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Ency VO > chapter 12, 13 > Flashcards

chapter 12, 13 Flashcards

1
Q

What is the double-entry accounting system characterized by?

A

Double income determination (net asset comparison and income-expenses comparison)
Business case recording in two books (Journal and individual accounts)
Double recording of each amount (debit and credit)
Business case record on inventory and revenue/expense account

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2
Q

What is an account in the double-entry accounting system?

A

Two-sided clearing field
Records business cases in monetary terms
DEBIT side (left), CREDIT side (right)
Balance: mathematical difference between the two sides

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3
Q

How is the balance of an account determined?

A

Entered on the side with smaller amount
Named by the larger side (“overhang”)
Debit balance on credit-side, credit balance on debit-side

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4
Q

What types of accounts (ledger accounts) are differentiated in the system?

A

Inventory accounts (start non-zero)
* Active inventory accounts for assets (buildings, equipment, vehicle fleet)
* Passive inventory accounts for capital (liabilities to banks, accounts payable)

Temporary accounts (start with zero)
* Income accounts for earnings (trading goods, rental income, …)
* Expense accounts for expenses (personnel, material, …)

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5
Q

What books are part of the double-entry accounting system?

A

Book of first entry (Journal): chronological recording
Book of final entry (Ledger): systematic recording
Secondary books: detail recording of certain transactions
Subsidiary books (Subledgers): fulfill additional tasks not covered by other books

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6
Q

What types of business transactions are recorded in which books?

A
  • All business transactions chronologically in the book of first entry (Journal)
  • Systematic recording according to content in the book of final entry (ledger)
  • Certain asset, liability, success transactions in detail in secondary books
  • Additional tasks in subsidiary books, varying by company size and industrial sector
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7
Q

How is profit determined in the double-entry accounting system?

A
  • Difference between assets and liabilities (net asset) at start and end of period; adjust for private withdrawals/deposits (“balance sheet comparison”)
  • Sum of changes in equity using profit and loss account (“income statement”)
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8
Q

How does balance sheet comparison (net asset comparison) work?

A
  • Compare net value (assets minus liabilities) at end and start of financial year
  • Increase in net asset indicates profit, decrease indicates loss
  • Neutralize private withdrawals (added) and private deposits (subtracted)
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9
Q

What does the financial statement published for external users consist of?

A
  • The balance sheet
  • The profit and loss account (= income statement)
  • The statement of total recognized gains and losses
  • The cash flow statement (for consolidated financial statements)
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10
Q

Describe the balance sheet

A
  • A financial statement summarizing a company’s assets (use of funds) and capital (liabilities and shareholders’ equity; source of funds) at a specific point in time
  • Assets represent economic resources that a corporation owns or controls, which are expected to provide future benefit
  • Capital is the sum of funds left to the enterprise, used for acquisition of assets and for production
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11
Q

What are liabilities and shareholders’ equity?

A

Liabilities are a company’s financial debt or obligations, including loans, accounts payable, mortgages, deferred revenues, and accrued expenses
Shareholders’ equity is a firm’s total assets minus its total liabilities, representing the net value of a company

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12
Q

What is inventory taking?

A

A prerequisite for the preparation of the balance sheet, recording all assets and capitals at a certain point in time into detailed list

Methods
* End-of-period inventory
* Perpetual or continuous inventory
* Brought forward/back inventory
* Random test inventory

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13
Q

What does the preparation of the balance sheet involve?

A

Inventory taking

Inclusion of an asset in asset side of the balance sheet, referred to as “capitalization”
Inclusion of an asset in the capital side of the balance sheet, referred to as “set up liabilities”

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14
Q

What is the structure of the balance sheet for non-corporations?

A
  • The basic accounting equation holds: Assets = Liabilities + Owner’s Equity.
  • Owner’s Equity: net assets, residual interest in assets of entity after deducting liabilities. Represents owner’s claim on business assets.
  • For corporations, the owner’s equity is referred to as shareholders’ equity and includes share capital and retained earnings.
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15
Q

What are fixed assets, tangible fixed assets?

A

Assets intended for use on a continuing basis in the company’s activities, usually longer than one year
Can be physical or intangible assets like concessions, industrial property rights, similar rights and benefits, and derived licenses

tangible fixed assets: assets with physical substance

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16
Q

What is goodwill?

A

The amount by which the value of a company exceeds the sum of the present values of all capitalizable assets minus liabilities, represents the excess value of a business beyond its tangible assets and liabilities

It often comes from elements like a strong brand name, good customer base, high employee morale, patents,proprietary technology.

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17
Q

What are financial assets?

A

Financial interlocking with other companies, not for speculative purposes

shares in affiliated companies,
loans to affiliated companies
other loans receivable

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18
Q

What are the two fundamental valuations for assets?

A

Acquisition costs:
* Purchase price
* operational readiness costs
* additional costs
* subsequent purchase costs
* price reductions

Production costs:
* Costs for production of an asset
* expansion of an asset
* significant improvement beyond original state of asset

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19
Q

How is depreciation defined, what are the types?

A

Measure of cost or revalued amount of economic benefits of tangible asset consumed during period.
Regular depreciation: use, effluxion of time
Extraordinary depreciation: Value change of fixed asset due to extraordinary circumstances

20
Q

How are tangible fixed assets classified in terms of depreciation?

A

non-wasting assets: infinite life, not worn out by use
wasting assets: time-limited life, use capacity reduced by technical/economic use or legally

21
Q

What is necessary for calculating tax depreciation?

A
  • Depreciation base
  • depreciation period (starts when fixed asset is put into operation)
  • depreciation start date
22
Q

What constitutes acquisition costs for assets?

