Chapter 1: Accounting in Action

Question 1

What are the 2 types of accounting?

Answer 1

Financial & Management

Question 2

What are some differences between the 2 types of accounting?

Answer 2

Financial: Used externally egs. banks & investors
Management: Used internally

Question 4

Define the three accounting activities

Answer 4

Identification, recording and communication

Question 5

Expand on the three activities

Answer 5

Identification: to select economic events (Transactions)
Recording: to record classify and summarize ( bookkeeping)
Communication: to prepare accounting reports; analyze and interpret for users

Question 6

Name some examples of internal users

Answer 6

Finance, marketing, HR, management

Question 7

Name some examples of external users

Answer 7

Investors, predators, taxing authorities, Regulatory Agencies, labour unions

Question 8

State the accounting building blocks

Answer 8

ethics in financial reporting, accounting standards, measurement principles and assumptions

Question 9

Name two standard setting bodies

Answer 9

IASB: International Accounting Standards Board - used in 130 countries
FASB : Financial Accounting Standards Board - used mainly by US companies

Question 10

Name the two accounting standards

Answer 10

IFRS: International Financial Reporting Standards
GAAP: Generally Accepted Accounting Principles

Question 11

Define convergence of accounting standards

Answer 11

The goal of establishing a single set of international standards

Question 12

What are the two measurement principles used by the IFRS

Answer 12

Historical Cost Principle: states that companies record assets at their cost, which is true at the time of purchase and over the time it is held
Fair Value Principle: states that assets and liabilities should be reported at the price received to sell an asset or settle a liability

Question 13

What are the trade offs between the principles?

Answer 13

Relevance: financial information can affect the decision made
Faithful Representation: the numbers and descriptions are factual - match what really happened/ existed

Question 14

State the two main assumptions

Answer 14

Monetary Unit Assumption: requires that companies include only transactional data that can be expressed momentarily in accounting records

Economic Entity Assumption: requires that the entity, its owner and any other entities’ activities are kept separate and distinct

Question 15

State the basic accounting equation

Answer 15

Assets= Liabilities+ Equity

Question 16

Define each component of the accounting equation

Answer 16

Assets: business owned resources

Liabilities: claims against assets egs, debts and obligations

Equity: ownership claim on a company’s total assets

Question 17

What does the accounting information system do?

Answer 17

Collects and processes transactional data and communicates financial information to decision makers

Question 18

What does Equity become in the expanded accounting equation?

Answer 18

Capital + returned earnings
additional answer (returned earnings: Revenue - expenses - dividends)

Question 19

Explain the new components in the expanded equation and their effects on equity

Answer 19

Share Capital - Ordinary: amounts paid by shareholders or owners for ordinary shares purchased; Equity increase

Revenue - income derived from income earning business activities; Equity increase

Expenses - cost of assets consumed/ Services used in earning revenue; Equity decrease

Dividends - the distribution of cash/ other assets to shareholders; Equity decrease

Question 20

State the financial statements

Answer 20

Income statements, Retained Earning statements, statement of Financial Position, statement of Cash Flows and Comprehensive Income statements

Question 21

Describe the connections between each financial statements

Answer 21

the net income identified in income statements is needed to calculate the end balance in returned earning statements

the end of balance from returned earning statements is needed to preprare pay the statement of financial position

the cash shown in the statement of financial position is used to prepare statement of cash flows

Question 22

Breakdown the structure of each financial statement

Answer 22

income statements: list Revenue first then expenses, final line states the net income or loss

return earnings statements:firstly state the beginning returned earnings amounts then add net income or subtract net loss AND subtract dividends & final amount equals the return earnings end balance

statement of financial position: list assets at the top then equity then liabilities

statement of cash flow: state operations, investing activities, financing activities, net increase/ decrease in cash, cash amounts at the end of period

comprehensive income statements immediately follows income statements