Introduction to Accounting

Question 1

How to define ACCOUNTING?

Answer 1

ACCOUNTING is concerned with the collecting, analysing, and communicating financial information to help the end-user make more informed decisions

Question 2

Define FINANCIAL MANAGEMENT

Answer 2

it is concerned with the ways which funds for a business are raised and invested

Question 3

Who are the MAIN USERS of financial information?

Answer 3

• Owners
• Customers
• Managers
• Lenders/Creditors
• Suppliers
• Investment analysts
• Government/Regulatory authorities
• Competitors
• Employees (and their representatives)
• Community representatives

Question 4

What are some costs of accounting information?

Answer 4

• time spent accruing and analysing accounting information
• salary and payroll of accounting staffs
• costs for external auditing

Question 5

How is MANAGEMENT ACCOUNTING different from Financial Accounting?

Answer 5

• FA is more general; broad overview; MA is more specific and in detail, with focus on a specific operational requirement
• MA tends to be specific-purpose, meant for managers in charge of a specific operation or organisational leaders; FA is general-purpose meant for all users, mostly external
• FA reporting is standardised and regulated; MA reporting has no particular standard, and can be designed to meet specific needs of managers
• FA is backward-looking, accounting for past performance, etc; MA reflects both past performance and information which concerns future performance
• FA is more focused on financial information, wheras MA may include other non-financial information in the reports

Question 6

What is a BALANCE SHEET otherwise known as?

Answer 6

Statement of Financial Position

Question 7

_________ = ___________ + ____________

ACCOUNTING EQUATION

Answer 7

ASSETS = EQUITY + LIABILITIES

Question 8

According to the International Accounting Standards (IAS1), what constitutes a complete set of financial statements?

Answer 8

1. Statement of Financial Position
2. Statement of Comprehensive Income
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Accounting Policies & Explanatory Notes

Question 9

What is a STATEMENT OF CASH FLOWS?

Answer 9

A Cash Flow Statement (also called the Statement of Cash Flows) shows how much cash is generated and used during a given time period.

Question 10

What is the PURPOSE OF STATEMENT OF FINANCIAL POSITION?

Answer 10

It shows the capital, and financially measurable resources (assets) & financially measurable obligations (liabilities) at a point of time – A snapshot of the financial position of a company at a specific point of time.

Question 11

What is meant by RETAINED EARNINGS?

Answer 11

profits kept in the business since it began; not meant to be distributed as dividends; usually re-invested into the business

Question 12

What are the MAIN CONCEPTS OF ACCOUNTING widely recognised?

Answer 12

1) Business Entity Concept
2) Going Concern Concept
3) Historic Cost Concept
4) Dual Aspect Concept
5) Prudence Concept

Question 13

Define DEPRECIATION

Answer 13

It is an attempt to measure the portion of the cost/fair value of an (non-current) asset that has been depleted during a particular period

Question 14

Define HISTORIC COST CONCEPT

Answer 14

This principle prevents a wrongful valuation of a transaction by only recording the price at which an asset was originally acquired.

Question 15

Define DUAL ASPECT CONCEPT

Answer 15

The dual aspect concept states that every business transaction requires recordation in two different accounts. This concept is the basis of double entry accounting, which is required by all accounting frameworks in order to produce reliable financial statements.

Question 16

What are the 4 FACTORS to be considered for Depreciation?

Answer 16

1. Depreciation Method
2. Residual Value of the Asset
3. Fair Value or Cost of the Asset
4. Useful Life of the Asset

Question 17

What are the 2 most common DEPRECIATION METHODS?

Answer 17

1) Straight-line method

2) Reducing balance

Question 18

Define BUSINESS ENTITY CONCEPT

Answer 18

This principle states that for accounting purposes, the business is treated as a separate entity from the owner(s) regardless of its actual legal status (sole proprietor or corporation)

Question 19

What are the TWO accepted methods for inventory costing as per the IFRS standards?

Answer 19

FIFO: First In First Out

AVCO: Weighted Average Cost

Question 20

Define the PRUDENCE CONCEPT

Answer 20

It is also known as the Conservative Principle, whereby assets and income are not to be overstated, while expenses are not understated.

In other words, it considers all prospective losses but not the prospective profits.

Question 21

Define the GOING CONCERN CONCEPT

Answer 21

It assumes that the business entity in question will remain in business for the foreseeable future and not be bankrupt

Question 22

In accounting, why should the CONSISTENCY CONVENTION be applied?

Answer 22

It helps users make valid and accurate comparisons of the performance and position from one period to the next

Question 23

What is the MATCHING CONVENTION?

Answer 23

This convention states that expenses should be matched to the revenue that it helps to create

Question 24

What is the MATERIALITY CONVENTION?

Answer 24

This convention states that, where the amounts involved are trivial, we should
consider only what is expedient.

This will usually mean treating an item as an expense in
the period in which it is acquired, rather than strictly matching it to the revenue to which
it relates.