Chapter 1-2

Question 1

Name and explain one stakeholder that will be interested in the business.

Answer 1

Owners and shareholders - Decide if they should countinue to invest in the business
Managers - Consider ways to improve the performance of the business
Employees - Decide if they should continue working for the company.
Lenders - Decide if they should grant loan to the business
Suppliers - Decide if they should sell goods to the business on credit
Customers - Decide if they should buy goods from the business (The quailty of the goods and the service)
Government - Decide the amount of tax the business has to pay

Question 2

Role of accounting

Answer 2

• To provide accounting information for stakeholders to make informed decisions regarding the management of resources and performance of business.

Question 3

Role of accountants

Answer 3

Provides information to the owner so that the owner knows how well the resources of the business are being managed. (Stewardship)
Provides information to stakeholders to make decisions relating to the business. (Decision-making)

Question 4

What is a trading business?

Answer 4

A trading business buys goods from suppliers and sells it to customers.

Question 5

What is a service business?

Answer 5

A service business provides services to its customers.

Question 6

State and explain the two professional ethics.

Answer 6

• Integrity. It is being straightforward and honest in all professional relationships.
• Objectivity. It is not letting bias, conflict of interest or the undue influence of others override their professional judgment.

Question 7

Explain accounting entity theory

Answer 7

The activities of a business are separate from the actions of the owner. All transactions are recorded from the point of view of the business.

Question 8

Explain accounting period theory

Answer 8

The life of a business is divided into regular time intervals.

Question 9

Explain accrual basis of accounting

Answer 9

Business activities that have occurred, regardless of whether cash is paid or received, should be recorded.

Question 10

Explain consistency theory

Answer 10

Once an accounting method is chosen, this method should be applied to all future accounting periods to enable meaningful comparison.

Question 11

Explain going concern concept

Answer 11

A business is assumed to have an indefinite economic life unless there is credible evidence that it may close down.

Question 12

Explain historical cost theory

Answer 12

Transactions should be recorded at their original cost.

Question 13

Explain matching theory

Answer 13

Expenses incurred must be matched against income earned in the same period to determine the profit for that period.

Question 14

Explain materiality theory

Answer 14

Relevant information should be reported in the financial statements if it is likely to make a difference to the decision-making process.

Question 15

Explain monetary concept

Answer 15

Only business transactions that can be measured in monetary terms are recorded.

Question 16

Explain objectivity theory

Answer 16

Accounting information recorded must be supported by reliable and verifiable evidence to ensure the transaction has taken place.

Question 17

Explain prudence theory

Answer 17

Assets and profits should not be overstated and liabilities and losses should not be understated.

Question 18

Explain revenue recognition theory

Answer 18

Revenue is only earned when goods have been delivered or services have been provided.

Question 19

4 stages of the accounting cycle

Answer 19

1. Identify and record
2. Adjust
3. Report
4. Close

Question 20

Order of accounting information system (AIS)

Answer 20

1. Source documents
2. Journal
3. Ledger
4. Trial balance
5. Statement of financial performance
6. Statement of financial position

Question 21

Purpose of receipt

Answer 21

Acknowledges payment received from customers immediately after the business has sold goods or provided services.

Question 22

Purpose of remittance advice

Answer 22

Informs credit supplier thaat payment by cheque has been made for a specific invoice.

Question 23

Purpose of invoice

Answer 23

Informs credit customers of the amount owed after the business sold goods or provided services on credit.

Question 24

Purpose of credit note

Answer 24

Reduces the amount owed by credit customers who were previously overcharged or after the goods were returned.

Question 25

Purpose of debit note

Answer 25

Increases the amount owed by credit customers who were previously undercharged.

Question 26

Purpose of payment voucher

Answer 26

Processes payment to credit suppliers:
- must be approved by authorised personnel
- must be supported by the original supplier’s invoice

Question 27

Purpose of bank statement

Answer 27

Checks and tallies against the business records of its cash at bank account.