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Exam Flashcards

0
Q

What do all companies issue?

A

Ordinary shares

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1
Q

What is a sole trader

A
  • Owned and operated by one person
  • business and owner are one legal entity (business cannot enter contractual agreements, instead relying on the owner)
  • limited life: change of owners
  • unlimited liability: owner is responsible for obligations and debts
  • limited access to funds
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2
Q

Advantages of sole trader

A

Control (ownership and management combined)
Simple and inexpensive to establish and operate
Profit does not have to be distributed among owners
No formal guidelines for financial report format

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3
Q

What are preference shares

A

Have preference over ordinary shares eg. Preference shareholders are first to receive dividends up to a maximum value. Higher priority in receiving dividends and/or in event of liquidation

  • fixed rate of dividend
  • not every company issues these
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4
Q

What is a partnership

A

Business owned and operated by two or more people

The business and owners are one legal entity (partners enter contractual agreements eg. Borrow, lend, sell)

Not bound by corporations act

Limited life: new partnerships commence when new partners are introduced

Mutual agency: partner responsible for other partner’s actions
Unlimited liability: each partner’s personal assets may be called upon to meet bad debts

Co- ownership of assets and profits

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5
Q

What are ordinary shareholders entitled to?

A

Undistributed profits and gains

One ordinary share carried one vote on issues affecting company such as voting for managing directirs

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6
Q

What are reserves

A

Represent ownership interests in assets. Amount set aside out of profits and surpluses which are not designed to meet any liability or commitment eg.
Capital profits reserve( profits made on sale of long term assets)
Dividend equalization reserve (constant dividends over time)
Capital redemption reserve (decision to redeem dividends)
Capital replacement reserve (decision to replace assets)
Revaluation reserve (increases in assets values to fair value due to inflation or other price changes)

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7
Q

If a company pays by cheque, where is this recorded?

A

Under accounts payable

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8
Q

Why may owner’s equity increase

A

When there is increase in profit showing an increase in owner’s stake in business

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9
Q

Why may owner’s equity decrease?

A

When the business makes a loss eg. Des not sell all of inventory
The owner’s stake in the business falls

Also when the owner makes drawings

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10
Q

What kind of acts have increase to regulate partners?

A

Jurisdictions across Australia have enacted partnership acts to regulate activities of partners in a partnership

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11
Q

When may regulations apply to small proprietary companies?

A

When requested by at least 5% of their shareholders or by ASIC

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12
Q

What is the directors’ report/ declaration according to corporation act?

A

A report made by the directors confirming their financial statements comply with relevant accounting standards and give a ‘true and fair’ depiction of the company’s financial performance and position

This is included in the annual report

Also at the declaration’s date whether the company can meet their liabilities as they fall due

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13
Q

what is the role if directors in a company

A

They are elected by the shareholders to manage the commonly for then.
Small company: board consists of 1 level management whom are all shareholders

Large: contains around 10 directors with thousands of shareholders

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14
Q

What is the role of accounting information

A

Assist with decision making

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15
Q

What is the role if external auditors

A

Must audit financial reports produced by companies to ensure the reports are fair, true and comply with statutory and accounting standards requirement

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17
Q

What is an auditor’s report?

A

Checks credibility and reliability of company’s financial reports in accordance with Australian Auditing Standards

Opinion section: whether the financial reports are a fair and true portrayal or company’s financial performance and position

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18
Q

What happens if the audit reveals the company’s financial statements are not a true reflection of their current performance and position?

A

In the auditor’s report under the opinion section, the auditor will state the report is ‘qualified’ and will give reasoning and evidence on how the company’s statements sway from their true position, performance, liquidity and accounting standards

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18
Q

What is an unqualified auditing report

A

When auditor states the business’s financial statements are a true reflection of their current performance and position
This gives assurance to company’s stakeholders in decision making

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19
Q

Do small proprietary companies need external auditors to audit their financial reports?

A

Usually no unless the ASIC stipulates then to do so
OR
At least 5% of shareholders just agree

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20
Q

Who uses the accounting report?

