Introduction to Accounting

Question 1

Define accounting

Answer 1

A method of communicating information for decision making

Question 2

Define financial accounting

Answer 2

The provision of information for third parties - people outside of the business.

Question 3

Define management accounting

Answer 3

Provision of information for internal decision making

Question 4

Define income (in accounting obviously)

Answer 4

Total amount of money generated from the sale of goods and services.

Question 5

Define expenses

Answer 5

The costs incurred in an effort to generate revenue

Question 6

Define profit

Answer 6

Income - expenses.

The value of all goods and services minus the cost of getting them to customers.

Question 7

Define an asset

Answer 7

Resources controlled by the entity that are of future value.

Question 8

What are tangible/intangible assets?

Answer 8

Tangible are ones you can physically see and touch like equipment whereas intangible you cannot like software.

Question 9

What are available for sale assets?

Answer 9

Things like shares and bonds.

Question 10

What is a current asset?

Answer 10

An asset that is expected to be turned to cash in the next 12 months.

Question 11

Define liability?

Answer 11

An obligation to transfer resources to third parties.

Question 12

What is a non-current liability?

Answer 12

A liability that isn’t due to be payed in the next 12 months.

Question 13

Define equity capital.

Answer 13

The difference between the company’s assets and liabilities - the owner’s investment in the company.

Question 14

What is an income statement?

Statement of profit or loss

Answer 14

Shows all incomes and expenses to show how much profit a business is making.
Revenue + gains - loses - expenses

Question 15

What is a balance sheet?

Statement of financial position

Answer 15

Shows the company’s assets, liabilities and equity capital on that date. More of a snapshot.

Question 16

What is the statement of cash flow?

Answer 16

Shows how all cash was generated and spent during a period.

Question 17

What’s the difference between an income statement and a cash flow statement?

Answer 17

An income statement is meant to show how much profit is being made whereas a cash flow statement is meant to show how much cash is being generated and how much it’s spending.

Question 18

What is included in annual reports?

Answer 18

Income statement 
Balance sheet
Statement of cash flows
Changes in equity
Details on accounting policy

Question 19

What is the equity concept?

Answer 19

Financial accounting only considers an entity’s transactions and not the owner’s finances. Duh.

Question 20

Who are the primary users of financial accounting?

Answer 20

Investors
Investment analysts
Lenders
Creditors

Question 21

Who are the other users of financial accounting?

Answer 21

Customers - may have warranty and want the business to continue
Employees - concerned about the direction of the business
Government - ensure taxes are paid
Competitors

Question 22

Why do investors take an interest in financial accounting?

Answer 22

To determine the profitability and prospects of the company.

Judge the economic stability and ascertain the ownership and control of the entity

Question 23

How useful are annual reports?

Answer 23

For the most part, efficient market theory suggests that the content of annual reports has little predictive value for share trading.