Core Text Chapter 1 - Accounting and Finance for Managers.

Question 1

What is the definition of accounting?

Answer 1

The process or work of keeping financial accounts.

Question 2

What is the definition of an accountant?

Answer 2

A person whose job is to keep or inspect financial accounts. (simplistic)

Accountants now are deeply involved in non-financial information such as CSR.

Question 3

What are the 2 forms of accounting?

Answer 3

• Financial accounting
• Management accounting.

Question 4

The financial accountant:

(an accounting firm)

Answer 4

• Common they are trained by and work within accounting partnerships.
• Big 4: PriceWaterhouseCoopers, Deloitte, KPMG and Ernst and Young (EY).
• Central function is to prepare the annual report and financial statements.

Question 5

The conceptual framework:

Answer 5

• Identifies the primary users of general-purpose financial reporting as present and potential investors.
• CF also notes other stakeholders may find financial reports useful such as Regulators, government.

Question 6

Principles-based VS Rules-based standards.

Answer 6

• IASB aim to create principle driven requirements. As this is thought to alleviate some of the problems created by hard rules e.g. ‘work around the rules’. And allows an organisation to meet requirements even when faced with a situation they haven’t previously encountered.

Question 7

2 purposes of the Conceptual Framework:

Answer 7

• used by companies to aid their financial reporting decision making.
• used by IASB to help them develop new accounting standards and revise old ones.

Question 8

6 qualitative characteristics of useful financial information:

2 fundamental characteristics.

4 enhancing characteristics.

Answer 8

FC:
- Relevant
- Faithfully represent.

EC:
- Comparability
- Verifiability
- Timeliness
Understandable

Question 9

Faithfully represent:

Answer 9

To be perfectly faithful representation a depiction would have 3 characteristics:

• Complete
• Neutral
• Free from error.

Question 10

Comparability:

Answer 10

Enables users identify and understand similarities in, and differences among, items.

Question 11

Verifiability:

Answer 11

means different knowledgeable and independent observers could reach consensus.

Question 12

Timeliness:

Answer 12

Information has to be available to decision makers in time to be capable of influencing their decisions.

Question 13

Understandable:

Answer 13

• Displaying information clearly.

Question 14

What is materiality?

Answer 14

Item is deemed material if its omission could influence decisions that users make.

Materiality is based on the nature and/or the magnitude of the items.

Question 15

What is the regulatory framework?

Answer 15

• Outlines a set of rules and regulations for major bodies

Question 16

What is the IFRS Foundation?

International financial reporting standards

Answer 16

• Independent, not for profit private sector organisation.
• Principle objectives of the IFRS:
• set and enforce IFRS through the IASB
• Take account of financial reporting needs of emerging economies and small, medium sized entities SMEs.

Question 17

What is the IASB?

International Accounting Standards Board.

Answer 17

• Independent standard setting body on behalf of the IFRS.
• Currently has 15 full-time members.

Question 18

What is the IFRS Interpretations Committee?

Answer 18

• Consists of 14 members.
• Responsible for reviewing widespread accounting issues that have arisen within the context of the current IFRS.

Question 19

What is the standard setting process in financial accounting?

Answer 19

1) Research paper
2) Agenda decision
3) Discussion paper
4) Exposure draft
5) Final standard
6) Post implementation review
7) Possible revision.

Question 20

3 Main business entities:

Answer 20

• Sole trader
• Partnerships
• Limited company

Question 21

Sole trader:

Answer 21

• Works for themselves.
• Business is not incorporated (unlimited liability)
• Required to produce limited financial accounting information.
  + retain control, all profits, reduced legal burden.
• unlimited liability, personal assets are at risk.

Question 22

Partnerships:

Answer 22

• 2 or more people decide to run a business together.
  + share responsibilities/expertise, reduced legal burden.
• Clashing in decisions.

Question 23

Limited company abbreviated in different ways due to different parts of the world.

Answer 23

Ltd - UK
Proprietary limited company (Pty. Ltd.) - Australia and South Africa.
Private limited (Pvt. Ltd.) - India and Pakistan
Corporation or Inc/ Ltd - United States

Question 24

Limited company:

Answer 24

• At law where a firm is separate legal entity.
• Shareholders are only responsible for the amount they paid for their shares.

Advantages:
- Personal assets are protected.
- Easier to generate funds.
- Potential tax advantages.

Disadvantages:
- Regulatory burden is greater, publishing statements/legal
- Must comply with domestic or international financing reporting requirements.
- Hostile takeover.