A

Accounting report is sent to shareholders and ASIC

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21
Q

Who may use accounting information?

A

Internal users: management board, managers, employees

External users: general public, potential investors, creditors, suppliers, customers, media and special interest group, government

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22
Q

What is financial accounting?

A

For external use

Must follow accounting standards

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23
Q

What is management accounting

A

For internal use

No accounting standards to follow

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25
Q

Are Australian and international conceptual frameworks binding?

A

No they are not binding but rather act as guidelines

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26
Q

What is the purpose if Australian and international conceptual frameworks

A

Guide those organizations responsible for the development of legally binding accounting standards

Guide accountants in preparing financial accounts

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26
Q

What conceptual framework does australia use and who set it up?

A

The Australian accounting standards board (AASB) adopted IASB (international accounting standards) framework since 2005

The IASB set IASB framework

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28
Q

Why did Australian accounting standards adopt IASB?

A

To conform with accounting standards adopted by trading partners

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29
Q

Describe accounting standards

A

Set of rules that defines how to measure and report information about an entity’s economic acrivity

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29
Q

What is the objective of accounting standards

A

Define how to record individual business transactions

Define how to summaries these transactions in a form understandable and useful to users

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30
Q

What does corporations act stipulate in regards to financial statements

A

Financial statements of companies other than small private companies must comply with accounting standards and regulations

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31
Q

Who oversees the setting of accounting standards

A

The financial reporting council oversees the Australian accounting standards board
Announced in 2005 australia would adopt IASB

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32
Q

Who sets accounting standards in Australia

A

Australian accounting standards board sets the accounting standards that is mandatory for all companies and other disclosing companies

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33
Q

What happened in January 2005

A

Australia adopted International Accounting Standards issued by the international accounting standards board (IASB)

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34
Q

What does the annual report consist of?

A

General purpose financial report
Directors report (provide management discussion and analysis of financial results, compare with competitors why the economic situation is, internal sales provide explanation to these questions)
Directors statement (declaration)
Auditors report

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36
Q

What must the GPFR contain

A 
Balance sheet
Statement of comprehensive income
Statement of changes in equity 
Statement if cash flows
Notes to financial statements
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37
Q

What must GPFR comply with

A

All relevant accounting standards

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37
Q

What is the primary objective of accounting

A

Provide economic information about entity to assist with decision making

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38
Q

Is management accounting subject to many rules and regulations?

A

No financial accounting is subject to rules and regulations as it is protested for external users

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39
Q

Is external auditor responsible for preparing GPFR of a company?

A

No they are responsible for auditing the business’s financial reports to ensure all data entered is true,fair and complies with accounting standards

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40
Q

What are major accounting assumptions?

A
  1. Accounting entity assumption
  2. Monetary assumption
  3. Historic cost assumption
  4. Going concern assumption
  5. Accounting period assumption
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41
Q

What is the accounting entity assumption

A

Business and owner are separate for accounting purposes eg. Reporting and recording

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42
Q

What is GAAP

A

General accepting accounting principles that guide Australia’s financial reporting

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43
Q

What is the historic cost assumption

A

historic cost is the value of asset when it was acquired. i.e. record asset at the value it was acquired

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44
Q

What is monetary assumption

A

Financial statements contains items that can reasonably be measured in monetary terms

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45
Q

What is an advantage and disadvantage of historic cost assumption

A
  1. No need to for subjective opinion on amount paid to acquire asset
  2. Ignores the fact that value of money and goods change over time
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46
Q

What are examples of measurement alternatives?

A

Replacement cost

Net realizable value

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47
Q

Describe replacement cost

A

Amount that would have to be paid to acquire the same or an equivalent item

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48
Q

Describe fair value

A

Price you would have received to sell an item in an arms length transaction

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49
Q

Describe net realizable value

A

Selling price less any further costs expected to complete goods and any costs involved in selling and distributing those goods

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50
Q

What is the going concern assumption

A

Except when firm is insolvent, accountants assume it will continue to exist
Despite the fact many small businesses fail within few years of operation

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51
Q

What are features of accounting period assumption?

