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Spring term 2019 > Intro to Financial Accounting > Flashcards

Intro to Financial Accounting Flashcards

1
Q

What is Accounting?

A

The systematic recording, reporting and analysis of financial transactions of a business.

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2
Q

What is the main difference between financial accounting and management accounting?

A

Financial Accounting: Communication with interested parties outside the company. (EXTERNAL)

Management Accounting: Preparation of reports from INTERNAL management purposes

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3
Q

Define entity capital.

A

The amount the company owes owners.

The amount directly or indirectly invested

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4
Q

What are the two statements that make up the annual report?

A

Statement of Profit or Loss / Income Statement
and
Statement of financial position / Balance Sheet

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5
Q

What are the 3 sources of accounting rules?

A

Company Law - Company Act 2006
The Stock Exchange - Listing Requirements
Accounting Standards Setters

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6
Q

Name the 3 Core accounting standards setters.

A

Financial Reporting Council (FRC) in the UK
International Accounting Standards Board (IASB)
Financial Accounting Standards Board (FASB) in the US

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7
Q

State some of the conceptual frameworks aims to assist in…

A

Standard setters developing standards in line with agreed principles
Avoiding ‘fire-fighting’
Certain critical issues being addressed
References to auditors when there is no standard
Having standards that are hard to get around
Strengthening credibility of financial reporting
Less likely to be influenced by companies/industries

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8
Q

Define Accountability.

A

Accountability refers to management’s responsibility to provide an account/report on the way in which the resources entrusted them to be used.

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9
Q

What does ‘framework objective’ refer to?

A

It refers to users of general purpose financial statements and considers three types of users specifically, although there is a wider base of potential users.

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10
Q

Who are the three types of users specifically considered by the framework objective?

A

Investors, lenders and other creditors.

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11
Q

What are the fundamental qualitative characteristics that make financial information useful?

A

Relevance and faithful representation.

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12
Q

What are the qualities of relevance?

A

Predictive value - assess or evaluate past, present of future events
Confirmatory value - confirm or correct past evaluations and assessments

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13
Q

What is meant by relevant financial information?

A

Information makes a difference to the users’ decisions, it is provided in a timely manner and has material.

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14
Q

What are the qualities of faithful representation?

A

Completeness
Free from bias
Free from error (subject to materiality)

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15
Q

Define comparability and state what it assists in.

A

Comparability enables users to identify and understand comparisons between items.
It assists in consistency in the treatment of items within an entity and across entities. It also assists accounting standards.

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16
Q

Define verifiability.

A

Information should be capable of verification by different knowledge and independent observers.

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17
Q

Explain direct and indirect verifiability.

A

Direct - observations such as counting cash
Indirect - By checking inputs into a model (disclosed assumptions, the model formula methods used) and recalculating the output using the same methodology.

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18
Q

Define Timeliness in relation to faithful representation.

A

Information given in sufficient time for decision- makers to influence.

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19
Q

Define understandability in relation to faithful representation.

A

Assisted when information is characterised and presented clearly and concisely.

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20
Q

Enhanced qualitative characteristics can have tensions. Give some examples.

A

Completeness vs Timeliness
Relevance vs Reliability
Understandability - Info shouldn’t be excluded if it is difficult to understand but is relevant, reliable, etc.

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21
Q

What are the 5 elements that are defined in the conceptual framework?

A 
Assets
Liabilities
Equity
Expense
Income
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22
Q

What are the definitions for assets and liabilities in the conceptual framework?

A

Assets - Resources controlled by the entity as a result of past events. Expected INFLOW of economic benefits.

Liabilities - Present obligations arising from past events. Expected OUTFLOW of economic benefits.

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23
Q

Define Equity.

A

Residual interest in the assets of the entity.

i.e. Assets - Liabilities = Equity

24
Q

What are the definitions form expense and income in the conceptual framework?

A

Expense - Recognised decrease in asset/increase in liability in current recording period. That resulted in equity except those relating to equity participants.

Income - Recognised increase in asset/decrease in liability in current reporting period. That resulted in increased equity except those from equity participants.

25
Q

What is the Accounting Equation?

A

Assets = Liabilities + Owner’s Equity

26
Q

What is going concern?

A

The assumption that an entity will continue in business for the foreseeable future. Assets are valued using reasonable measurement basis over their useful economic life to the entity.
There is no threat of liquidation, ceasing to trade or seeking protection from those to those to whom it’s in debt.

27
Q

Define ‘accruals concept’.

A

Allocating expenses and income to the periods they relate. i.e. when expenses/income were used/earned as opposed to paid out/received.

28
Q

Explain what is meant by prudence.

A

Prudence means that accounts should neither be optimistic nor pessimistic. Accounting estimates should be conservative.

29
Q

What is the concept of ‘matching’?

A

Matching revenues and costs.

For example, cost of inventory to the period in which it’s sold.

30
Q

Are sole traders and partnerships required to keep records of their transactions?

A

There is no specific legislation.
However, it is expected to determine income tax liability and without records it will be difficult to obtain discharge from possible bankruptcy.

