to raise funds and why?

A

Limited Company as it’s easier to borrow from banks and can issue shares to raise funds

23
Q

Between a sole proprietorship and limited company, what is the rewards and risk?

A

Sole proprietorship takes all profits and all losses

Limited partnership shares profits but only loses amount invested

24
Q

Between a sole proprietorship and limited company, which is easier to transfer ownership up and why?

A

Limited company as its easier for shareholders to sell their share ownership

25
Q

Between a sole proprietorship and limited company, which is easier to prepare financial statements and why?

A

Sole proprietorship as limited companies have to follow strict regulations for audit purpose

26
Q

To ensure professional ethic, you must have what 2 important principles

A

Integrity, as you must be straightforward and honest in recording and reporting all information.
Objectivity, as you must unbiased and rely only on facts instead of being influenced by gains or interests of other parties

27
Q

What are the 11 key accounting theories

A 
Accounting entity
Going concern
Accounting period
Monetary assumption of money measurement
Historical cost
Objectivity
Materiality
Accural
Matching
Consistency
Prudence or conservatism
28
Q

What is the significance of accounting entity?

A

The business and it’s owners are treated as separate and different entities

29
Q

What is the significance of Going concern?

A

Business is assumed to operate for an indefinite period of time

30
Q

What is the significance of Accounting period?

A

Life span of business divided into fixed periods of time

31
Q

What is the significance of Monetary assumption?

A

Only transactions that can be measured in monetary terms are included in the accounting records

32
Q

What is the significance of Historical cost?

A

Transactions are recorded at the original cost to the business

33
Q

What is the significance of Objectivity?

A

Transactions are based on verifiable evidence

34
Q

What is the significance of Materiality?

A

Amount which is immaterial is treated as an expence

35
Q

What is the significance of Accural?

A

Income recognised when earned, not received;
expenses recognised when incurred, not paid

Accural Basis : Profit = Revenue earned - Expenses incurred

Cash Basis : Profit = Revenue received - Expenses paid

36
Q

What is the significance of Matching?

A

Expenses incurred are matched against income earned during the same period to determine profit

37
Q

What is the significance of Consistency?

A

The same accounting method should be applied to an item for all the accounting periods

38
Q

What is the significance of Prudence?

A

When reporting an item, select the option which gives a lower profit or asset value

Loss is usually recognised but not gain

39
Q

Identify the accounting theory

The assests of a business are expected to be used in the business and not to be sold in the near future

A

Going concern

40
Q

Identify the accounting theory

Every business transactions must have supporting documents before they can be recorded in the books

A

Objectivity

41
Q

Identify the accounting theory

Skills and good performance of the staff cannot be recorded in the accounting books

A

Monetary assumption

42
Q

Identify the accounting theory

When figures cannot be accurately determined, the method that will report a lower profit will be used

A

Prudence

43
Q

Identify the accounting theory
When preparing teh accounts of a firm, one should normally use the same accounting methods for similar items from one accounting period to the next

A

Consistency

44
Q

Identify the accounting theory

Profit is the difference between income earned and expense incurred during the same period

A

Matching

45
Q

State the accounting theory and whether it is followed or violated?
The owner of a business used a business cheque to pay for a sofa for his home

A

Accounting theory - violated

46
Q

State the accounting theory and whether it is followed or violated?
In preparing financial reports, the life of the business is divided into specific periods of time

A

Accounting period - followed

47
Q

State the accounting theory and whether it is followed or violated?
Market values rather than historical costs are used to record non current assets in accounts

A

Historical cost - violated

48
Q

State the accounting theory and whether it is followed or violated?
A company records all income received in cash without considering if they belong to the relevant accounting period

A

Accural - violated

49
Q

State the accounting theory and whether it is followed or violated?
The accountant feels that the money spent on computer software is not significant enough to be considered as a non-current asset

A

Materiality - followed

POA sec 3 (11 decks)

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