A

Accounting period is the period of time selected for reporting results of operations and changes in financial position

Accountants must ensure revenue and expenses are accounted for in appropriate period

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52
Q

Are all shareholders interested in having managerial roles blo

A

Some shareholders merely invest to make capital gains

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53
Q

What accounting rules just a company comply with?

A 
Company law (corporations act, accounting standards) 
International accounting standard
Stock exchange rules imposed by ASX
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54
Q

3 characteristics of assets

A

Inflow of future economic benefits to the entity
Controlled by entity
Transaction occurred in the past

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55
Q

Two types of assets

A

Tangible

Intangible : copyright, trademark, patent, franchise, goodwill

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56
Q

3 characteristics liabilities must have

A

Present obligations
Past events
Outflow of economic benefits

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57
Q

Describe drawings in terms of businesses with several partners

A

Each business owner had their own separate drawing account

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58
Q

Role of income

A

Increases economic benefits by increasing assets value or decreasing liabilities
Results in increase in equity in non distribution nature

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59
Q

Revenue?

A

Gross inflow of economic benefits from ordinary activities

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60
Q

Expenses?

A

Deceased economic benefits in form of decease in assets or increase in liability
Decease in owner’s equity in non distribution nature

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61
Q

Profit

A

Earnings the business makes over a period of time

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62
Q

Two accounting approaches

A

Cash and accrual accounting

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63
Q

Features of accrual accounting

A

Income recorded when earned
Expenses recorded when incurred ( economic benefits used up)
Regardless of date of receipt and payment of cash

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64
Q

Describe cash accounting

A

Revenue recognized when cash is received
Expense recognized when cash is paid

Regardless of when income is earned or expense has incurred

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65
Q

How May cash accounting distort an entity’s financial performance?

A

Cash received may relate to goods or services provided earlier (accounts receivable) or future period (subscriptions, service fees received in advance, deposits)

Cash paid relate to earlier (wages, rent in arrears) or future period (prepayments)

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66
Q

3 components it cash flow statement

A

Operating activities
Investing activities
Financing activities

67
Q

Cash flow statement

A

Summary of cash receipts and payment over a period of time

68
Q

What is another name for balance sheet?

A

Shows business’s assets and claims against those assets

69
Q

Cash flow from operating activities

A

Bet inflow from operations eg. Purchase of inventory, payment of wages

70
Q

Cash flows from investing activities

A

Cash payments to acquire additional non current assets and cash receipts from the disposal of such assets through proceeds from sale

Also includes loans made by the business, shares or other investments the business purchased

71
Q

Describe cash flow from financing activities

A

How business finances eg. Long term borrowings or equity through share issues and debt repayment and return to equity holders
In exception of very short term credit such as trade credit

72
Q

Current assets

A

Used or converted into cash in the next 12 months or within operating cycle

73
Q

What are non current assets

A

Held on continuing basis for minimum period of one year, held for generating wealth rather than resale

74
Q

Why is cash for business to function effectively?

A

Used to acquire other resources eg. Stock
Satisfy operating expenses
Distribute to shareholders in form of dividends

75
Q

Limitation or cash flow statements

A

Inflows and outflows of cash do not reveal profit generated

76
Q

When does accounting year normally end

A

30th June

77
Q

Liquidity of business is important to determine

A

Whether the business has enough cash on hand to meet short term obligations

78
Q

Describe duality in double entry bookkeeping

A

For every debit, there needs to be a credit

79
Q

In an individual debit account describe debit and credit

A

Entries made on debit increase amount in asset account

Entries on credit decrease amount in particular account

81
Q

Ledger accounts are produced from whose point of view?

A

Banks point of view

82
Q

What are accruals/ expense payable/ accrued expense ?

