Introduction to Accounting

Question 1

What is accounting? / Define accounting.

Answer 1

Accounting is a language used in businesses. It is the process of recording, summarising, analysing, interpreting and reporting the financial information of an organisation.

Question 2

What are some examples of financial information?

Answer 2

1. The amount earned from selling goods.

2. The amount of cash the business has and the expenses paid.

Question 3

Why is accounting / the reporting of financial information important?

Answer 3

Accounting / The reporting of financial information is important for making business decisions.

Question 4

What is book-keeping? / Define book-keeping.

Answer 4

Book-keeping involves only the recording of business transactions. It is only one part of the accounting process.

Question 5

Distinguish between book-keeping and accounting.

What is the difference between book-keeping and accounting?

Answer 5

Accounting involves more than just the recording of business transactions. It also includes summarising, analysing, interpreting and reporting financial information in the form of financial reports.
(Book-keeping is only a part of the entire accounting process.)

Question 6

How is financial information reported to business stakeholders / interested parties?

Answer 6

In the form of financial reports / financial statements such as Income Statement and Balance Sheet.

Question 7

What are financial reports used for?

Answer 7

Financial reports are used to communicate to the stakeholders / interested parties of a business the financial results of the business and the use of its resources.

Question 8

State the roles of accounting. / What role does accounting play in businesses?

Answer 8

Accounting plays two major roles in businesses: stewardship and decision making.

Question 9

Define ‘Stewardship’.

Answer 9

Stewardship is the careful and responsible management of something that has been entrusted to one’s care.

Question 10

What are accountants and book-keepers regarded as in the business world?

Answer 10

They are regarded as stewards (i.e. caretakers) of the financial affairs of businesses.

Question 11

Does the accountant / book-keeper (i.e. the steward) own the business?

Answer 11

No. He is given the responsibility to manage the business’ resources. Other stewards of a business could be the sales manager or anyone who is involved in managing the resources of the business on the owner’s behalf.

Question 12

What does a business owner expect from his / her accountant?

Answer 12

The business owner expects the accountant to provide him / her with financial information to help him / her make decisions on how to manage and operate / run the business.

Question 13

What information does the business owner need from his accountant? / What does the owner want to know from the accountant?

Answer 13

Examples:

1. The business owner will want to know how his / her business is performing, i.e. whether the business is making a profit or loss.
2. Whether the business should reduce / cut cost or increase the selling price.

Question 14

How does the accountant go about providing a business owner with the financial / accounting information that he / she needs?

Answer 14

By setting up an accounting information system to collect, record and report the financial information of the business.

Question 15

What do business stakeholders (i.e. interested parties such as business owner, managers, employees, shareholders, investors, banks, etc) do with the information presented in the financial reports prepared by the accountant?

Answer 15

They rely / use the information presented in the financial reports to make their decisions.

Question 16

What are the people who are interested in the financial information of a business called / known as?
What are the users of accounting information called / known as?

Answer 16

Stakeholders or interested parties.

Question 17

Do all business stakeholders require the same type of information?

Answer 17

No. Different stakeholders require / need different types of information to make decisions.

Question 18

How can stakeholders be categorized / grouped?

Answer 18

2 categories: Internal and External

Question 19

Define ‘internal stakeholders’.

Answer 19

Internal stakeholders are people who are responsible for the day-to-day running of the business and they may have detailed financial information. (Internal stakeholders work in the business.)

Question 20

Give some examples of internal stakeholders.

Answer 20

1. Sole proprietors / owners (they run their own business)
2. Managers
3. Employees

Question 21

What kind of financial information might the sole proprietor and managers of a business be interested in?

Answer 21

All financial information because they need all types of financial information to make decisions on how to plan, control, monitor and operate the business. E.g. whether to open another store next year; whether to buy more inventory (i.e. stock / goods), whether to hire / fire, cut costs, expand or downsize the business, etc.

Question 22

What kind of financial information might the employees of a business be interested in?

Answer 22

The business’ profit and cash.

Question 23

What is the main decision employees make?

Answer 23

Whether to continue working for the business or not.

Question 24

Why do employees want to know if the business they are working for is profitable or not?

Answer 24

To evaluate their career prospects with the business and whether to expect any bonuses.

Question 25

Why do employees want to know if the business they are work for is / is not cash rich?

Answer 25

So that they know whether the business has sufficient cash to pay their salaries promptly / on time.

Question 26

Who are the external stakeholders of the business?

Answer 26

External stakeholders are people / interested parties of the business who are not involved in the day-to-day running of the business. (External stakeholders do not work in the business.)