A
  • Purchase price of the asset
  • Operational readiness costs (training, grounding, installation)
  • Additional costs (freight, customs, transport insurance, real estate transfer tax, commissions, etc)
  • Subsequent purchase costs (additional equipment, late stipulation of a charge)
  • Decreases from price reductions (rebate, cash discounts)
23
Q

How are current assets accounted and valued?

A

Considered for sale, not for continuing use
Subdivided into inventories, receivables, securities, cash
Valued using “strict lower of cost or market principle” ( lower of original cost or market value, ensuring conservative reporting of asset value)

24
Q

How are accruals and deferrals accounted and valued?

A

Period-correct allocation of income and expenses; Ensures correct determination of success in the profit and loss account

25
Q

How is equity categorized and accounted?

A

Accounting depends on legal form of the company. Equities categorized into
* nominal capital (part of equity committed by proprietors in the articles of incorporation)
* capital reserves (proprietor contributions exceeding nominal capital)
* revenue reserves (retained earnings)
* unappropriated profit/loss (profit share for distribution of profits to proprietors, plus retained profits/losses carried forward.)

26
Q

What are accrued liabilities or provisions?

A

Future obligations of the company incurred in current period
Reason and/or amount are unknown
are recorded in the company’s accounts as current liabilities

27
Q

What is the difference between provision, liability, and reserve?

A
  • Liability is an established company debt
  • Reserves are included in equity
  • Provisions represent debt capital
28
Q

What provisions must non-incorporated companies form?

A

Provisions for severance payment
Pension provisions
Provisions for anniversary bonus
Holiday provisions
Goodwill provisions, escheat-burden provisions, product liability provisions, take-back/recycle obligations

29
Q

What are provisions for future expenses?

A

Expenses not representing an obligation to third parties
Likely to arise during the continuation of the company
Must be recorded under certain conditions

30
Q

What is a liability in accounting and valuation terms?

A

A fixed company debt in terms of reason and amount
A creditor can rely on an enforceable, quantifiable claim

31
Q

What are the types of liabilities for incorporated companies?

A
  • Bond loans
  • Liabilities to credit institutions
  • Payments received on account of orders (Advance payments received from customers for goods or services not yet delivered or completed.)
  • Trade payables (Money owed to suppliers for goods or services received but not yet paid for.)
  • Liabilities from drawn bills and own bills of exchange (Debts arising from bills of exchange, a type of short-term financial instrument.)
  • Accounts due to affiliated companies (Money owed to companies that are somehow related or connected, such as subsidiaries or parent companies.)
  • Accounts due to companies with a participation relationship (Money owed to companies in which the business owns a stake, but they are not fully controlled subsidiaries.)
  • Other liabilities
32
Q

How are liabilities valued?

A

Recorded at their settlement amount (expected amount to be spent to meet the obligation)

33
Q

What is the Profit and Loss Account (P&L)?

A
  • Determines the income (profit or loss)
  • Compares all incomes and expenses caused by the company’s activities
  • Profit or loss is the balance
  • Mandatory application of vertical form

Formats
* Choice between total expenditure format or cost of sales format
* Operating success is the same in both formats

34
Q

What is the effect of the financial statement?

A
  • Explains balance sheet and income statement in detail
  • Makes their presentations clearer
  • Shows development of individual items of fixed assets via fixed-asset-movement-schedule
35
Q

What is a fixed-asset-movement-schedule?

A
  • Table representation of fixed assets development
  • Information on acquisition/production costs, additions, disposals, book values, depreciation, write-ups, accumulated depreciation
36
Q

What is the purpose of the financial/management report?

A
  • Supplement financial statements with general information
  • Presents business development and position
  • True and fair picture of assets, financial and earnings situation
  • Description of key risks and uncertainties
37
Q

In which subfunctions can management be divided?

A
  • Planning
  • Decision-making
  • Directing (Delegating)
  • Control
38
Q

What are human and technical aspects of management?

A
  • Technical aspects – institutional aspect (to create organizational structure)
  • Processual approach (logical sequence of management actions)
  • Instrumental aspect (which management technologies to be utilized)
  • Human aspects – Personal Relationships between supervisor and subordinates
  • Socio-Cultural (intersection of social and cultural events of certain time period)
39
Q

Divide management with respect to volition.

A

Constitution of volition (Decision-making; Planning (Objectives, Activities))
Enforcement of volition (Delegation; Controlling)

40
Q

Name characteristics of planning process.

A
  • Goal and Activity Oriented
  • Looking ahead
  • Intellectual process
  • Provides alternatives
41
Q

What is content of planning process?

A

Objectives (what do we want to achieve? (Monetary/Non-monetary)) and
Activities (by what means and which structures do we attain objectives)

42
Q

Name main types of planning with details.

A
  • Long-term planning: Considers 5-10-year period, defines strategic objectives, set by top-level managers, framework for lower-level planning
  • Tactical plans: Specific to distinct areas of the organization, helps departments fulfill strategic plan
  • Operational plans: Day-to-day decisions at the lowest level of organization
  • Overall planning: Whole organization oriented towards the same goal
  • Partial planning: Supports overall planning, e.g., marketing and sales plan, production plan
  • Rough planning: Based on estimations and assumptions
  • Detailed planning: Based on facts and calculations
43
Q

Why is decision making risky?

A

Planning can be seen as decision preparation. But decision making is not delegable. It is risky because information is never fully complete and future events cannot be foreseen.

44
Q

What is delegation and what are its objects?

A

Objects of delegation are
- further planning process or
- execution of a plan.

45
Q

What is controlling?

A

Controlling is comparing actual vs. target performance and drawing conclusions from the results.
Requirement for controlling is clear definition of the targetwihch is to be achieved.
Very important for manager assertiveness.

Ency VO (10 decks)

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