Financial Accounting

Question 1

Accounting consists of three basic activities:

Answer 1

Identify, Record and Communicate

Question 2

Internal users and External users

Answer 2

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

Question 3

Managerial accounting and Financial Accounting

Answer 3

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

Question 4

Ethics

Answer 4

Effective financial reporting depends on sound ethical behaviour

Question 5

International Accounting Standards Board (IASB)

Answer 5

International Financial Reporting Standards (IFRS)

Question 6

Financial Accounting Standards Board (FASB)

Answer 6

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

Question 7

Convergence

Answer 7

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

Question 8

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

Answer 8

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

Question 9

Monetary unit assumption and Economic entity assumption

Answer 9

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

Question 10

Organisations that use accounting

Answer 10

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

Question 11

The basic accounting equation

Answer 11

Assets = Liabilities + Equity

Question 12

Assets

Answer 12

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

Question 13

Liabilities

Answer 13

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

Question 14

Creditors

Answer 14

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.

Question 15

Equity

Answer 15

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

Question 16

Share capital-ordinary

Answer 16

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

Question 17

Retained earnings

Answer 17

Income from previous periods not yet paid out as dividends.

Retained earnings = Revenues - Expenses - Dividends

Question 18

Revenues

Answer 18

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

Question 19

Expenses

Answer 19

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

Question 20

Dividends

Answer 20

Distribution of cash or other assets to shareholders.

Question 21

Gross

Answer 21

Without deduction of tax or other contributions.

Question 22

Value of equity can change from

Answer 22

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)

Question 23

Expanded basic accounting equation

Answer 23

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

Question 24

Bookkeeping

Answer 24

Process of registering transactions, recording activity

Question 25

Financial statements

Answer 25

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

Question 26

Public accounting

Answer 26

Auditing, taxation and management consulting

Question 27

Private accounting

Answer 27

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

Question 28

Government accounting

Answer 28

Tax authorities, law enforcement agencies and corporate regulators

Question 29

Forensic accounting

Answer 29

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

Question 30

Timing issue

Answer 30

Companies allocate the costs to the periods of use. | Airplane used for 5 years

Question 31

Time period assumption

Answer 31

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

Question 32

Interim periods

Answer 32

Monthly and quarterly time periods

Question 33

Fiscal year

Answer 33

Accounting time period that is one year in length

Question 34

Calendar year

Answer 34

January 1 to December 31

Question 35

Accrual-basis accounting (IFRS)

Answer 35

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

Question 36

Cash basis accounting

Answer 36

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

Question 37

Performance obligation

Answer 37

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

Question 38

Revenue Recognition Principle

Answer 38

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

Question 39

Expense Recognition Principle / Matching principle

Answer 39

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

Question 40

Adjusting entries

Answer 40

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

Question 41

Types of adjusting entries

Answer 41

Deferrals and Accruals

Question 42

Deferrals

Answer 42

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

Question 43

Accruals (before)

Answer 43

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

Question 44

The recording process

Answer 44

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

Question 45

The journal

Answer 45

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

Question 46

Journalising

Answer 46

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

Question 47

What happens after the journals are made?

Answer 47

They are transferred to the General Ledger

Question 48

Simple entry

Answer 48

Involves only two accounts - one debit and one credit

Question 49

Compound entry

Answer 49

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

Question 50

Ledger

Answer 50

The entire group of accounts maintained by a company

Question 51

General ledger

Answer 51

Contains all assets, liabilities and equity accounts

Question 52

Posting

Answer 52

Transferring journal entries to the ledger account

Question 53

The recording process in general

Answer 53

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

Question 54

The trial balance

Answer 54

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

Question 55

Prepaid expenses

Answer 55

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

Question 56

Unearned revenue

Answer 56

Debit to the liability account and credit to revenue account

Question 57

Accrued revenue

Answer 57

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

Question 58

Accrued interest

Answer 58

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