Chapter 1 The role of Accounting

Question 1

Purpose of Accounting

Answer 1

Provide financial information and advice to assist in business decision-making

Question 2

Accounting

Answer 2

The process of collecting and recording financial data; reporting, analysing and interpreting financial information; and advising users about possible courses of action to assist decision making

Question 3

Non-financial information

Answer 3

Any information that cannot be found in the financial statements, and is not reliant on for calculation or expressed in dollar figures

Question 4

Ethical considerations

Answer 4

Social and environmental consequences of a financial decision

Question 5

Financial Data v Financial information

Answer 5

Financial date is the raw facts and figures upon which financial information is based but financial information has been sorted, classified and summarised into a more useable understandable form

Question 6

Accounting Process

Answer 6

1. Source Documents
2. Records
3. Reports
4. Advice

Question 7

Accounting entity assumption

Answer 7

The business activities of the business are kept completely separate from those of the owner.

Question 8

Going Concern

Answer 8

A business is assumed to be a going concern, i.e. the existing entity will continue to operate into the future.

Question 9

Period Assumption

Answer 9

Reports are prepared from a period of time (a month or a year). Profit is determined by comparing revenues earned and expense incurred for that period. (not more than a year for tax reasons)

Question 10

Accrual basis assumption

Answer 10

Profit is calculated by deducting expenses incurred from revenues earned in that same period.

Question 11

Relevance

Answer 11

Information that is capable of making a difference and is useful for decisions made by users.

Question 12

Faithful representation

Answer 12

Information must faithfully represent economic events and be complete, free from material bias and neutral.

Question 13

Verifiability

Answer 13

The ability for independent observers to reach a consensus that the depiction of an event is faithfully represented, usually maintained with source documents

Question 14

Comparability

Answer 14

Accounting reports should be prepared so that users can identify and understand similarities in and differences among items.

Question 15

Timeliness

Answer 15

Having information available to decision-makers in time to be capable of influencing their decisions

Question 16

Understandability

Answer 16

Information in accounting reports should be comprehensible to likely users.

Question 17

Asset

Answer 17

Present economic resource, controlled by an entity as a result of past events

Question 18

Liability

Answer 18

Present obligation to transfer an economic resource as a result of past events

Question 19

Owner’s equity

Answer 19

The residual interest in the assets of an entity after the deduction of its liabilities

Question 20

Revenue

Answer 20

Increase in assets/Decrease in liabilities that results in an increase in owner’s equity (other than capital contribution since it was not earned as a result of the actions of the business)

Question 21

Expenses

Answer 21

Decrease in assets or increase in liabilities that results in a decrease in owner’s equity other than drawings.