Question 27

Are internal stakeholders involved in the daily operations of the business? Do they need detailed financial information of the business?

Answer 27

Yes. | Yes.

Question 28

Are external stakeholders involved in the daily operations / day-to-day running of the business? Do they need detailed financial information of the business?

Answer 28

No. No, they do not need detailed financial information of the business. They have only the summarised financial information found in financial reports.

Question 29

Give some examples of external stakeholders.

Answer 29

1. Shareholders 2. Investors 3. Banks and other lenders / creditors 4. Suppliers 5. Customers 6. Government 7. Public 8. Competitors

Question 30

Who are 'shareholders'?

Answer 30

They are the owners of a company.

Question 31

Why are shareholders of a company considered external stakeholders?

Answer 31

They only have access to the summarised financial information. If these owners also manage the company, they will have access to the detailed financial information.

Question 32

What kind of financial information might shareholders and investors be interested in?

Answer 32

The financial information they might be interested in are: profit, assets, liabilities and the amount they received in return for the investment made.

Question 33

Why might existing shareholders and investors be interested in the profit, assets, liabilities and other financial information of the business? What decisions do they make?

Answer 33

They need the financial information in order they could evaluate whether they should maintain, increase or decrease their investment. Potential investors decide if they should invest in the business.

Question 34

What kind of financial information might banks and other lenders be interested in?

Answer 34

Banks and other lends might be interested in the profits, assets and liabilities of the business.

Question 35

Why might banks and other lenders be interested in the profit, assets, liabilities and other financial information of the business?

Answer 35

Banks / Lenders need to decide whether to grant the business loans or not. Based on the business profit, assets and existing / current debt amount, the lender evaluates whether the business will be able to repay the loan principal and pay interest.

Question 36

What kind of financial information might suppliers be interested in?

Answer 36

Suppliers might be interested in the profit, cash and liabilities of the business.

Question 37

Why might suppliers be interested in the profit, cash and liabilities of a business?

Answer 37

Suppliers decide whether to grant the business credit or not, i.e. enter into credit transactions with the business. Based on the business profit, cash and existing debts owed to suppliers, the supplier evaluates whether the business will be able to pay for its credit purchases.

Question 38

What kind of financial information might customers be interested in?

Answer 38

Customers might be interested in the profit made by the business.

Question 39

Why might customers be interested in the profit making ability of the business?

Answer 39

In deciding whether to buy from the business, customers evaluate whether the business will be able to provide after-sales support. A profitable business is likely to continue operating in the future and hence provide support.

Question 40

What kind of financial information might the government be interested in?

Answer 40

The government might be interested in the income and profit of the business.

Question 41

Why might the government be interested in the income and profit of a business?

Answer 41

The government decides how much tax to collect from the business.

Question 42

What kind of information might the public be interested in?

Answer 42

The public might be interested in the income and profit of the business.

Question 43

Why might the public be interested in the income and profit of a business?

Answer 43

The performance of a business is an indication of how well the economy is doing.The better the business performance, the more confident the public is. This affects the public's decisions on how their assets will be invested, whether to change job, whether to take up a loan, etc.

Question 44

What kind of information might the competitors of a business be interested in?

Answer 44

The competitors of a business might be interested in the income and profit of a business.

Question 45

Why might the competitors of a business be interested in the income and profit of a business?

Answer 45

Although the business might not like to supply / provide information to its competitors, the competitors can still access the financial reports of the business. Competitors may compare their performance against the business and decide how to improve their performance.

Question 46

Define 'ethics'.

Answer 46

Ethics refer to the study of what is morally right and what is not.

Question 47

Why are professional ethics important in accounting?

Answer 47

Stakeholders rely / depend on financial reports to make business decisions. If they are given false or inaccurate information about the business, they are likely to make poor decisions. It can also be said that stakeholders are wrongly led into making poor decisions because they rely / depend on financial reports which have not been properly prepared.

Question 48

Is it important that financial reports are fairly prepared? | How would erroneous or incomplete financial information affect stakeholders?

Answer 48

Yes, otherwise the stakeholders would be wrongly led into making poor decisions because they rely / depend on financial reports which have not been properly prepared.

Question 49

What are the people involved in the accounting process expected to possess?

Answer 49

High standards of professional ethics. Accountants are required to follow a code of conduct that upholds the good reputation of the accounting profession.

Question 50

What are professional ethics?

Answer 50

Professional ethics refer to the standards of conduct for people in a specific profession.

Question 51

What are the two important professional ethics principles that accountants, book-keepers and all staff who prepare and communicate financial information must uphold / follow?

