Chapter 1: Introduction

Question 1

Proprietorship

Answer 1

organisation with only one owner –> personally liable for debt and losses

Question 2

partnership

Answer 2

consists of two or more people, co-owners. both personally liable for debt

Question 3

limited liability partnership

Answer 3

every partner is only liable for the amount of their investment plus her part of the debt

Question 4

corporation

Answer 4

organisation owned by shareholders –> legal person which means that shareholders are not responsible for debt, not are they personally liable

Question 5

International Financial Reporting Standards

Answer 5

primary objective of financial reporting is to provide useful information that can be used by a wide group of users –> principle based and less strict

Question 6

General Accepted Accounting Principles

Answer 6

rule-based and promotes strict rules

Question 7

qualitative characteristics

Answer 7

make sure that the financial statements are are comprehensible and useful (fundamental vs enhancing)

Question 8

relevance

Answer 8

information has to make a difference for the decision maker

Question 9

materiality

Answer 9

information has to be of such importance that the decision maker would have made a different decision had the information been wrong or unavailable

Question 10

predictive value

Answer 10

when information is used to estimate future outcomes

Question 11

confirmative value

Answer 11

information used to criticise prior evaluations

Question 12

faithful representation

Answer 12

faithfully represents the underlying economic phenomena of the financial statements must be:

1. complete
2. neutral
3. free from error

Question 13

accrual accounting

Answer 13

financial events should be recognised the moment they occur, regardless of when cash is received or paid

Question 14

going concern

Answer 14

assumption that the entity will continue to operate long enough to use existing assets for its intended purposes

Question 15

revenue

Answer 15

result of a company’s main activities

Question 16

gains

Answer 16

result of company’s non-primary operations and production processes

Question 17

expenses

Answer 17

costs that arise from the company’s main activities

Question 18

losses

Answer 18

cost resulting from a company’s non-primary operations

Question 19

first accounting formula

Answer 19

assets = liabilities + equity

Question 20

second accounting formula

Answer 20

net income = total revenue and gains - total expenses and losses

Question 21

general ledger

Answer 21

central database that includes all the accounting information that the company works with –> stores periodic (weekly/monthly) summaries of transactions –> secondary control as it makes it easier to track mistakes

Question 22

to close the books

Answer 22

set all accounts back to zero

Question 23

cash basis accounting

Answer 23

recognise the transaction when the money is transferred

Question 24

concepts of accrual accounting

Answer 24

1. time-period concept: info should be reported on a regular basis
2. revenue recognition principle: revenue is only recognised when it is realised
3. matching concept: costs and revenues must be matched –> which costs were made to sell which products

Question 25

deferrals

Answer 25

already paid not yet received

Question 26

depreciation

Answer 26

costs of assets are spread over a longer period in which these assets are used

Question 27

accumulated depreciation

Answer 27

accounts shows the total depreciation costs that have been recognised at a certain moment

Question 28

accruals

Answer 28

reported now but not yet paid –> received but not yet paid

Question 29

unqualified opinion

Answer 29

if the reports all look good

Question 30

qualified opinion

Answer 30

when there seems to be something wrong with one element of the reports

Question 31

adverse opinion

Answer 31

when there are problems with more than one element

Question 32

time-period concept

Answer 32

information should be reported on a regular basis

Question 33

revenue recognition principle

Answer 33

revenue is only recognised when it is realised

Question 34

matching concept

Answer 34

costs and revenues must be matched –> must report which costs were made for which product