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EBE Year 1 > Financial Accounting > Flashcards

Financial Accounting Flashcards

1
Q

Accounting consists of three basic activities:

A

Identify, Record and Communicate

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2
Q

Internal users and External users

A

Internal - managers
External users - investors (owners) buy/hold/sell ownership shares, creditors (suppliers and bankers) evaluate the risks of granting credit or lending money

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3
Q

Managerial accounting and Financial Accounting

A

1) Provides internal reports to help users to make decisions about their companies
2) Provides economic and financial information to external users

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4
Q

Ethics

A

Effective financial reporting depends on sound ethical behaviour

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5
Q

International Accounting Standards Board (IASB)

A

International Financial Reporting Standards (IFRS)

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6
Q

Financial Accounting Standards Board (FASB)

A

Generally Accepted Accounting Principles (GAAP) in most companies in US

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7
Q

Convergence

A

Process of reducing the difference between IFRS and US GAAP in order to increase comparability .

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8
Q

IFRS’s measurement principles - Historical cost principle and Fair value principle

A

1) Dictates that companies record assets at their cost; even if the value of the asset changes over time, the original cost is reported
2) Assets and liabilities should be reported at fair value

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9
Q

Monetary unit assumption and Economic entity assumption

A

1) Only transaction data that can be expressed in terms of money; quantify economic events, excludes information that cannot be quantified
2) An economic entity can be any organisation or unit of society, activities of the entity be kept separate and districts from the activities of its owner and other economic entities

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10
Q

Organisations that use accounting

A

Companies: proprietorship, partnership and corporation
Non-profit organisations
Government organisations

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11
Q

The basic accounting equation

A

Assets = Liabilities + Equity

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12
Q

Assets

A 
Capacity to provide future services or benefits. 
1) Cash
2) Inventory 
3) Buildings 
4) Equipment 
5) IT systems 
6) Patents 
7) Trademarks 
8) Accounts receivable
Assets are claimed by either creditors or shareholders
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13
Q

Liabilities

A

Claims against assets - existing debts and obligations.

1) Accounts payable (purchasing on credit from suppliers)
2) Note payable (borrowing money from the bank)
3) Salaries and wages payable (employees)
4) Taxes payable (amounts owed to the tax authorities)
5) Bonds

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14
Q

Creditors

A

All of the people or entities to whom the business owes money. May legally force the liquidation of a business that does not pay its debts.

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15
Q

Equity

A

The value of the corporation to its owners. It is what belongs to shareholders.
Component 1) Share capital-ordinary
Component 2) Retained earnings

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16
Q

Share capital-ordinary

A

Amounts paid in by shareholders for the ordinary shares they purchase.

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17
Q

Retained earnings

A

Income from previous periods not yet paid out as dividends.

Retained earnings = Revenues - Expenses - Dividends

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18
Q

Revenues

A

Gross increases in equity resulting from business activities entered into for the purpose of earning income.

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19
Q

Expenses

A

Costs of assets consumed or serviced used in the process of earning revenue. Decreases in equity that result from operating the business

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20
Q

Dividends

A

Distribution of cash or other assets to shareholders.

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21
Q

Gross

A

Without deduction of tax or other contributions.

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22
Q

Value of equity can change from

A

1) Operations - revenues and expenses resulting in a net income

2) Transactions with owners:
Shareholders can invest in the firm (buy shares)
Shareholders can be paid by the firm (receive dividends)

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23
Q

Expanded basic accounting equation

A

Assets = Liabilities + Share capital-ordinary + Revenue - Expenses - Dividends

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24
Q

Bookkeeping

A

Process of registering transactions, recording activity

25
Q

Financial statements

A

The annual reports of companies contain five financial statements

  1. Income statement - net income or net loss
  2. Statement of financial position/Balance sheet - reports of assets, liabilities and equity
  3. Retained earnings statement - changes in retained earnings
  4. Statement of cash flows - cash inflows/receipts and outflows (payments)
  5. Comprehensive income statement
26
Q

Public accounting

A

Auditing, taxation and management consulting

27
Q

Private accounting

A

Cost accounting, budgeting, internal auditing, accounting information system design and support, tax planning and preparation.

