Lesson 6 - Booklet 1 Revision

Question 2

What is Accounting?

Answer 2

Accounting is a management information system that involves the collecting, sorting, classifying and recording of financial data to produce and report financial information to assist business owners in decision making.

Question 3

Financial information is…

Answer 3

Data which is usually expressed in dollar terms.

Question 4

Non-financial information is…

Answer 4

Any information that cannot be found in the financial statements and is not expressed in dollars and cents or reliant on dollars and cents for its calculation.

Question 5

Examples of non-financial information include…

Answer 5

No. of customer complaints
No. of website visitors (hits)
No. of sales returns

Question 6

Who are the main users of financial information?

Answer 6

Customers
Suppliers
Banks and other financial institutions
Employees
Prospective owners
The Australian Tax Office

Question 7

What are the four stages of the accounting process?

Answer 7

1. Source documents
2. Records
3. Reports
4. Advice

Question 8

A source document is…

Answer 8

A document that provides both the evidence that a transaction has occurred and the details of the transaction itself.

Question 9

Recording is…

Answer 9

The process of sorting, classifying and summarising the data contained in the source documents so that it is more useable.

Question 10

Reporting is…

Answer 10

The preparation of financial statements that communicate financial information to the owner.

Question 11

Advice is…

Answer 11

The provision to the owners of a range of options available to their aims/objectives, together with recommendations as to the suitability of those aims / objectives

Question 12

The accounting process is used to…

Answer 12

…take financial data and convert it into financial information in order to be able to make decisions about the business.

Question 13

T/f - “Tax invoice” means the source document is an invoice.

Answer 13

False - this is on all source documents which involve GST and is a requirement set by the Australian Tax Office.

Question 14

The two types of transactions are…

Answer 14

Cash and credit.

Question 15

The point of difference between cash and credit transactions is…

Answer 15

The immediacy of the payment.
Cash = Customer pays immediately.
Credit = Customer pays at a later date.

Question 16

Give me two pieces of info that would indicate that a source document was an invoice.

Answer 16

1. Payment terms
2. Invoice number
3. The words “Due by”

Question 17

T/f - The business at the top of the invoice has issued the source document.

Answer 17

True - the header can always be used to identify who issued the invoice.

Question 18

This source document is a…

Answer 18

Cheque butt.

Question 19

This source document is a…

Answer 19

Invoice.

Question 20

T/f - This document is a source document.

Answer 20

False - This is a cheque. It cannot be used as a source document as it is not retained by either party in a transaction. It must be paid into the bank for processing.

Question 21

This source document is a…

Answer 21

Memo.

Question 22

T/f - This document is a source document.

Answer 22

False - a Bank Statement is not strictly a source document, though it can be used to verify a transaction in the absence of the original source document (e.g. if it got lost)

Question 23

This source document is a…

Answer 23

Invoice.

Question 24

This source document is a…

Answer 24

Cheque butt.

Question 25

This source document is a...

Answer 25

Receipt.

Question 26

This document is a...

Answer 26

Bank Statement

Question 27

Source documents that are used for CASH transactions are...

Answer 27

Receipt Cheque butt

Question 28

Source documents that are used for CREDIT transactions are...

Answer 28

Invoice

Question 29

The three elements of the accounting equation are...

Answer 29

Assets Liabilities Owners Equity

Question 30

T/f - The accounting equation is: Assets = Liabilities + Owners Equity.

Answer 30

True

Question 31

T/f - The accounting equation is: Assets + Liabilities = Owners Equity.

Answer 31

False. The accounting equation is: Assets = Liabilities + Owners Equity.

Question 32

Who am I? A present economic resource controlled by the entity (as a result of past events) that has the potential to produce future economic benefit

Answer 32

Asset

Question 33

Who am I? A present obligation of the entity (as a result of past events) to transfer an economic resource.

Answer 33

Liability

Question 34

Who am I? The residual interest in the assets of the entity after all its liabilities are deducted.

Answer 34

Owners equity

Question 35

Grouping together items that have similar/common characteristics is referred to as...

Answer 35

Classifying/classification

Question 36

Inventory, Bank, Accounts Receivable, Equipment, Vehicle and Premises are examples of...

Answer 36

Assets

Question 37

Loan, Accounts Payable, Bank Overdraft and Mortgage are examples of...

Answer 37

Liabilities

Question 38

Who am I? The assumption that the accounting records of asset, liabilities and business activities of the entity are kept completely separate from those of the owner of the entity as well as from those of other entities.

Answer 38

Accounting entity assumption.

Question 39

Current assets = a) Less than 12 months b) More than 12 months

Answer 39

a) Less than 12 months.

