POA Flashcards
What is the difference between a trading business and a service business?
A trading business refers to a business that buys goods and resell at a higher price while a service business provides services to customers.
What are different type of stakeholders and the decisions they make?
Managers: Whether to find ways to improve the business performance.
Employee:Whether they can choose to continue working for the business.
Lenders: Whether the business has the ability to repay the loan.
Competitors:Whether the business is comparable to other businesses.
What is the role of accountants?
It is to set up the accounting informtion system and become stewards of the business and are responsible in managing resources on the business on behalf on the owner.
What is the role of accounting?
An accounting information system is set up to give information to stakeholders regarding the management of resources and the performance of the business.
What are the 2 things an accountant must have?
Have integrity:Be honest in all professional relationships.
Be Objective: Must not let any bias, conflicts of interests or any undue influence that affects his or her professional judgment.
What is the Objectivity theory?
The Objectivity theory states that all source documents in the business transactions provide verifiable and reliable evidence that the business activity has taken place.
What is the Monetary theory?
All business transactions are recorded in monetary terms.
What is the historical cost theory?
All business transactions are recorded at their original cost.
What is the Going Concern Theory?
It states that the business is assumed to have an indefinite economic life unless there is credible evidence that it may close down.
What is the Accounting Entity Theory?
It states that the activities of the business should be separated by the actions of the owner. All business transactions are recorded from the point of view of the business.
What is the accounting period theory?
It states that the business life is divided into regular time intervals.
What is Matching Theory?
It states that the expenses incurred should be matched against the income in that same period to determine profit for that period.
What is Revenue Recognition Theory?
It states that revenue is earned when goods have been delivered or when services have been provided.
What is the Accural Basis of Accounting Theory?
It states that the business activities that have occurred, regardless of whether cash is paid or received, should be recorded in the relevant accounting period.
What is Prudence theory?
It states that the accounting treatment used by the business should least overstates its assets and profits while it least understates liabilities and losses.
What is Consistency theory?
It states that the accounting method used by the business must be consistent from one financial period to another financial period. Inconsistency may lead to misleading figures in financial statements.
What is the Materiality theory?
It states that the item is material if it makes a big difference in decision making. The value of the transaction is compared to the size of the business.
What is Net Realisable Value?
It refers to the amount of potential receivable from selling its inventory.
What is an Asset?
It refers to the resources owned by the business that are used to provide future benefits.
What is a liability?
It refers to the obligations owed by the business that are expected to be settled in the future.
What is Equity?
It refers to the claim by the owner on the net assets of the business.
What is an Income?
It refers to the amount of revenue earn through activities of the business; comprises revenue.
What is an Expense?
It refers to the costs incurred against the operation of the business to earn income in the same financial period.
What are the elements of the Accounting Equation?
Assets, Liabilities and Equity
What is the Accounting Equation?
Assets = Liabilities + Equity
What is the Expanded Accounting Equation?
Assets = Liabilities + Income - Drawings - Expenses + Capital
What are the rules of the journal entries?
-Total debits must equal to total credits to ensure that the accounting equation remains balanced.
-Each business transaction affects at least 2 accounts.
-When one account is credited, the other account is debited from the same business transaction.
What are the Stages in Accounting Cycle?
Identifying and Recording, Adjusting, Reporting and then Closing.
What are the steps of the accounting information system?
Source documents, journal entries ,ledger, trial balance and then financial statements
What is the difference between cash discount and trade discount?
-Cash discount refers to the reduction in the invoiced price while Trade discount refer to the reduction in the list price.
-Cash discount helps to encourage credit customers to pay early while Trade discount helps to encourage credit customers to buy in bulk, customer’s loyalty and patronage.
-Cash discount can’t be recorded in the ledger account while Trade discount is recorded in the ledger account.
What is the Income Receivable?
It refers to the amount of Income earned but not yet received.(Current Asset)
What is Income received in Advance?
It refers to the Income that is received before services have been provided.
What is Prepaid Expense?
It refers to the expenses paid in advance before services have been used.
What is Expense payable?
It refers to the amount of expenses that are not paid yet after services have been used.
How is inventory valued?
Inventory is valued at the net realisable value or cost whichever is lower.
What is allowance for impairment of trade receivables?
It refers to the esitmated amounts from trade receivables that are likely to be uncollectible.
What is impairment loss of trade receivables?
It refers to the difference in amounts from trade receivables that are likely to be uncollectible from one financial year to another financial year.
What are trade receivables?
It refers to the amounts from credit customers which are owed to the company after the result of sale of goods or services on credit.
What are trade payables?
It refers to the amounts owed by the business to suppliers on credit.
What is Depreciation expense?
