Intro To Accounting

Question 1

What are the three main activities involved in accounting?

Answer 1

1. Identification: Accountants identify economic events and transactions related to the business
2. Recording: Accountants summarise and record these transactions
3. Communication: They then prepare accounting reports and analyse this to interpret for users. Explain why e.g. salaries are too high, increase in revenue… In order to make the business profitable.

Question 2

Going concern

Answer 2

The entity will continue in operation for the foreseeable future

Question 3

Accrual

Answer 3

Revenue and costs must be recognised as they are earned or incurred, not as money is received or paid.

Question 4

Materiality

Answer 4

Information is material if its omission or misstatement could influence the economic decision of users.

Question 5

General objective of financial statements

Answer 5

• to provide financial information about the business which is useful to existing investors, lenders and creditors in making decisions.
• assess security for amount to lend
• to assess accountability of management

Question 6

Purpose of statement of financial position

Answer 6

• helps users assess an entity’s financial strengths/ weaknesses. Including liquidity and solvency

Question 7

Purpose of the income statement

Answer 7

• Helps users understand the return the entity has produced. Indicator of how efficiently resource have been used

Question 8

Purpose of the statement of cash flow

Answer 8

• helps users assess an entity’s ability to generate future new cash inflows, gives users a better understanding of operations

Question 9

Two primary basis’s of accounting

Answer 9

• Cash basis accounting: a business recognises revenue when earned and expenses when bills are paid. Widely used by smaller businesses
• Accrual basis of accounting: a business recognises revenue when earned and expenses when expenditures are consumed/ incurred