Lecture 1 (24/9) Flashcards
What do businesses need in order to function
need money
What is one of the main reasons to start a business
To make money
What will business owners WANT TO do in the future
MAKE MONEY MONEYYYY
What is accounting?
keeping track/producing reports to work out how to make money/ fix problems
-communicates the information they have created to decision makers
Why do businesses need accountants if they want to function
accountants will keep track of money, make sure money is under control
Why do buinsesses need accountants if they want to make money?
they would need them so they will be able to know how much money buisnesses are making (external people will also like this information eg. investors)
Why do businesses who want to make MORE money in the future need accountants
they will have detailed information to help them decide how to best do this
-by having a track record of their financial information they are able to improve.
What are the two core areas of accounting
Financial accounting and Management accounting
What is financial accounting?
recording what’s going on with the operations and money and product the business status so it can be published so ppl can know how it is doing
–done once a year
What is Management Accounting
record the info and use internally how to make businesses better –
e.g. changing prices/ stop making products
etc. make decisions to improve internally –inside business through the year –constantly looking at how to improve and get rid of stuff not making profit
What are the two specialists areas
Auditing and Tax
What is Auditing
basically checking financial accounts
= ensuring the data is reliable
- Independent checkers check the financial statement of the businesses to ensure this
What is tax accounting
financial statements work out how much tax – reduce tax bill etc
What are the reasons to study Financial Accounting before Management Accounting
-First introduced 500/600 years ago.
-easier to understand
What is the main goal of Accountants?
Work out how well a business did in a year
Goal of Financial accounting
Producing a financial statement
Why are financial statements important?
people need to know how the business is doing - they need to know for many reasons
e.g. Investors need to know so that they don’t make a risk investment - they need to make a return on investment
What will happen if there arent any financial statements?
The economy will go to a halt:
> people don’t know how the business is operating
> don’t know if they are making a profit/loss
> people are uncertain
> no one will invest/banks wont lend
>businesses wont be able to operate
without money
> = crashed economy = no taxes paid etc
List 8 people/groups of people who are interested in the financial statements.
-Owners/shareholders/potential investors
-Lenders (e.g. banks)
-Employees
-Competitors
-Suppliers
-Customers
-General Public
-Governments
Why are :Owners/shareholders/potential investors, interested in financial statements
Want to know:
- their Return on investment (e.g. is the business making profit)
Riskiness on investments (will they make a loss)
Why are Lenders, interested in financial statements
Want to know:
-Businesses ability to repay loan and interest
Why are Employees, interested in financial statements
Want to know:
-Job security (e.g. will be made redundant/wages etc)
-pay rises
Why are Competitors, interested in financial statements
Want to know:
-Rivals:
-sales
-margins
-cost structure
Why are Suppliers, interested in financial statements
Want to know:
-Ability o pay for goods/services (e.g. if got trade credit)
-continuity of operations
Why are Customers, interested in financial statements
Want to know
-Continuity of operations
Why are General Public, interested in financial statements
Want to know
-Economic prospects
]-Employment
Why are Government, interested in financial statements
Want to know
-Taxes payable
-Economic indications
What also impacts accounting
Assumptions and concepts
What are 5 of some of the assumptions and concepts that may impact accounting?
1.Historical cost
2. Money Measurement
3.Business Entity
4.Dual Aspect
5. Time interval
What is Historical cost ?
a measure value used in accounting = value of asset on balance sheet is recorded as the cost it was when bought
What is Money Measurement
businesses should only record transactions that can be quantified in monetary terms (e.g. branding)
What is Business Entity?
states that a business is a separate entity from its owners and other organizations
What is Dual Aspect
every financial transaction has two equal and opposite effects
What is time interval
businesses should divide their financial activities into regular intervals, or accounting periods, to assess their performance and position
What are Financial statements also known as?
Financial accounts or Annual reports
What is the three basic contents of Financial Statements?
- The statement of Financial Position
- The statement of Profit or Loss
- The statement of Cash Flows
What is The statement of Financial Position also known as?
“Balance Sheet”
What is The statement of Profit or Loss also known as?
Income statement
What is the Balance Sheet?
statement at the end of the year – shows all of the main stuff- money in bank – owns/owes
What are Assets?
What the business owns
What are Liabilities
The amount the business owes
What is capital
A measure of the owners stake in the business (what the owner invested in the business - what has taken out)
What is Capital also known as?
Owners Equity
What is the meaning of ‘Stock of good for resale’
inventory
What is money in the bank on the balance sheet
Asset
What is the name for money due from customers and an example of how it can be incurred
receivables
-e.g. customers paying for a good on credit, they are going to pay it back eventually over a period of time
What is the businesses brand/rep on the balance sheet
Asset but it is too hard to usually measure so it isnt really represented .
What is the ‘accounting equation’
Asset = Capital + Liabilities
What is the term used for owed to suppliers
Payables/trade payables
What does the accounting equation say
Resources = Source of resources.
Why does the accounting equation say that they are equal?
Because assets are made from liabilities = everything u got must’ve been paid somehow
> Either through owner/lenders
What are the three ways the accounting statement can be rearranged
Asset = Liabilities + Capital
Capital = Asset - Liabilities
Liabilities = Asset - Capital
Why should the balance sheet be written in order
better understand = easier to read so can invest
What is Liquidity?
the ease with which an asset can be converted into ready cash without affecting its market price
What is the most liquid asset
Cash
What order must the balance sheet be displayed in
Least liquid -> Most Liquid
What is the order of the balance sheet
Inventory, Receivables, Bank, Cash
What are the two assets on the SFP
Non current assets/Current assets
What does SFP stand for
The Statement of Financial Position
What is Non current Asset
Long life assets acquired by the business to be used over MORE then one year
Examples of non current asset
Machinery, Buildings
What is Current Asset
Assets expected to be sold, consumed, converted into other assets WITHIN one year
Example of current asset
Inventory
Is Cash an Current or Non current Asset
Current - always going up and down - consumed
Is trade receivables a current/non current asset and why?
Current asset - customer is going to pay within a short time period - and then be converted into cash
What are the two liabilities
Current and Non current
What is current liabilities
Amount owed and expected to be paid off WITHIN a year
Examples of current liabilities
Trade payables, bank overdraft
What is Non current Liabilities
Amount expected to be paid after MORE then one year
Examples of non current asset
Bank Loan (usually have a longer time to pay off e.g. 5 years)
