Chapter 1

Question 1

What are the two elements of accounting?

Answer 1

recording and summarising

Question 2

The significance of recording

Answer 2

transactions must be recorded as they occur to provide up to date information for management

Question 3

The significance of summarising

Answer 3

The transactions for a period are summarised in order to provide information about the company to interested parties

Question 4

What goes under summarising?

Answer 4

financial statements

Question 5

What are the two components of financial statements?

Answer 5

statement of profit or loss

statement of financial position

Question 6

Statement of Profit or Loss

Answer 6

reflects the performance of a business over a period of time

Question 7

Statement of Financial Position

Answer 7

reflects the position of a business at a point of time

Question 8

Who needs to record and summarise their transactions?

Answer 8

any organisation, business or individual which needs to keep track of its income, expenses, assets and liabilities

Question 9

What are the three types of profit-making business entities?

Answer 9

sole trader

partnership

company

Question 10

What is a sole trader?

Answer 10

a business owned and operated by one person

Question 11

What is a partnership?

Answer 11

a business owned and operated by 2 or more people

Question 12

What is a company?

Answer 12

a business owned by any number of shareholders and operated by directors - who may or may not be shareholders

Question 13

Characteristic of a sole trader

Answer 13

simplest form of business

Question 14

Who owns a sole trader?

Answer 14

owned and managed by one person - although there might be number of employees

Question 15

Who is liable for losses in a sole trader?

Answer 15

the sole trader - fully and personally

Question 16

What is a partnership?

Answer 16

a business owned jointly by a number of partners

each partner is jointly and severely liable for any losses that business might make

Question 17

Who are companies owned by?

Answer 17

shareholders or members

Question 18

In companies, who elect the directors?

Answer 18

shareholders to run the business

Question 19

What is the liability status of a company?

Answer 19

almost always limited liability

Question 20

What does a limited liability mean?

Answer 20

this means that the shareholders will not personally be liable for the losses the company incurs

their liability is limited to the nominal value of the shares that they own - their shares may become worthless, but they will not be forced to make goods losses

Question 21

What is the relationship between the owners and shareholders in a company?

Answer 21

the company is completely separate legal entity from its owners, the shareholders

Question 22

What are non-profit entities that require accounting info and prepare financial statements?

Answer 22

charties

clubs and societies

government (or public sector) organisations

Question 23

According to IAS 1 Presentation of Financial Statements, what are the full set of financial statements made up of? (5)

Answer 23

s of financial position

s of profit or loss

s of changes in equity

s of cash flows

notes of financial statements

Question 24

What is a statement of financial position?

Answer 24

It’s a list of assets or liabilities of the business

its a snapshot of the business at a particular point in time

Question 25

Asset

Answer 25

are items that the business owns or controls

Question 26

Liabilities

Answer 26

are items that the business owes

Question 27

Net asset calculation

Answer 27

assets - liabilities

Question 28

The purpose of a statement of financial position

Answer 28

to show the total value of the net asset of the business at the end of each accounting period

Question 29

When is capital expenditure incurred?

Answer 29

either to acquire long-term assets (ei. those which will be kept in business for more than a year)

or

to improve or enhance the earning capacity of long-term assets

Question 30

Where is capital expenditure recorded?

Answer 30

statement of financial position within non-current assets

Question 31

When is revenue expenditure incurred?

Answer 31

either

for trade purpose including purchase of raw materials or items for resale, expenditure on wages and salaries, selling and distribution expenses, administrative expenses and finance costs

or

to maintain the existing earning capacity of long term assets

Question 32

Where is revenue expenditure recorded?

Answer 32

statement of profit or loss

Question 33

GAAP

Answer 33

generally accepted accounting practise

Question 34

Who’s financial statements are most classless regulated?

Answer 34

limited liability companies

Question 35

Two examples of areas where the judgement of different people may vary

Answer 35

valuation of buildings in times of changing property prices

determining whether expenditure is revenue or capital

Question 36

What are the 5 code of ethics IESBA and ICAEW principles?

Answer 36

integrity

objectivity

professional competence and due care

confidentiality

professional behaviour