Lecture 1 Flashcards
Define accounting
Accounting is a process of identifying, measuring and communicating economic information to make informed decisions by users of information
Accounting is a systematic way of…
recording business transactions in the books of account so that the state of the business is quickly revealed
Who is dubbed the ‘father of accounting’?
Luca Pacioli
What is a conceptual framework for accounting?
A statement of principles which provides generally accepted guidance for the development of new reporting practices and for challenging and evaluating the existing practices
When was the new conceptual framework completed by and who was it issued by?
Issued by the international Accounting Standards Board (IASB) in 1989, completed in 2018
Who are the users of the information financial accounting provides?
Wide range of external users ( e.g: banks, at it is released to the public
What is the nature of a financial accounting report like?
- It is a broad overview
- It is less detailed
- It covers a general purpose
Who are the users of the information management accounting provides?
Managers, as it is internal to the business
What is the nature of a management accounting report like?
- It is used for specific decision making
- It contains a high level of detail
- It is created for a specific purpose
What is the difference in interval time between financial and management accounting reports?
Financial reports are determined by rules and regulations and are produced annually or semi-annually. Management reports are produced when required.
What are the timelines of financial accounting reports like?
They are prepared to cover a past period of time and thus are mainly historical. Show what has happened to the entity.
What are the timelines of management accounting reports like?
They are prepared for future periods of time, and can therefore be both based on the past and future. Essentially predicting and setting aims
What kind of information are financial accounting reports made up of?
Quantifiable figures
What kind of information are management accounting reports made up of?
Both quantitative and qualitative information
What are the six key factors that enhance the usefulness of accounting information?
Relevance
Faithful representation (reliability)
Comparability
Verifiability
Timeliness
Understandability
Define financial statement
Financial statements are the main mechanism we have in business to establish business confidence, for effective operation and investment decision making
What does an ‘income statement’ do?
Measures profit or loss over a period of time
What does a ‘cash flow statement’ do?
Shows the amount of cash going in and out of the company
What is a ‘statement of financial position’?
A financial photograph at a moment in time (Assets, liabilities, capital)
What does the ‘Statement of Changes in Equity’ present?
Changes in the ownership interest of an entity from the start to the end of the period
Why would managers and owners as investors look at their companies financial statements?
To see how the company is performing and what they need to improve
Why would lenders look at a companies financial statements?
To look at the risk associated with lending to this company - know how much to lend
Why would suppliers and other trade creditors look at a companies financial statements?
To know if the company is reliable - will they will get payment/should they enter contracts?
Why would employees look at a companies financial statements?
To see the companies job stability, potential for growth e.t.c
Why would the Government and their agencies look at a companies financial statements?
To see it’s financial stability and ability to pay taxes, the companies profits and regulate them if necessary
Why would customers look at a companies financial statements?
To see how their money is being used, the companies reason for existence and their aim - does it resonate? Possibility of investing in company
Why would the general public look at a companies financial statement?
To see if it is benefitting the world in any way e.g are they sustainable
What are the six (8) types of business structure?
- Sole Proprietorship/trader
- Partnership
- Limited Liability Company (LLC)
- Private Limited Company (Ltd)
- Public Limited Company (Plc)
- Limited liability partnership
- Corporation
- Cooperative (Co-op)
What is the difference between a Private Limited Company and a Public Limited Company?
A public limited company can sell shares on the market and therefore have lower liability as any risks will not directly affect just the owners
Accrual Basis of Accounting
Revenues and expenses are recognised when they are earned or incurred, regardless of when cash is received or paid
Cash Basis of Accounting
Revenues and expenses are recognised only when cash is received or paid
What confusion can Accrual Basis of Accounting cause?
Income is recorded when the company has delivered goods or services, and expenses are recorded when they are incurred, not necessarily when cash changes hands
What problem can Cash Basis of Accounting cause?
Cash Basis of Accounting does not account for accounts receivable or payable, so it can sometimes present a misleading view of the company’s financial health