Chapter 30- Accounting fundamentals

Question 1

What is the work of financial accountants?

Answer 1

1-Collection of daily transactions
2-Making income statement, bal sheet and cash flow statement.
3-Accounts are made once or twice a year.
4-Info is used my external groups
5-Accountants are bound by the rules and concepts of the accounting profession. (IAS)
6- Cover past periods.

Question 2

What is the work of management accountants?

Answer 2

1- Preparing information for managers of the business, its products and departments.
2- Analysing internal accounts like budgets.
3-accounts are made when needed by owners and managers.
4- Info is only used by internal groups
5- No set rules
6- cover both past and future time periods.

Question 3

What is the double entry principle?

Answer 3

Whenever a transaction happens it should be recorded twice once on debit and once on credit to ensure that the accounts balance.

Question 4

What are accruals?

Answer 4

Accruals are when a business has been provided with services but hasn’t paid yet. They should still be included in the expenses.

Question 5

What is the prudence concept?

Answer 5

Anticipated losses should be recorded and provided for before they happen and anticipated profits should not be recorded until they are realised.

Question 6

What is the money measurement principle?

Answer 6

Money measurement principle states that a business should only record an accounting transaction if it can be expressed in terms of money.

Question 7

What is the realisation concept?

Answer 7

Sales should only be recorded once the goods/ services are provided to the customer. Not when an order is recieved or payment is made.

Question 8

What is the income statement?

Answer 8

An accounting statement that records the revenue, costs and profit/loss of a business over a period of time.

Question 9

What is gross profit?

Answer 9

Revenue minus cost of goods sold

Question 10

What is the cost of sales?

Answer 10

Direct cost of the goods that were sold during the year.

Question 11

what is Operating profit?

Answer 11

Gross profit minus overhead expenses.

Question 12

what is profit for the year?

Answer 12

profit after deducting finance costs and tax.

Question 13

what are dividends?

Answer 13

share of profits given to shareholders as a return for investing in the company.

Question 14

what are the uses of income statement?

Answer 14

• to measure business performance
• to compare profits
• to show to bankers and investors

Question 15

what is low and high quality profit?

Answer 15

low quality profit is one off profit that can’t easily be sustained. high quality profit can be sustained and repeated.

Question 16

what is the SOFP?

Answer 16

it records a business’s assets,capital and liabilities.

Question 17

what are intangible assets? (intellectual capital)

Answer 17

items that don’t have a physical presence for eg. trademarks,copyrights,goodwill

Question 18

what is goodwill?

Answer 18

the value of the reputation of a business.

Question 19

what is cash flow statement?

Answer 19

a statement that records cash received by a business and cash paid by the business over a period of time.

Question 20

what is the chairman’s statement?

Answer 20

a report on the achievements of the business, future plans etc.

Question 21

what is the chief executive’s report?

Answer 21

detailed analysis of the past year. info of new products etc.

Question 22

what is the auditor’s report?

Answer 22

a report by an independent firm of accountants insuring that the accounts are accurate and valid and IAS are followed.

Question 23

what are the methods to increase profit margins?

Answer 23

• increase sales
• reduce cost of sales
• reduce overheads

Question 24

what are liquidity ratios?

Answer 24

they access the firms ability to pay its short term debts.

Question 25

current ratio formula?

Answer 25

current assets/ current liabilities

Question 26

acid test ratio formula?

Answer 26

current assets- inventory/current liabilites

Question 27

what are the methods to increase liquidity?

Answer 27

• sell fixed assets
• sell inventory
• take loan

Question 28

what are the limitations of ratio analysis?

Answer 28

• incomplete analysis.
• one ratio of its own is of very limited value. needs to be compared with prev. years and other companies.
• comparing with other businesses should be done with caution as they have different ways/ could be window dressed.

Question 29

what are the limitations of published accounts?

Answer 29

• they become obsolete as soon as they are published.
• they could be window dressed.
• they do not include:
  1) future plans and budgets.
  2) impact of business on community and environment.
  3) the performance of each department

Question 30

what is window dressing?

Answer 30

presenting the accounts of a business in a favourable light.

Question 31

what are some ways of window dressing?

Answer 31

• charging low depreciation rates
• not writing off bad debts
• overstating the value of intangible assets.
• overstating the value of inventory
• delaying payments
• selling assets to improve liquidity position.