Question 40

Non Current assets = a) Less than 12 months b) More than 12 months

Answer 40

b) More than 12 months

Question 41

What is the purpose of the Balance Sheet in Accounting?

Answer 41

A Balance Sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time, showing its assets, liabilities, and owner's equity.

Question 42

What's the difference between "current" and "non-current" assets on a Balance Sheet?

Answer 42

Current assets are short-term assets that are expected to be converted into cash or used up within one year, while non-current assets are long-term assets that have a useful life of more than one year, such as property and equipment.

Question 43

What is the residual interest that an owner has invested in a business recorded as in the owners equity section?

Answer 43

Capital.

Question 44

How do you calculate the total of the owners equity section?

Answer 44

Assets - liabilities = OE

Question 45

How would you classify the following item?

Answer 45

Inventory is a current asset.

Question 46

How would you classify the following item?

Answer 46

Van is a non-current asset.

Question 47

How would you classify the following item?

Answer 47

Electricity bill is a current liability.

Question 48

How would you classify the following item?

Answer 48

Accounts Receivable is a current asset.

Question 49

How would you classify the following item?

Answer 49

Accounts Payable is a current liability.

Question 50

How would you classify drawings?

Answer 50

Owners equity.

Question 51

How would you classify capital contribution?

Answer 51

Owners equity.

Question 52

Which two figures must balance in the Balance Sheet?

Answer 52

Total Assets = Total Equities

Question 53

How do you calculate Total Equities?

Answer 53

Total Liabilities (CL+NCL) + Total OE

Question 54

Why does a balance sheet have two columns for balances?

Answer 54

Left column = item totals Right column = element totals

Question 55

What is the accounting equation?

Answer 55

A = L + OE

Question 56

What is the basic idea of the two-fold effect?

Answer 56

The concept of the two-fold effect outlines that every transaction will impact the accounting equation in a minimum of two ways.

Question 57

According to the two-fold effect, what must remain true after a transaction has been recorded?

Answer 57

The accounting equation must still balance, i.e. A=L=OE.

Question 58

T/f - A single transaction can impact two items in the same element.

Answer 58

True - examples of this include cash purchase of inventory and cash received to settle an account receivable.

Question 59

When there are two impacts under the same element, what additional piece of information must we write then recording in the Accounting Equation?

Answer 59

We must include the overall impact.

Question 60

T/f - When the owner takes a "Drawing" - this would mean the drawings would increase, whilst causing Owners Equity overall to decrease.

Answer 60

True - the Owners Equity decreases, as Drawings have increased.

Question 61

T/f - A capital contribution would increae the value of owners equity.

Answer 61

True.

Question 62

Which two elements would be impacted following a monthly loan repayment?

Answer 62

Assets (bank) decrease Liabilities (loan) decrease

Question 63

Which two elements would be impacted if a busines purchased $1000 of inventory on credit?

Answer 63

Assets (inventory) increase $1000 Liabilities (accounts payable) increase $1000

Question 64

What would happen when a business made a cash payment to settle an Accounts Payable of $1000?

Answer 64

Assets (bank) decrease $1000 Liabilities (AP) decrease $1000

Question 65

Which elements would be impacted when the owner makes a drawing of $1000 cash?

Answer 65

Assets (bank) decrease $1000 Owners Equity (drawings [have increased]) decrease $1000

Question 66

How do we measure liquidity?

Answer 66

Working Capital Ratio

Question 67

How do we measure stability?

Answer 67

Debt Ratio

Question 68

What is the formula for stability?

Answer 68

TL/TA x 100

Question 69

What is the formula for WCR?

Answer 69

CA/CL

Question 70

How should the WCR be written?

Answer 70

The WCR should always be written as a ratio to the number 1. E.g. ____ : 1

Question 71

How should the debt ratio be written?

Answer 71

The debt ratio should always be written as a percentage.

Question 72

What does the WCR of 2:1 represent?

Answer 72

This represents good liquidity. It suggests that for every $1 of current liabilities, the business has $2 in current assets. This would be a good result.

Question 73

What does a WCR of 0.5:1 represent?

Answer 73

This represents poor liquidity. It suggests that for every $1 of current liabilities, the business only has 50c in current assets. This would be a bad result and suggests the business will have difficulty in meeting its short term debts.

Question 74

Define liquidity.

Answer 74

Liquidity measures the ability of the business to meet its short term debts as they fall due by comparing current assets with current liabilities.

Question 75

Define stability.

Answer 75

Stability measures the businesses ability to meet its total liabilities and continue operating in the long term.