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H1) ACCA F3 > Chapter 1: Introduction To Accounting > Flashcards

Chapter 1: Introduction To Accounting Flashcards

1
Q

[C1/1/1.1]What is Financial Reporting?

A

It is a way of recording, analyzing and summarizing financial data.

  • Record
  • Analyze
  • Summarize
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2
Q

[C1/1/1.1]What is Financial Data?

A

All transactions carried out by a business.

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3
Q

[C1/1/1.1]Where all transactions carried by business are recorded?

A

These trans. are recorded in !books of prime entry!

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4
Q

[C1/1/1.1]Where all transactions are analysed?

A

In the books of prime entry.

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5
Q

[C1/1/1.1]Where did !totals of all transactions in the books of prime entry post?

A

Totals of transactions in the books of prime entry are posted to the ledger accounts.

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6
Q

[C1/1/1.1]Where did transactions summarize?

A

In the financial reports.

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7
Q

[C1/2/2.1]What is business?

A

Business of whatever size or nature exist to make a profit.

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8
Q

[C1/2/2.1] 4 Ideas referring to ways of looking at a business? (4)

A
  1. !Commercial or industrial concern dealing in:
    - Manufacture
    - Resale
    - Supply of goods and services.
  2. !Organization which uses economic resources to create:
    - Goods
    - Services which customers will buy

3.!Organization providing Jobs.

  1. !Investment in resources:
    - Buildings
    - Machinery
    - Employees in order to make more profit for its owners.
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9
Q

[C1/2/2.1]What is profit?

A

Profit is excess of income over expenditure.

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10
Q

[C1/2/2.1]When the business is running at a loss?

A

When expenditure exceeds revenue.

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11
Q

[C1/2/2.2]Types of business entity? (3)

A

Sole Trader Limited Liability Companies Partnerships.

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12
Q

[C1/2/2.2]What is business entity concept?

A

For accounting purposes all three business entities are !treated as separate from their owners !however in law sole traders and partnerships are not separate from their owners.

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13
Q

[C1/2/2.3-2.5]Sole traders?

A

Business owned and run by one individual. Individuals business and personal affairs, for legal and tax purposes are identical (Sole trader is legally separate from the business they operate).

Advantages:

  • Limited paperwork and cost of establishment.
  • Complete control
  • Ownership of assets and profit
  • Less stringent reporting obligations. No audit, no publicity.
  • High flexibility.

Disadvantages:

  • Personal responsibility of all liabilities.
  • Vulnerability of all personal belongings for liabilities.
  • Limited sums of capital.
  • Long working hours without normal employee recreation.
  • Issues of business continuity in the event of death or illness.
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14
Q

[C1/2/2.3-2.5]Partnerships?

A

Two or more people decide to run a business together (Accountancy, medical and legal practice). Formed by contract. Proportionate amount of:
Capital. Profit. Responsibilities.
Are legally separate from the business they operate.

Advantages:

  • Less stringent reporting obligations. No audit, no publicity.
  • Additional investments.
  • Division of roles and responsibilities.
  • Risk sharing.

Disadvantages:

  • Jointly personally liable for all debts.
  • Costs associated with setting up partnerships agreements.- Issues of business continuity.
  • Need of consensus.
  • Requirement to renew or update agreement.
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15
Q

[C1/2/2.3-2.5]Limited Liability Companies?

A

The shareholders of a LLC are only responsible for the amount paid for their shares. Not responsible for the companies debts (unless they have given personal guarantees). Shareholders may be individuals or other companies. Shareholders have a clear distinction from directors.

Advantages:

  • Investments are less risky due to loans registered on a companies balance.
  • Helps raise finance easier through the sales of shares.
  • Separation of legal identity. No risk in case of owners death, illness.
  • Tax advantages.
  • Easier to transfer of shares.

Disadvantages:

  • Have to publish annual financial statements. Anyone (including competitors) can see how badly they are doing.
  • Have to comply with legal and accounting requirements and standards.
  • The fin. statements have to be audited. Inconvenient, time consuming and expensive.
  • Share issues are regulated by law. Difficulties with reducing of share capital.
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16
Q

[C1/3.1-3.2]Financial and management accounting.Dealing?

A

Fin. accounting:

  • Dealing with financial accounts. (fin. performance; position of business.)
  • Providing Historical information.

Management accounting:
- Responsibility of planning (Budget, revenue, expenditure) and controlling the resources of business.Financial accountants have to create accounting information which has to be presented by managerial accountants in the form of most helpful for company management.

17
Q

[C1/4/4.1]What does IASB states in its document Conceptual framework for financial reporting?

A

The objective of financial statements is to provide information about the:

  • Financial position
  • Performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.
18
Q

[C1/4/4.2]Who are the users of financial statements and accounting information?

