Chapter 1

Question 1

What is Accounting

Answer 1

Identifying, Recording and Communicating economic events

Question 2

What is Bookkeeping

Answer 2

It is the part of Recording in the Accounting process

Question 3

Internal users of accounting data

Answer 3

Managers who plan, organise and run the business
They perform managerial accounting

Question 4

External users of accounting data

Answer 4

Investors (owners) and creditors (suppliers and bankers)
They perform financial accounting

Question 5

Managerial accounting

Answer 5

Provides internal reports to help users make decisions about their companies

Question 6

Financial accounting

Answer 6

Provides economic and financial information for external users use

Question 7

Accounting Standards

Answer 7

IFRS - 166 countries follow it
Since 2005, all EU listed companies follow it

GAAP (Generally Accepted Accounting Principles) also indicate how to report economic events

Question 8

Historical cost principle

Answer 8

Dictates companies record assets at their cost, including over the time the asset is held

Question 9

Fair value principle

Answer 9

States that assets and liabilities should be reported at the price received to sell an asset or settle a liability
- relevance: is the financial information capable of making a difference in a decision
- faithful representation: numbers match reality

Question 10

Monetary unit assumption

Answer 10

Requires that companies only record the transactions which can be expressed in money terms

Question 11

Economic entity assumption

Answer 11

Requires that companies keep owner and entity activity separate

Question 12

Entity

Answer 12

Any organisation or unit in society

Question 13

Proprietorship

Answer 13

1 sole owner
Personally liable

Question 14

Partnership

Answer 14

2/more owners
Personally liable

Question 15

Corporation

Answer 15

Separate entity under jurisdiction corporation law
Ownership divided into transferable shares - shareholders enjoy limited liability

Question 16

Basic accounting equation

Answer 16

Assets = Liabilities + Equity

Question 17

Assets

Answer 17

Resources a business owns –> normal debit balances
The capacity to provide future services or benefits
Example: cash, machinery

Question 18

Liabilities

Answer 18

Claims by third parties –> normal credit balances
This means that for every asset the business owns, the business owes a claim to someone –> debt or obligation
Example: accounts payable, loans

Question 19

Equity

Answer 19

Ownership claim on a company’s total assets
- What the company owes to the owners
Example: share capital, retained earnings

Question 20

Expanded accounting Equation

Answer 20

Asset = Liabilities + Equity

WHERE EQUITY = Share Capital Ordinary and Retained Earnings

WHERE RETAINED EARNINGS = Revenue - Expenses - Dividends

Question 21

Share Capital Ordinary

Answer 21

The amounts paid in by shareholders for the ordinary shares they buy

Question 22

Retained earnings

Answer 22

Revenue - Expenses - Dividends
Cumulative amount of net income a company has earned and kept in the business over time, rather than distributing it to shareholders as dividends

Question 23

Revenue

Answer 23

Gross increases in equity resulting from business activities which have taken place in the purpose of earning income
Normal credit balances
Result in an increase in an asset

Question 24

Expenses

Answer 24

Cost of assets consumed or services used in the process of earning income
Normal debit balances
Decreases in equity

Question 25

Dividends

Answer 25

Distribution of cash or other assets to shareholders
NOT AN EXPENSE

Question 26

Accounting information system

Answer 26

System of collecting and processing transaction data and communicating financial information to decision makers

Question 27

Accounting cycle

Answer 27

Steps companies follow each period to record transactions and eventually prepare financial statements

Question 28

Transactions

Answer 28

Business’s economic events recorded by accountants

Question 29

Internal transactions

Answer 29

Economic events that occur entirely within one company

Question 30

External transaction

Answer 30

Involve economic events between the company and some outside enterprise

Question 31

Income statement

Answer 31

Presents the revenues and expenses and resulting net income or net loss for a specific period of time
“End of”

Question 32

Retained earnings Statement

Answer 32

Summarises the changes in retained earnings for a specific period of time
“For period ending”
The ending balance will flow over to the balance sheet

Question 33

Balance sheet or Statement of financial position

Answer 33

Reports assets, liabilities and equity of a company
“As of DATE”
Includes retained earnings

Question 34

Statement of cash flows

Answer 34

Summarises information about the cash inflows (receipts) and outflows (payments) for a specific period of time
“For period ending”
Operating cash flows are the most important indicator