A

Accrued liability is when expense has been incurred before end of accounting period but invoices have not been received and have not been paid

Eg. Interest is not paid until maturity date. Interest expense is accrued

83
Q

Difference statement of financial position and performance

A

Financial position: snapshot of business’s wealth at a point of time

Financial performance: wealth generated over a period it time

83
Q

Statement of changes in equity?

A

Changes in owners’ interests in net assets of the business as a result of transactions and events during the period

84
Q

Freight inward and outward differences

A

Inward: transportation charge paid when important goods from suppliers ( recorded under COGS)

Outward: cost of transportation to deliver to customers ( recorded under selling and distribution expenses)

85
Q

What expense are discounts

A

Financial

86
Q

What expense are administration and sale staff salaries

A

Administration salaries; administrative and general expenses

Sale staff salaries: selling and distribution expenses

87
Q

What expense is cash register repair and maintenance

A

Selling and distribution

88
Q

What expense is rate

A

Administration and generals

89
Q

What expense is inventory insurance?

A

Selling and distribution

90
Q

Why may companies be reluctant to provide fully classified income statement

A

They do not want to provide competitors with company details

91
Q

Where are unrealized gains recorded?

A

Other comprehensive income under statement of comprehensive income

Eg. Unrealized gain on revaluation of land

92
Q

When is income recognized

A

Probable income has occurred

The inflow can be reliably measured

93
Q

When are expenses recognized

A

Probable outflow has occurred

The outflow can be reliably measured

94
Q

Describe recognition criterion

A

Change has occurred and the ability to reliably measure the change eg. In construction projects, income is recognized earlier

95
Q

What are accrual salaries

A

Salaries not paid during financial period
They are recorded under current liabilities as they will be paid within the next 12 months
Accrual salaries up, expenses up
Once paid, deduct cash and deduct accrual salaries

96
Q

Why is prepayment a current asset?

A

Represents future economic benefits

97
Q

What is the materiality convention

A

Adopted for accruals and prepayments
Items need to be separately disclosed if they are seen as important to users
Items not deemed to be important enough can be grouped together ($5 stationery ignored when preparing financial statement for that period)

98
Q

Do non current assets have perpetual existence

A

No they are consumed during the process of generating economic income for the business

99
Q

Is it possible to measure consumption of economic benefits of assets during a period?

A

Through cost allocation managers can determine how much of the economic benefits of the assets have been used up during the period

100
Q

Describe the cost/ fair value of the asset

A

All costs to bring the asset to use eg. Cost to acquire, delivery, installation (plant), legal costs incurred in transfer of legal title (eg. Freehold property), any costs incurred in improving or altering the asset

101
Q

How can physical life of an asset be extended?

A

Through maintenance and improvements

102
Q

Why may economic benefits derived from an asset be reduced over time?

A

Various factors such as change in market demand, new competitors in markets, technological advancement, obsolescence

103
Q

Differ economic and physical life an asset has

A

Economic life: how long the asset will be useful towards business in generating income

Physical life: how long asset lasts without breaking

104
Q

Describe the estimated residual/disposal value

A

Worth of asset at the end of it’s economic life

Nevertheless the asset might still be useful towards others and the business can receive payment

105
Q

3 depreciation methods

A

Straight line depreciation
Accelerated depreciation
Units of production depreciation

106
Q

Describe straight line

A

Equal depreciation expense in each period of the asset’s useful life

107
Q

Accelerated deprecation

A

Systematically higher depreciation in early periods of asset’s useful life while smaller depreciation expense in the later periods

Eg. Reducing-balance method (fixed percentage rate of depreciation)

108
Q

Units of production depreciation

A

Depreciation expense allocated to each period reflects objective measure of the asset’s life (km travelled, units produced)

109
Q

Formula for calculating fixed depreciation percentage for the accelerated depreciation method eg. Reducing balance method

A

P= (1- square root n (R/C) x 100%

110
Q

Formula for straight-line depreciation

A

Depreciation per annum : cost -residual value / estimated useful life

111
Q

Formula for reducing-balance method

A

Cost x fixed percentage of depreciation = depreciation expense for one year

112
Q

What is the written-down/ carrying/ net book value?