  • Company sphere?
  • Cooperation sphere?
  • Government?
  • Specific individuals?
A
  • Managers of the company. (Need the most information).
  • Shareholders of the company.
  • Trade contacts; Suppliers/ Customers.
  • Providers of finance to the company.
  • The taxation authorities.
  • Government and their agencies.
  • Employees of the company.
  • Financial analyst and advisers.
  • The Public.
19
Q

[C1/5]Who is responsible for the preparation of the financial statements?

A

Those, charged with governance of a company, are responsible for the preparation of the financial statements.

20
Q

[C1/5]What is corporate governance?

A

Corporate governance is the system by which companies and other entities are directed and controlled. Good corporate governance is important because the owners of a company and the people who manage the company are not always the same, which can lead to conflict of interest.

21
Q

[C1/5/5.1]What are legal responsibilities of directors?

  • Seven statutory duties?
  • Companies act 2006?
  • Directors should consider mainly?
A
  • Duty of care.
  • Reasonable competence.
  • Indemnify the company losses caused by their mistakes.
  • Fiduciary position.
  • Act honestly and in good faith.
  • Seven statutory duties?
  • Act within their powers.
  • Promote the success of the company.
  • Exercise independent judgement.
  • Exercise reasonable skill, care and diligence.
  • Avoid conflicts of interest.
  • Not accept benefits from third parties.
  • Declare an interest in a proposed transaction or arrangement.
  • Companies act 2006?
  • Help companies do business.
  • Create wealth for the shareholders.
  • Directors should consider mainly?
  • Long term consequences of decisions.
  • Employees interests
  • Good relationships with customers and suppliers.
  • Impact of the company on local community and the environment.
  • Good reputation.
  • Fair acting between all members of the company.
22
Q

[C1/5/5.2]Responsibility for the financial statements?

A
  • Preparation of reports in accordance with framework. FIRS.
  • Create conditions necessary to prepare fin. statements that are free from material misstatement. (free from internal frauds)
  • Prevention and detection of fraud.
23
Q

[C1/6]What are the principal statements of a business?

A

The principal financial statements of a business are:

  • The statement of financial position (SFP)
  • The statement of profit or loss (SPL)
24
Q

[C1/6/6.1]What is the Statement of Financial Position? Balance sheet?

A

The Statement of financial position is (Balance sheet):

  • List of all the assets owned
  • All the liabilities owed by a business as at a particular date.
25
Q

[C1/6/6.1.1]What are Assets?Examples?

A

An asset is something valuable, which a business owns or can use. The IASB’s Conceptual Framework for financial reporting defines as an asset as follow:

An asset is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Factories, office buildings, warehouses, delivery vans, lorries, plant and machinery, computer equipment, office furniture, cash and goods held in store awaiting sale to customers.

26
Q

[C1/6/6.1.2]What are liabilities?Examples?

A

A liability is something which is owed to somebody else. The IASB’s Conceptual Framework for financial reporting defines a liability as follow:

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Amounts owed to a supplier for goods bought on credit, amounts owed to a bank (or other lender), a bank overdraft, amounts owed to tax authorities (sales tax).

27
Q

[C1/6/6.1.3]What is capital? What is equity?

A

Capital is the amounts invested in a business by the owner; business owes these amounts to the owner. !Special kind of liability called capital. Equity is share capital. Residual interest of the entity after deducting all its liabilities.

28
Q

[C1/6/6.1.4] What is the form of the statement of financial position?

A

SFP - Balance Sheet or former name APT. APT;
Assets = Liabilities + capital/equity.

EXAMPLE:

Assets = $ = $
Plant and machinery = 55.000 = 0
Inventory = 5.000 = 0
Receivables = 1.500 = 0
Bank = 500 = 0
----------------------------------------------------------
Total Assets = 62.000 = 0

Capital = $ = $
Balance brought forward = 0 = 25.000
Profit of the year = 0 = 10.400
———————————————————-
Balance carried forward = 0 = 35.400

Liabilities
Bank loan = 0 = 25.000
Payables = 0 = 1.600
———————————————————-
Total capital plus Liabilities = 0 = 62.000

29
Q

[C1/6/6.2]What is Statement of profit or loss (SPL)?

A

A statement of profit or loss is a record of income generated and expenditure incurred over a given period. The statements show whether the business has had more revenue than expenditure or vice versa.

30
Q

[C1/6/6.2.1]What is revenue? What is expenses?

*How IASB’s Conceptual framework defines income, revenue and expenses?

A

Revenue is the income generated by the operations of a business for a period.Expenses are the costs of running the business for the same period.

31
Q

[C1/6/6.2.2] Form of the Statement of Profit or Loss?

A

Revenue = 150.000
Cost of sales = 75.000
———————————————————-
Gross profit = 75.000
Other Expenses = 64.600
———————————————————-
Profit of the year = 10.400

H1) ACCA F3 (6 decks)

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