Introduction to Accounting

Question 1

What are the main objectives of financial accounting?

Answer 1

• to provide FINANCIAL INFORMATION for the PURPOSE OF ASSESSING THE ORGANISATION and MAKING DECISIONS
• to prepare the relevant FINANCIAL STATEMENTS in accordance with the RULES AND REGULATIONS as laid down by the accounting regulatory bodies

Question 2

Users of Financial Information - Shareholders

Answer 2

• the PROFITABILITY of the company, is it IMPROVING or not

- how much of the AUTHORISED SHARE CAPITAL has already been ISSUED

Question 3

Users of Financial information : banks and other financial institutions

Answer 3

• check on the CREDITWORTHINESS of the business so as to assess their ABILITY TO PAY any future loans
• to see what EXISTING LOANS the company may already have taken out and how much SECURITY for any new loan is available

Question 4

Users of financial information : employees and trade unions

Answer 4

• financial statements to ensure JOB SECURITY for their members
• check if the company can continue to PAY EXISTING WAGE RATES
• looking for any possible WAGE INCREASES

Question 5

Users of financial information: trade creditors

Answer 5

• to check the organizations CREDIT RATING

- how long does the company TAKE TO PAY ANY EXISTING CREDITORS

Question 6

Users of financial information: competitors

Answer 6

• FINANCIAL STATEMENTS
• compare the PERFORMANCE against their own business
• if considering any POTENTIAL TAKE-OVER BID

Question 7

Four Fundamental Accounting Concepts: Prudence

Answer 7

• when preparing accounts, CAUTION should be exercised
• this means that LOSSES CAN BE ANTICIPATED BUT GAINS CANNOT
• this ensures that PROFITS WILL NOT BE OVERSTATED and losses will not be understated
• the prudence concept overrides the accruals concept in cases where they may clash