A

The value of asset after deducing accumulated depreciation from cost

113
Q

What is a contra asset account?

A

Account that goes together with another account but represents a reduction in that account eg. accumulated depreciation- equipment

114
Q

How may a business determine what depreciation method to use?

A

Reflect the pattern in which asset’s future economic benefits are expected to be consumed by the entity

115
Q

Why may a business use straight line method?

A

Benefits constant over time

116
Q

Why may business use reducing-balance depreciation?

A

Asset expected to lose efficiency and hence decline in benefits (machinery)

117
Q

Why may a business use units of production depreciation?

A

High correlation between activity of an asset and its physical wear and tear

118
Q

Formula for units of production depreciation

A

(Cost -residual value) x production units in the period/ total estimated production units over useful life

119
Q

How will depreciation affect the business?

A

It is an expense. This will reduce net profit in then reducing dividend distribution and retained earnings

120
Q

What type of expense is inventory?

A

Deferred expense as the inventory isoniazid for before recognition of the expense

121
Q

What is the traditional basis for valuing assets??

A

Historical cost

122
Q

Describe the consistency convention

A

Particular method of accounting is adopted to deal with transaction, this should be applied consistently over time eg. Depreciation and inventory valuation

123
Q

When is revenue recognized for credit sales?

A

As soon as goods are passed to and accepted by the customer

124
Q

How will bad debt affect financial performance and position?

A

It is written off by reducing ‘accounts receivable- customer’s name’ and increasing expense known as ‘bad debts written off’/bad debts expense

126
Q

Matching convention requires bad debt…..

A

Matching convention requires bad debt to be written off in the same period as that of the sale that gave rise to the debt. Income earned in period matches with expenses incurred in generating income

127
Q

Why may writing off bad debts as an expense be useful?

A

It can help management review their credit policies

128
Q

What are doubtful debts?

A

Debts not expected to be received but are not currently uncollectable

There is risk of nonpayment. They are not bad debts (irrecoverable). It is likely that a significant portion of doubtful debts ultimately prove to be bad

129
Q

How can a doubtful debt proved to be irrecoverable/ bad debt be written off? When does this normally occur?

A

Written off by reducing accounts receivable
Reducing allowance for doubtful debts

This normal occurs after the end of accounting period when the business knows that they collect collect the debt from customer

129
Q

How can business determine doubtful debts

A

Credit sales approach: past experience and current expectations applied to credit sales figure

Analysis of accounts receivable outstanding: how long the accounts have been outstanding. For each aged category (current, 31-60,61-90) . Different percentage based in past experience and future expectations is applied to each category to determine the amount that is not expected to be collected

130
Q

Where will doubtful debts be recorded?

A

Recorded under expenses in the income statement as ‘doubtful debts expense’
Deduction from accounts receivable account labelled ‘allowance for doubtful debts’

131
Q

What kind or account is doubtful debts?

A

A contra asset account, ‘allowance for doubtful debts’ is deducted from accounts receivable on the balance sheet

132
Q

When there is overestimate on allowance for doubtful debts what will happen?

A

Overestimate should be written back in the next accounting period as ‘doubtful debts expense written back’

  1. Reducing allowance for doubtful debts
  2. Increasing revenue or deduct expense
133
Q

Describe impairment loss

A

Assets are labeled as ‘impairment loss’ when they are written down to the recoverable amount this occurs when the recoverable amount of the asset is less than the carrying amount

134
Q

What is another name for doubtful debts expense

A

Impairment loss on accounts receivable

On contra debtors account, may be changed to ‘allowance for impairment loss’

135
Q

Double entry

A

Every business transaction is recorded in at least two accounts

136
Q

What is unearned revenue/ prepaid income

A

Liability account. When a company has received cash in advance of earning it. Company has cash but also has obligation to perform the service, deliver the product or return the cash

Results to increase in cash and increase in unearned revenue under liability. As it is earned, it is added to revenue

138
Q

How do we recognize sales?