28
Q

Government accounting

A

Tax authorities, law enforcement agencies and corporate regulators

29
Q

Forensic accounting

A

Investigations into theft and fraud. Money-laundering, identity theft and tax evasion

30
Q

Timing issue

A

Companies allocate the costs to the periods of use.

Airplane used for 5 years

31
Q

Time period assumption

A

Accountants divide the economic life of a business into artificial time periods

32
Q

Interim periods

A

Monthly and quarterly time periods

33
Q

Fiscal year

A

Accounting time period that is one year in length

34
Q

Calendar year

A

January 1 to December 31

35
Q

Accrual-basis accounting (IFRS)

A

Companies record transactions that change a company’s financial statements in the periods in which the events occur.
Recognise revenues/expenses when they perform the services/incurred, rather than receiving cash/getting paid

36
Q

Cash basis accounting

A

Companies record revenue at the time when they receive cash and they record an expense at the time they pay out cash.

37
Q

Performance obligation

A

When a company agrees to perform a service or sell a product to a customer

38
Q

Revenue Recognition Principle

A

Companies recognise revenue in the accounting period in which the performance obligation is satisfied

39
Q

Expense Recognition Principle / Matching principle

A

Expenses are recognised in the accounting period in which the company generates revenues because of these expenses

40
Q

Adjusting entries

A

Ensure that the revenue recognition and expense recognition principles are followed. They ensure that revenues and expenses are recognised in the period to which they belong

41
Q

Types of adjusting entries

A

Deferrals and Accruals

42
Q

Deferrals

A

1) Prepaid expenses: expenses paid in cash before they are used or consumed
2) Unearned revenues: cash received before services are performed

43
Q

Accruals (before)

A

1) Accrued revenues: revenues for services performed but not yet received in cash or recorded
2) Accrued expenses: expenses incurred but not yet paid in cash or recorded

44
Q

The recording process

A
  1. Analyse transactions in terms of effects on the accounts
  2. Enter the transaction information in a journal
  3. Transfer the journal info to the appropriate accounts in the ledger
45
Q

The journal

A

Book of original entry. Record transactions in the chronological order
Several contributions to the recording process:
1) chronological order
2) discloses in one place the compete effects of a transaction
3) helps to prevent and locates error

46
Q

Journalising

A 
Entering transaction data in the journal.
Consists of:
1) date of transaction 
2) amounts to be debited and credited 
3) a brief explanation
47
Q

What happens after the journals are made?

A

They are transferred to the General Ledger

48
Q

Simple entry

A

Involves only two accounts - one debit and one credit

49
Q

Compound entry

A

Requires three or more accounts - one bed it and two credit

50
Q

Ledger

A

The entire group of accounts maintained by a company

51
Q

General ledger

A

Contains all assets, liabilities and equity accounts

52
Q

Posting

A

Transferring journal entries to the ledger account

53
Q

The recording process in general

A
  1. Analyse each transaction
    What type of count is involved
    What decreased and increased and by how much
    Translate them into debits and credits
  2. Enter the transactions in the journal
  3. Post the journal entries to the ledger
54
Q

The trial balance

A

List of accounts and their balances at a given time. Debit, credit and balance

55
Q

Prepaid expenses

A

An debit to an expense account and a credit to an asset account
Supplies
Insurance: prepaid insurance and cash, insurance expense and prepaid insurance Cr
Depreciation: depreciation expense and Cr Accumulated depreciation-Equipment

56
Q

Unearned revenue

A

Debit to the liability account and credit to revenue account

57
Q

Accrued revenue

A

A debit to an asset account and a credit to a revenue account
Accounts receivable and service revenue, revenue for services perform

58
Q

Accrued interest

A

Face value * annual interest rate * time in terms of year = Interest

EBE Year 1 (7 decks)

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