Lecture 2 Flashcards
Effect on accounting equation if business receives cash from the owner
Increase in asset (cash)
Increase in ownership interest (capital contributed)
Effect on accounting equation if vehicle is bought for cash
Assets increase (vehicles)
Asset decrease (cash)
Effect on accounting equation if bill is received for gas consumed
Increase in liability (trade payable)
Decrease in OI (expenses)
Effect on accounting equation if paying bill for gas in cash
Asset decrease (cash)
Liabilities decrease (trade payable)
Effect on accounting equation if buy materials on credit terms
Asset increase (inventory)
Liability increase (trade payable)
Effect on accounting equation if sell goods on credit terms
Asset increase (trade payable)
OI increase (revenue)
Effect on accounting equation if pay wages to employee
Assets decrease (cash)
OI decrease (expense)
Effect on accounting equation if rent paid in advance
Asset decrease (cash)
OI decrease (expense)
Effect on accounting equation if equipment has fallen in value (depreciation)
Asset decrease (equipment and furniture/non-current assets)
OI decrease (expenses)
What must be reported in a statement of financial position/balance sheet
Financial position
Last two rows
What must be reported in an income statement
Performance
Revenue & expenses
What must be reported in statement of cash flows
Financial adaptability
Cash column
What is the structure of a balance sheet?
- Non-current assets
- Current assets
- Current liabilities
- Non-current (long term) liabilities
- Net assets (total assets - total liabilities)
- Capital at the start of year
- Plus/minus capital contributed or withdrawn
- Profit of the period (revenue - expenses)
What is the structure of an income statement?
Revenue
minus
Expenses
equals
Profit
What is the structure of a statement of cash flows?
- Operating activities
Cash inflows
minus
Cash outflows
equals
Net outflow from operations
- Investing activities
E.g payment for equipment - Financing activities
E.g capital contributed/withdrawn - Change in cash (increase/decrease) (net outflow from operations + net outflow from investing + net outflow from financing)
What are investing activities?
Buying and selling non-current assets for long term purposes
What are financing activities?
Raising and repaying the long-term finance of the business
E.g
Loans
Getting funded from anyone
Capital contributed/withdrawn
What are operating activities?
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
What are the fundamental qualitative characteristics of financial statements?
Relevance
- predictive value
- confirmatory value
Faithful representation
- neutrality
- freedom from error
- completeness
What are the enhancing qualitative characteristics of financial statements?
Comparability
Verifiability
Timeliness
Understandability
What is the general quality characteristic of financial statements
Materiality
When does financial info have predictive value?
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
What does confirmatory value mean?
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.
What does completion mean under the terms of faithful representation?
Includes all info necessary for a user to understand what is being reported
What does neutrality mean under terms of faithful representation?
No bias in selection or presentation of info
What does free from error mean in terms of faithful representation?
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
What does materiality mean in terms of the general quality characteristic?
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)
What does comparability mean in terms of the enhancing qualitative characteristics?
Similarities and differences can be observed and evaluated
What does verifiability mean in terms of the enhancing qualitative characteristics?
Independent observes can reach broad agreement that a particular depiction is a faithful representation
What does timeliness mean in terms of the enhancing qualitative characteristics?
Info to be made available in time to influence decisions
What does understandability mean in terms of the enhancing qualitative characteristics?
The significance of the info can be perceived by the user
What is prudence?
Exercise of caution when making accounting judgments under conditions of uncertainty
What are the 4 (most widely known) accounting measurement principles in the Companies act 2006?
Going concern
Accruals
Consistency
Prudence
What does going concern mean?
A company will continue to exist for an unspecified period
What are accruals?
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.
What is consistency (in terms of companies act 2006)?
Use similar accounting principles from one year to the next and explain the reason for the change and impact of change
What should you avoid in terms of prudence and why?
Overstatement of assets
Understatement of liabilities
These will leave to overstatement of profit
Creating asset will create profit
Excluding liability will also create profit
What is double entry accounting”?
The process to record transactions
What is bookkeeping?
The stage of accounting to enter the transaction data in accounting books.
