Chap 1 Role of Accounting and accounting principles

Question 1

What is Bookkeeping?

Answer 1

It refers only to the recording process of business transactions

Question 2

What is accounting?

Answer 2

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

Question 3

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

Answer 3

Stewardship and Decision making

Question 4

What is stewardship?

Answer 4

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

Question 5

What is decision making?

Answer 5

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

Question 6

What is the accounting information system?

Answer 6

A system to collect, record and report the financial information

Question 7

Who are the internal stakeholders?

Answer 7

Owners and managers

Employees

Question 8

Who are the external stakeholders?

Answer 8

Shareholders and investors
Banks, suppliers and lenders
Competitors
Customers
Government
Public

Question 9

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

Answer 9

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

Question 10

How is accounting information used by employees for decision making?

Answer 10

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

Question 11

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

Answer 11

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

Question 12

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

Answer 12

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

Question 13

How is accounting information used by Competitors for decision making?

Answer 13

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

Question 14

How is accounting information used by Customers for decision making?

Answer 14

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

Question 15

How is accounting information used by Government for decision making?

Answer 15

They want to know the income and profit for tax purpose

Question 16

How is accounting information used by Public for decision making?

Answer 16

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

Question 17

What is a cash transaction?

Answer 17

it is for which immediate payment is made

Question 18

What is a credit transaction?

Answer 18

It is for which payment is postponed to a future date

Question 19

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

Answer 19

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

Question 20

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

Answer 20

Sole-proprietorship
Partnership
Limited Company

Question 21

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

Answer 21

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

Question 22

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

Answer 22

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

Question 23

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

Answer 23

Sole proprietorship takes all profits and all losses

Limited partnership shares profits but only loses amount invested

Question 24

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

Answer 24

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

Question 25

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

Answer 25

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

Question 26

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

Answer 26

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

Question 27

What are the 11 key accounting theories

Answer 27

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

Question 28

What is the significance of accounting entity?

Answer 28

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

Question 29

What is the significance of Going concern?

Answer 29

Business is assumed to operate for an indefinite period of time

Question 30

What is the significance of Accounting period?

Answer 30

Life span of business divided into fixed periods of time

Question 31

What is the significance of Monetary assumption?

Answer 31

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

Question 32

What is the significance of Historical cost?

Answer 32

Transactions are recorded at the original cost to the business

Question 33

What is the significance of Objectivity?

Answer 33

Transactions are based on verifiable evidence

Question 34

What is the significance of Materiality?

Answer 34

Amount which is immaterial is treated as an expence

Question 35

What is the significance of Accural?

Answer 35

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

Question 36

What is the significance of Matching?

Answer 36

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

Question 37

What is the significance of Consistency?

Answer 37

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

Question 38

What is the significance of Prudence?

Answer 38

When reporting an item, select the option which gives a lower profit or asset value Loss is usually recognised but not gain

Question 39

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

Answer 39

Going concern

Question 40

Identify the accounting theory | Every business transactions must have supporting documents before they can be recorded in the books

Answer 40

Objectivity

Question 41

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

Answer 41

Monetary assumption

Question 42

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

Answer 42

Prudence

Question 43

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

Answer 43

Consistency

Question 44

Identify the accounting theory | Profit is the difference between income earned and expense incurred during the same period

Answer 44

Matching

Question 45

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

Answer 45

Accounting theory - violated

Question 46

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

Answer 46

Accounting period - followed

Question 47

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

Answer 47

Historical cost - violated

Question 48

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

Answer 48

Accural - violated

Question 49

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

Answer 49

Materiality - followed