Answer 51

1. Integrity | 2. Objectivity

Question 52

What does it mean to have 'integrity'?

Answer 52

To have integrity is to be straightforward and honest in all professional and business relationships.

Question 53

What are some examples of actions with integrity?

Answer 53

1. Not deliberately or purposely omit / miss out important information that may affect how stakeholders make their decisions. 2. Not falsify, overstate / understate accounting records such as recording $100,000 of fictitious or false sales revenue.

Question 54

What does it mean to be 'objective'?

Answer 54

To be objective is to be unbiased when making a professional judgement in the accounting process. It involves focusing on facts and not being influenced by personal feelings, personal gains or other people when deciding on what financial information is to be recorded and how it is reported.

Question 55

What are some examples of actions with objectivity?

Answer 55

1. An accountant reporting a loss even when such a loss affects his bonus for that year. 2. An accountant reporting the profit accurately despite threats and pressure from his boss.

Question 56

Is it difficult to differentiate an action that violates the principle of integrity from an action that violates the principle of objectivity?

Answer 56

Yes. Very often, the same action violates both. For example, an accountant who submits to threats and pressure from his boss to report false sales revenue would have violated both principles.

Question 57

How can organisations be grouped?

Answer 57

Business (i.e. profit-making) and non-business (i.e. non-profit) organisations.

Question 58

How may business organisations be grouped / categorized?

Answer 58

Three main categories: trading, service and manufacturing. | Note: Syllabus focuses on accounting for trading and service businesses.

Question 59

What do all business organisations do?

Answer 59

Exchange goods and services for money.

Question 60

What do trading businesses do? Give some examples of trading businesses.

Answer 60

Trading businesses buy and sell goods. | Examples: supermarket, furniture shop

Question 61

What do service businesses do? Give some examples of service businesses.

Answer 61

Service businesses provide services. | Examples: Hairdressing salon, bus company

Question 62

What do manufacturing businesses do? Give some examples of manufacturing businesses.

Answer 62

Manufacturing businesses manufacture goods. | Examples: Car manufacturer, toy manufacturer

Question 63

Give some examples of non-business organisations.

Answer 63

Government, community or religious organisations, charities.

Question 64

What is a business known as?

Answer 64

Entity

Question 65

Are the activities of a business entity separate from the personal activities of its owner(s)?

Answer 65

Yes | Business Entity / Accounting Entity Concept... Textbook Page 14

Question 66

How are different forms of business entities classified?

Answer 66

They are classified according to the: 1. Number of owners 2. Way the businesses are managed 3. Amount of reward 4. Level of investment risk faced by the owners.

Question 67

What are the three different forms of business entities that I must know?

Answer 67

1. Sole Proprietorship 2. Partnership 3. Company

Question 68

How many owners can there be in a sole proprietorship and what is this owner called?

Answer 68

One owner only and he is called the sole proprietor.

Question 69

How many owners can there be in a partnership and what is these owners called?

Answer 69

A minimum of two owners, who are called called partners.

Question 70

How many owners can there be in a company and what is these owners called?

Answer 70

A minimum of one owner. The owners own shares in a company and are known as shareholders.

Question 71

Name the two main types of companies.

Answer 71

1. Private | 2. Public

Question 72

What is the maximum number of shareholders a private company can have?

Answer 72

50

Question 73

Is there a limit on the number of shareholders a public company can have?

Answer 73

No

Question 74

Describe the way a business is managed by a sole proprietor.

Answer 74

The sole proprietor usually manages the business himself and has full control over the running of the business. He may hire / employ professionals to help him.

Question 75

Describe the way a partnership is managed by its owners.

Answer 75

At least one partner is heavily involved in managing the business. The partners may hire professionals to help them.

Question 76

Describe the way a company is managed by its shareholders.

Answer 76

The shareholders are usually not involved in managing the business. The company hires professionals to manage the business.

Question 77

What are the amount of reward and the level of investment risk faced by sole proprietors like?

Answer 77

The sole proprietor assumes all the profits and losses of the business. If the business fails, the sole proprietor has to pay all its debts.

Question 78

What are the amount of reward and the level of investment risk faced by the partners of a partnership like?

Answer 78

Since there is more than one owner, the partners share the profits and losses of the business. If the business fails, some partners may have to pay all the debts.

Question 79

What are the amount of reward and the level of investment risk faced by the shareholders of a company like?

Answer 79

The shareholders are given a portion of the profits called dividends. If the business fails, the shareholders will lose everything they have invested but do not have to pay any of the debts of the business.

Question 80

Give some examples of a sole proprietorship.

