Key Terms and Concepts

Question 1

Accountability

Answer 1

Refers to management’s responsibility to provide an account/report on the way in which the resources entrusted to them have been used.

Question 2

Annual report

Answer 2

• A document which contains the financial statements (with related notes) along with reports from management explaining what they are doing and what they plan to do.
• The supporting reports provided by management typically include the operating and financial review, the directors’ report, the chairman’s statement and the corporate social responsibility report.
• They also provide information on how they govern themselves in a corporate governance report and information on director salaries is provided in the remuneration report.

Question 3

Assets

Answer 3

A present economic resource controlled by the entity as a result of past events.

Question 3

Appropriation account

Answer 3

An account which is used to apportion the profit or loss for the period between the partners in a partnership business.

Question 4

Available-for-sale assets

Answer 4

Investments that are denominated in money, or in paper (such as shares and bonds), which the entity holds for financial gain and which will be sold by the entity in the future.

Question 5

Balance sheet

Answer 5

The UK equivalent of the statement of financial position. It contains details of an entity’s assets, liabilities and capital.

Question 6

Bookkeeping system

Answer 6

A system to record the nature and monetary value of the transactions of an organization.

Question 7

Comparatives

Answer 7

Term used to describe prior year figures that are included in financial statements so that current year results can be easily compared to the previous year’s figures

Question 8

Current assets

Answer 8

Cash, cash equivalents and assets that are expected to be turned into cash within 12 months and all assets that are intended for sale or consumption as part of the entity’s normal operating (trading) activities of the business.

Question 9

Current liabilities

Answer 9

Liabilities that are due to be settled within 12 months or that are incurred as part of the firm’s normal operating (trading) activities. It also includes liabilities that are repayable on demand (overdraft).

Question 10

Double-entry bookkeeping

Answer 10

In double-entry bookkeeping each transaction is entered in the books twice. This duplication, considered to be a form of internal check, highlights any errors.

Question 11

Economic decision-making

Answer 11

A view of the function of financial accounting is that it facilitates the efficient and effective allocation of resources.

Question 12

Economic decision-making

Answer 12

A view of the function of financial accounting is that it facilitates the efficient and effective allocation of resources.

Question 13

Economic resource

Answer 13

A right that has the potential to produce economic benefits (Conceptual Framework, IASB,
2018).

Question 14

Equity

Answer 14

The residual interest in the assets of the entity after deducting all its liabilities.

Question 15

Equity shareholder

Answer 15

Another name for owner/proprietor (holds shares of ownership in the entity).

Question 16

Expenses

Answer 16

Decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims (Conceptual Framework, IASB, 2018).

Question 17

Financial accounting

Answer 17

The process of designing and operating an information system for collecting, measuring and recording business transactions, and summarizing and communicating the results of
these transactions to users to facilitate the making of financial/economic decisions.

Question 18

Financial adaptability

Answer 18

An entity’s financial adaptability is its ability to take effective action to alter the amount and timing of its cash flows so that it can respond to unexpected needs or opportunities.

Question 19

Financial statements

Answer 19

A collective term to describe the comprehensive income statement, the statement of financial position, the statement of cash flows and the related notes.

Question 20

Income

Answer 20

Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims.

Question 21

Income tax

Answer 21

A percentage of personal income that is paid to the government each year.

Question 22

Intangible assets

Answer 22

• Cannot be seen or touched, but have value. They help the entity to generate income.

Examples include patents, intellectual capital, knowledge and reputation.

Question 23

Internal check

Answer 23

An internal control established by the entity to ensure that a transaction has been undertaken correctly.

Question 24

Internal control

Answer 24

A process for assuring achievement of an organization’s objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies.

Question 25

Inventory

Answer 25

Goods that have been purchased for resale, but are not yet sold. The UK financial reporting standards refer to inventory as stock.

Question 26

Investments in associates

Answer 26

Investments in paper shares, however, the intention is to retain this investment as part of the entity’s normal activities.

Question 27

Liabilities

Answer 27

A present obligation of the entity to transfer an economic resource as a result of past events
(Conceptual Framework, IASB, 2018).