31
Q

What is the main advantage of double-entry bookkeeping?

A

The duplication when inputted makes it more accurate. The internal check highlights some errors.

32
Q

What are the 4 categorised types of asset?

A

Tangible
Intangible
Available-for-sale
Investments in Associates

33
Q

What are some advantages and disadvantages of having global financial reporting standards prepared by the IASB?

A

Advantages:
Improves comparability between countries
Provides a global business language and therefore better communication
Increased global investments
Provides legitimacy to businesses in countries that don’t have their own framework.

Disadvantages:
A treat to national identity
Treatments recommended may not reflect national culture
May not be flexible enough to deal with unique country specific transactions
Deemed inappropriate for small-medium entities (hence UK didn’t fully converge)

34
Q

What is the difference between a normative/destructive and a positive/empiricist approach to conceptual framework?

A

Normative/destructive: regards framework as essential

Positive/empiricist: regards framework as at best unnecessary, and at worst positively dysfunctional

35
Q

How can a company boost their CSR with their employees?

A 
Health and safety
Fair wages
Pension schemes
Training and Promotion
Share options
Bonus and other perks
36
Q

What is deferred income?

A

Cash received in advance in an earlier period.
e.g. A deposit received in the previous period when ordering a product that will not be ready for sale until the current period.

37
Q

Define ‘Measurement Basis’.

A

Methods used to determine the monetary value.

Four main bases are historical cost, current cost, realisable value and present value.

38
Q

What are the 5 main stages of every audit?

A
  1. Client acceptance or retention
  2. Audit planning stage
  3. Control testing stage
  4. Substantive testing stage
  5. Opinion formulation stage
39
Q

What is the difference between tax avoidance and tax evasion?

A

Tax Avoidance - Lowers your tax bill by structuring your transactions so that you reap the largest tax benefits. It’s LEGAL.
Tax Evasion - An attempt to reduce your tax liability by deceit, subterfuge, or concealment. It’s ILLEGAL.

40
Q

What is the basic accounting concept relating to profit?

A

Profit generates an increase in capital.
Profit can be withdrawn from a business but share capital must be left intact.
Historic profits can be withdrawn hence dividends can be given out even with a loss.

41
Q

Define ‘Capital Expenditure’.

A

Relates to items with future benefit recorded in the SoFP as an asset.
e.g. A new delivery scooter as it can be used for many years, or goods not yet sold, etc.

42
Q

Define ‘Revenue Expenditure’.

A

Consumed within the reporting period.

e.g. Rates for the year, rent on premises, etc.

43
Q

What is the difference between a trade and a cash discount?

A

Trade Discount - Discount given by one trader to another, often involved with credit transactions.
Cash Discounts - Reduction in the amount the customer has to pay if paid within given period.

44
Q

What are the advantages of computerised accounting systems?

A 
Cost savings 
e.g. fewer admin staff
Timely Information
e.g. Info inputted is updated to reports instantly
Simultaneous access to data
Improved accuracy of data
Improved detail
Improved reporting
45
Q

What are the key steps to take when doing a double-entry?

A
  1. Determine the two accounts to be adjusted
  2. Consider the flow of value
  3. Identify the money value that is being transferred.
46
Q

Money is put into the business. What are the entries recorded?

A

Cash or bank account is debited.

Capital introduced account is credited.

47
Q

Define ‘Gross Profit’.

A

Difference between sales value and purchase value of items sold.

48
Q

What happens after all drawings for the accounting period have been entered?

A

The total is transferred to the capital account.
Credit Drawings Account
Debit Capital Account

49
Q

What is the capital account?

A

It’s the owner’s investment into the equity. Liability of equity to the owner.

50
Q

What determines a profit or loss on the SoPL?

A

A profit is a credit balance.

A loss is a debit balance.

51
Q

Which elements feature on each side of the SoFP?

A

Debit Balances =
Assets
Drawings
Losses

Credit Balances = 
Liabilities
Capital (Opening Balance0
Capital Introduced
Profits
52
Q

Define ‘Trial Balance’.

A

A list of the balances in the general ledger at the end of an accounting period, divided between those ledger accounts with credit and debit balances.

53
Q

What are some of the purposes of a trial balance?

A

To ascertain whether the total of the ledger accounts with credit and debit balances match.
To assist in the preparation of the financial statements.

54
Q

The cash account can only have a…

A

DEBIT balance.

55
Q

If a bank account has a credit balance, what does it mean?

A

It means that the business is overdrawn.

56
Q

What is the purpose of the sales day book?

A

It records the sale on credit of those goods bought specifically for resale.
It’s written up from copies of sales invoices and debit notes retained by the seller.
The amount entered in the saes book is after deducting trade discount but before deducting cash discount.

57
Q

What is the purpose of the purchases day book?

A

It records the purchase on credit of goods intended for resale.
It’s written up from the invoices and debt notes received from suppliers.
The amount entered is after deducting trade discount but before deducting cash discount.

Spring term 2019 (5 decks)

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