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Principles Of Accounting > Lecture 2 > Flashcards

Lecture 2 Flashcards

1
Q

Effect on accounting equation if business receives cash from the owner

A

Increase in asset (cash)
Increase in ownership interest (capital contributed)

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2
Q

Effect on accounting equation if vehicle is bought for cash

A

Assets increase (vehicles)
Asset decrease (cash)

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3
Q

Effect on accounting equation if bill is received for gas consumed

A

Increase in liability (trade payable)
Decrease in OI (expenses)

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4
Q

Effect on accounting equation if paying bill for gas in cash

A

Asset decrease (cash)
Liabilities decrease (trade payable)

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5
Q

Effect on accounting equation if buy materials on credit terms

A

Asset increase (inventory)
Liability increase (trade payable)

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6
Q

Effect on accounting equation if sell goods on credit terms

A

Asset increase (trade payable)
OI increase (revenue)

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7
Q

Effect on accounting equation if pay wages to employee

A

Assets decrease (cash)
OI decrease (expense)

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8
Q

Effect on accounting equation if rent paid in advance

A

Asset decrease (cash)
OI decrease (expense)

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9
Q

Effect on accounting equation if equipment has fallen in value (depreciation)

A

Asset decrease (equipment and furniture/non-current assets)
OI decrease (expenses)

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10
Q

What must be reported in a statement of financial position/balance sheet

A

Financial position
Last two rows

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11
Q

What must be reported in an income statement

A

Performance
Revenue & expenses

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12
Q

What must be reported in statement of cash flows

A

Financial adaptability
Cash column

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13
Q

What is the structure of a balance sheet?

A
  1. Non-current assets
  2. Current assets
  3. Current liabilities
  4. Non-current (long term) liabilities
  5. Net assets (total assets - total liabilities)
  6. Capital at the start of year
  7. Plus/minus capital contributed or withdrawn
  8. Profit of the period (revenue - expenses)
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14
Q

What is the structure of an income statement?

A

Revenue
minus
Expenses
equals
Profit

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15
Q

What is the structure of a statement of cash flows?

A
  1. Operating activities

Cash inflows
minus
Cash outflows
equals
Net outflow from operations

  1. Investing activities
    E.g payment for equipment
  2. Financing activities
    E.g capital contributed/withdrawn
  3. Change in cash (increase/decrease) (net outflow from operations + net outflow from investing + net outflow from financing)
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16
Q

What are investing activities?

A

Buying and selling non-current assets for long term purposes

17
Q

What are financing activities?

A

Raising and repaying the long-term finance of the business
E.g
Loans
Getting funded from anyone
Capital contributed/withdrawn

18
Q

What are operating activities?

A

Anything else that doesn’t fit into the category of investment or financial activities
E.g
Provision of services
Manufacturing, using and selling of goods for resale

19
Q

What are the fundamental qualitative characteristics of financial statements?

A

Relevance
- predictive value
- confirmatory value

Faithful representation
- neutrality
- freedom from error
- completeness

20
Q

What are the enhancing qualitative characteristics of financial statements?

A

Comparability
Verifiability
Timeliness
Understandability

21
Q

What is the general quality characteristic of financial statements

A

Materiality

22
Q

When does financial info have predictive value?

A

If it can be used to predict future outcomes
Doesn’t need to be a prediction but can be interpreted by users to allow them to make their own predictions
E.g. current year revenue info can be used to predict revenue in future years

23
Q

What does confirmatory value mean?

A

The info provides feedback (confirms or changes) on previous evaluations
E.g current year revenue can be compared with revenue predictions made in previous years to correct/improve processes that were used to make the previous predictions.

24
Q

What does completion mean under the terms of faithful representation?

A

Includes all info necessary for a user to understand what is being reported

25
Q

What does neutrality mean under terms of faithful representation?

A

No bias in selection or presentation of info

26
Q

What does free from error mean in terms of faithful representation?

A

No errors or exclusions in the description of the event
Process used to produce reported info has been selected and applied with no errors in the process

27
Q

What does materiality mean in terms of the general quality characteristic?

A

Info is material is it’s exclusion or mis-testament would influence the user’s decision
Applies to both fundamental trial qualitative characteristics (relevance and faithful representation)

28
Q

What does comparability mean in terms of the enhancing qualitative characteristics?

A

Similarities and differences can be observed and evaluated

29
Q

What does verifiability mean in terms of the enhancing qualitative characteristics?

A

Independent observes can reach broad agreement that a particular depiction is a faithful representation

30
Q

What does timeliness mean in terms of the enhancing qualitative characteristics?

A

Info to be made available in time to influence decisions

31
Q

What does understandability mean in terms of the enhancing qualitative characteristics?

A

The significance of the info can be perceived by the user

32
Q

What is prudence?

A

Exercise of caution when making accounting judgments under conditions of uncertainty

33
Q

What are the 4 (most widely known) accounting measurement principles in the Companies act 2006?

A

Going concern
Accruals
Consistency
Prudence

34
Q

What does going concern mean?

A

A company will continue to exist for an unspecified period

35
Q

What are accruals?

A

Transactions and other events are recognised when they occur (not when money is actually spent)
Companies record revenue when it’s earned, not when the company collects the money.

36
Q

What is consistency (in terms of companies act 2006)?

A

Use similar accounting principles from one year to the next and explain the reason for the change and impact of change

37
Q

What should you avoid in terms of prudence and why?

A

Overstatement of assets
Understatement of liabilities

These will leave to overstatement of profit

Creating asset will create profit
Excluding liability will also create profit

38
Q

What is double entry accounting”?

A

The process to record transactions

39
Q

What is bookkeeping?

A

The stage of accounting to enter the transaction data in accounting books.

Principles Of Accounting (10 decks)

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