A

no set method but it is often said that a sale is recognized when the risks and rewards are transferred to the customer. In other words, when the customer receives the good/ service

139
Q

High proportion of funding for expansion comes from?

A

Retained profits

Approximately cash flow from operating activities - dividends

140
Q

How would you record $70 credit sales that cost $20?

A

Increase AR by 70
Increase sales revenue by 70

Decrease inventory by 20
Increase COGS by 20

141
Q

How can you express bad and doubtful debts in an income statement

A

Bad and doubtful debts expense

141
Q

What is the net accounts receivable

A

Accounts receivable the business can expect to collect after deducting allowance for doubtful debt and bad debts

142
Q

When is provision for doubtful debts and bad and doubtful debts expense normally recorded?

A

At the end of accounting period

143
Q

What are prepayments? (Prepaid expenses)

How do you record it when cash is paid and how do you record it at the end of accounting period?

A

Amount paid for future benefits
Generates future economic benefits

cash paid before expense is incurred: reduce cash, increase prepayment

End of accounting period: record expense doer the amount of benefits consumed
Prepayment decrease, expense increase

144
Q

How would you alter unearned revenue after the good has been delivered/ service is performed (earned revenue)?

A

Record revenue
Revenue increases
Unearned revenue decreases

145
Q

How do you record accruals?

A

Increase accruals/ expense payable

Increase expense

146
Q

When dividends at declared and paid?

A

Retained earnings falls

Cash falls

147
Q

Dividends declared and not paid?

A

Dividends payable increases

Retained earnings fall

148
Q

How are intangible assets recorded?

A

At historic cost

149
Q

What are identifiable intangible assets?

A

Separate existence eg. Trademarks, franchises and parents

Assets with finite life are amortized over useful life

150
Q

What is amortization?

A

Systematic allocation of depreciable amount of an intangible asset over it’s useful life
Same meaning as depreciation

151
Q

What are unidentifiable intangible assets?

A

Cannot be attributed to particular event or transaction

Eg. Goodwill because it is only recorded by business that purchases another enterprise. Excess of the cost to purchase another business over the fair value of its net assets

Internally generated goodwill shall not be recognized as an asset

152
Q

Are unidentifiable assets required to be valued each year?

A

Yes they are required to be calked each year and any impairment (reduction) in the value of asset has to be expensed
Increase in value of asset not recorded (accounting conservatism)

153
Q

Why may asset be revalued.

A

Recorded as their far value

Increase in asset revaluation reserve
Increase in asset

154
Q

Are intangible assets allowed to be revalued to their fair value?

A

No

155
Q

Impairment loss

A

Carrying amount- recoverable amount

156
Q

What is asset impairment

A

If non current asset’s recoverable amount falls below it’s carrying amount, the asset must be reduced to it’s recoverable amount and the impairment loss is recorded in the comprehensive income statement

157
Q

What are gains?

A

Bet Inflows from non ordinary activities

158
Q

What are formats of the income statement?

A

Descriptive format: classify expenses according to their nature normally used by service businesses
Functional format: classify expenses according to their function. Used by retail and manufacturing firms

159
Q

Describe the responsibilities for external and internal reporting

A

External reporting: reporting cycle is normally one year. Listed companies required to provided half yearly reports

Internal functions: profit figures prepared on monthly basis

161
Q

What are consolidated financial statements?

A

Financial statements of a group presented as those of single entity

162
Q

What is a group in terms of consolidated financial statements

A

Parent and it’s subsidiary

163
Q

What is a parent in terms of consolidated financial statements

A

Entity with one or more subsidiaries

164
Q

What is a subsidiary in terms of consolidated financial statements

A

Entity controlled by another entity (parent)

165
Q

What is control in terms of consolidated financial statements

A

Power to govern financial and operating polices of entity so as to obtain benefits from its activities

166
Q

What is non controlling interest (minority interest) in terms of consolidated financial statements

A

Subsidiary is not wholly owned by parent

Business (11 decks)

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