Introduction to Accounting Flashcards
Define accounting
A method of communicating information for decision making
Define financial accounting
The provision of information for third parties - people outside of the business.
Define management accounting
Provision of information for internal decision making
Define income (in accounting obviously)
Total amount of money generated from the sale of goods and services.
Define expenses
The costs incurred in an effort to generate revenue
Define profit
Income - expenses.
The value of all goods and services minus the cost of getting them to customers.
Define an asset
Resources controlled by the entity that are of future value.
What are tangible/intangible assets?
Tangible are ones you can physically see and touch like equipment whereas intangible you cannot like software.
What are available for sale assets?
Things like shares and bonds.
What is a current asset?
An asset that is expected to be turned to cash in the next 12 months.
Define liability?
An obligation to transfer resources to third parties.
What is a non-current liability?
A liability that isn’t due to be payed in the next 12 months.
Define equity capital.
The difference between the company’s assets and liabilities - the owner’s investment in the company.
What is an income statement?
Statement of profit or loss
Shows all incomes and expenses to show how much profit a business is making.
Revenue + gains - loses - expenses
What is a balance sheet?
Statement of financial position
Shows the company’s assets, liabilities and equity capital on that date. More of a snapshot.
What is the statement of cash flow?
Shows how all cash was generated and spent during a period.
What’s the difference between an income statement and a cash flow statement?
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.
What is included in annual reports?
Income statement Balance sheet Statement of cash flows Changes in equity Details on accounting policy
What is the equity concept?
Financial accounting only considers an entity’s transactions and not the owner’s finances. Duh.
Who are the primary users of financial accounting?
Investors
Investment analysts
Lenders
Creditors
Who are the other users of financial accounting?
Customers - may have warranty and want the business to continue
Employees - concerned about the direction of the business
Government - ensure taxes are paid
Competitors
Why do investors take an interest in financial accounting?
To determine the profitability and prospects of the company.
Judge the economic stability and ascertain the ownership and control of the entity
How useful are annual reports?
For the most part, efficient market theory suggests that the content of annual reports has little predictive value for share trading.