Question 28

Listed companies

Answer 28

Companies that have their shares for sale (listed) on public stock markets, also called stock exchanges.

Question 29

Management accounting

Answer 29

The provision of information to an organization’s management for the purposes of planning, control and decision-making. The latter includes production, marketing, investment and financing decisions.

Question 30

Member governed bodies

Answer 30

Where members of an organization are given the authority to govern/administer the organization. Their role includes providing guidance on the strategic direction of the organization and ensuring that the organization is properly managed.

Question 31

Non-current assets

Answer 31

• Assets with a life of more than one year that the entity expects to use for periods that extend beyond one year and are not part of their normal trading activity.

For example, motor vehicles in a car dealership are inventory not non-current assets but the building in which the vehicles are kept is.

Question 32

Non-current liabilities

Answer 32

Liabilities that the entity expects to pay in periods that extend beyond one year.

Question 33

Notes to the financial statements

Answer 33

Detailed information to support the summarized information that is provided in the comprehensive income statement, the statement of financial position and the statement of cash flows.

Question 34

Other comprehensive income

Answer 34

Income that is not realized during the period such as holding gains (increases in value) on the valuation of non-current assets over the period being reported on.

Question 35

Other income

Answer 35

Income from activities that are not the entity’s core business. For example, receiving interest, or rent.

Question 36

Partnerships

Answer 36

Describes a business that is owned and run by two or more individuals (partners).
Partnerships can be incorporated (as a limited company) or unincorporated (not established as a separate legal entity).

Question 37

Profit or loss for the period

Answer 37

It shows the difference between income generated in the period and the costs associated with the period and with generating the income (including interest costs).

Question 38

Regulatory framework of accounting

Answer 38

A general term used to describe the legislation and other rules that govern the content and format of company final financial statements.

Question 39

Revenue

Answer 39

The gross inflow of economic benefits arising from ordinary operating activities of an entity such as the sale of goods if a retailer, the sale of motor vehicles if a car dealership or interest and fee income if a bank.

Question 40

Self-assessment tax return

Answer 40

A form completed by individuals who have personal income in addition to wages from an employer. This form is completed every year and is sent to the tax authorities. It reports on all earnings received and their sources.

Question 41

Sole traders

Answer 41

Name for a business which is owned and run privately by an individual who gets all the profits, or suffers all the losses.

Question 42

Statement of cash flows

Answer 42

Shows the source and use of cash in the period.

Question 43

Statement of changes in equity

Answer 43

Provides information on the movements within the equity accounts in the period and any payments made to equity holders (dividends).

Question 44

Statement of comprehensive income

Answer 44

Statement detailing the total performance of an entity in a specified period. The performance includes realized income and expenditure and unrealized income (holding gains).

Question 45

Statement of financial position

Answer 45

Provides information on the financial position of an entity. It typically contains details of the entity’s assets, liabilities and equity capital.

Question 46

Statement of other comprehensive income

Answer 46

Provides information on income that is not included in the statement of profit or loss (typically unrealized gains/losses).

Question 47

Statement of profit or loss

Answer 47

Shows the profits and losses for the period from realized activities. This includes normal operating activities and other activities, such as the sale of a property, that took place during the period covered.

Question 48

Stewardship accounting

Answer 48

Term to describe a form of accounting which focuses on keeping a count of items. It was the earliest form of accounting and typically involved keeping a record of the assets and liabilities of an entity. Stewardship is the accountability of an enterprise’s management for the resources entrusted to them.

Question 49

Stewardship objective

Answer 49

Financial statements should provide information that is useful for assessing management’s stewardship function.

Question 50

Tangible assets

Answer 50

Assets that can be seen and touched (they are tangible in nature), for example a car, a house, or a desk.

Question 51

Trade payable

Answer 51

Amounts owed to a supplier who provided goods on credit.

Question 52

Trade receivable

Answer 52

Amounts owed from a customer for credit sales (the goods were given in advance of the entity receiving money for the goods).

Question 53

Unincorporated businesses

Answer 53

Not established/registered as separate legal entities in law