Answer 80

School canteen stall holders, hawkers, etc.

Question 81

Give some examples of a partnership.

Answer 81

Medical clinics, law firms, audit firms, etc.

Question 82

What are public companies?

Answer 82

These are companies that are listed on the Singapore Stock Exchange (SGX). Their business names usually end with 'limited'.

Question 83

What are private companies?

Answer 83

These are companies that are not listed on the SGX and their business names usually end with 'private limited'.

Question 84

What are shares?

Answer 84

Shares are units of ownership in a company.

Question 85

How does a company raise capital?

Answer 85

Through issuing shares.

Question 86

Define 'shareholders'.

Answer 86

Shareholders are people who buy shares from a company. They are the owners of the company.

Question 87

How can the advantages and disadvantages of different business entities be summarized?

Answer 87

By comparing the following four features: 1. How easy it is to set up and maintain the business 2. How much reward the owner receives and his level of investment 3. How easy it is to raise funds 4. How easy it is for the owner to transwer his ownership in the business

Question 88

How easy is it to set up and maintain a sole proprietorship? / What is the advantage of setting up a sole proprietorship?

Answer 88

It is easier and less expensive to set up and maintain a sole proprietorship.

Question 89

How easy is it to set up and maintain a company? / What is the disadvantage of setting up and maintaining a company?

Answer 89

It is more complicated and expensive to start a company. A company also has to comply with more rules and regulations.

Question 90

How much reward does a sole proprietor receive from his investment?

Answer 90

The entire profit of the business belongs to the sole proprietor. Note however that he may lose more than his investment in the business if he were to make a loss.

Question 91

How much reward does a shareholder receive from his investment?

Answer 91

The shareholder receives only portions of the company's profits as dividends. Note that the maximum amount he / she will lose will be his / her investment.

Question 92

How easy is it for a sole proprietorship to raise funds?

Answer 92

Not that easy as banks may be unwilling to lend to a sole proprietorship. Thus, the owner / sole proprietor has to use his / her personal funds / money.

Question 93

How easy is it for a company to raise funds?

Answer 93

Easier as banks are more willing to lend to a company. A company is also able to issue its shares to raise funds.

Question 94

How easy is it for the sole proprietor to transfer his ownership in the business?

Answer 94

It is more difficult for the sole proprietor to transfer his ownership.

Question 95

How easy is it for a shareholder in a company to transfer his ownership to another?

Answer 95

It is easier. It is especially easy for a listed company where the shares are traded on the stock exchange as there are many people willing to buy over his ownership of the company.

Question 96

What would someone choose to start a sole proprietorship instead of a company?

Answer 96

A sole proprietorship is easier and less expensive to set up. The sole proprietor also has few rules and regulations to follow / comply with. In addition, the sole proprietor has full control of his business and enjoys the flexibility to withdraw his capital and profits from the business.

Question 97

What is 'objectivity'?

Answer 97

Objectivity is not letting bias, conflict of interest or undue influence of others to override professional judgement.

Question 98

Possible Exam Question: What are the advantages of a sole proprietorship? or Explain the advantages of a sole proprietorship. or Why would someone choose to start a sole proprietorship instead of a company?

Answer 98

1. Easier and less expensive to set up and maintain. | 2. Entire / 100% of the profit of the business belongs to the sole proprietor.

Question 99

Possible Exam Question: What are the disadvantages of a sole proprietorship? or Explain the disadvantages of a sole proprietorship. or Why would someone choose to not start a sole proprietorship?

Answer 99

1. The sole proprietor may lose more than his investment in the business. 2. Banks may be less willing to lend to a sole proprietorship. Thus the owner usually has to use his personal funds. 3. More difficult for the sole proprietor to transfer his ownership.

Question 100

Possible Exam Question: What are the advantages of a limited company? or Explain the advantages of a limited company. or Why would someone choose to start a company instead of a sole proprietorship?

Answer 100

1. The maximum amount that the shareholders lose is their investment. 2. Banks are more willing to lend to a company. 3. A company is also able to issue its shares to raise funds. 4. Easier for a shareholder in a company to transfer his ownership to another. It is especially easy for a listed company where the shares are traded on the stock exchange as there are many people willing to buy over his ownership of the company.

Question 101

Possible Exam Question: What are the disadvantages of a limited company? or Explain the disadvantages of a limited company. or Why would someone choose to not start a company?

Answer 101

1. More complicated and expensive to start a business. 2. Has to comply with more rules and regulations. 3. Shareholders receive only portions of the company's profits as dividends (i.e. portion of the profits given to the shareholders).