It refers to the allocation of a non-current asset over its estimated useful life.
What are the 4 causes of Depreciation?
-Legal limits
-Obsolescence
-Usage
-Wear and tear
What is the difference between the capital expenditure and revenue expenditure?
-Capital expenditure refers to the cost of the non-current asset and bringing it to its intended use while revenue expenditure refers to the cost to run , repair and maintain its non-current asset.
-Capital expenditure is recorded in the non-current asset account while Revenue expenditure is recorded in the expense account.
-Capital expenditure brings benefits for more than 1 financial year while revenue expenditure provides benefits within 1 financial year.
What are the differences between a bank loan and bank overdraft?
-Bank loan refers to the fixed amount of money borrowed from the bank that is transferred to the business bank account while bank overdraft refers to the amount of money withdrawn more than what is deposited agree up to the limit with the bank.
-Bank loan is recorded as long-term borrowings under the non-current liabilities section while bank overdraft is recorded as bank overdraft under the current liabilities section.
-Bank loan is repaid by interval payments until the end of the loan period or one time lump-sum at the end of the loan period while bank overdraft can be paid by depositing more money into the business bank account to reduce the bank overdraft.
What are the benefits of using internal controls?
-To act as a deterrence against fraud
-To safeguard assets of the business
-To record business transactions accurately
-To comply with the laws and regulations
What are the type of internal controls and explain why for each.
Segregation duties:To separate duties to different employees so that there is no one is handling the entire process.
Authorisation:Obtain proper approval from all forms of payment through authorised personal.
Bank Reconciliation:To identify errors in both the cash at bank account and the bank reconciliation and correct the cash at bank account.
Custody of Cash:Secure Cash and Cheques in a locked storage.
What are the benefits of using bank reconciliation?
-To act as a deterrance against fraud
-To identify errors in both the bank reconciliation and the cash at bank account.
-To identify the items which caused a difference in both bank reconciliation and the cash at bank account.
-To accurately calculate cash at bank account correctly.
State two reasons why the ending capital is higher than the beginning capital.
-Additional assets contributed to the business
-Profit earned for the business for the year
State two reasons why the ending capital is lower than the beginning capital.
-Withdrawal of assets for the owner for personal use to the business
-Loss incurred by the business for the year ended
What is Shareholder’s equity?
It refers to the shareholder’s claim on the net assets of the private limited company.
What is Share Capital?
It refers to the total amount of cash raised by issuing shares to shareholders.
What is retained earnings?
It refers to the accumulation of profits and losses that have not been distributed to shareholders yet since the start of the operations.
What is Dividends?
It refers to the portion of the retained earnings that has been distributed to shareholders.
What are the two reasons for the increase in shareholder’s equity?
-Issuance of new shares
-Profit earned by the business for the year
What are the two reasons for the decrease in shareholder’s equity?
-Declarations of dividends
-Loss incurred by the business for the year ended
What are the advantages of a Private limited company?
-Bankers and lenders are more likely to lend money to a PLC because the business has high valued assets which can be used as collaterals. The company also issue more shares to raise funds.
-When the PLC incurred debts and losses, the shareholders are not obliged to pay with their personal assets and may not receive dividends. In the worst case scenario, the shareholders need to forfeit their investments.
What are the advantages of a Sole proprietorship?
-The sole owner usually suns the business by himself or herself and has absolute control over the business.
-The business has minimal administrative duties to adhere to.
What are the disadvantages of a private limited company?
-The shareholders have no control in running the business unless they are part of the management team.They need to hire professionals to manage the business on behalf of the shareholders.
-They must comply with statuory requirements and must file its annual reports.
What are the disadvantages of a Sole proprietorship?
-Less likely for the bankers and lenders to lend money to the business because the owner lacks personal assets which can be used as collaterals. Funds are usually limited to owner’s personal funds.
-When a sole proprietorship incurs debts of losses,the sole owener is obliged to pay using his or her personal assets.
What is the limitation of a trial balance?
A balanced trial balance doesn’t mean there are no errors in the recording.
What is profitability?
It refers to the ability of the business to generate excess income to cover its expenses.
Why is it important for the business to be profitable?
-The profits earned can be reinvested to future business growth.
-The profits can be distributed as dividends to reward shareholders of the business.
What are the ways to improve profitability?
-Selling goods at a higher price
-Buy in bulk to received trade discounts
-Pay suppliers early to take advantage of cash discount
-Sublet excess office space to another business to earn rental income
-Hired part-timers during non-peak hours to reduce wages expenses
-Use of technology to reduce manpower
What is Liquidity?
-It refers to the ability of the business to convert current assets into cash to pay its current liabilities.
Why is liquidity important for the business?
-The business needs cash to meet its daily operating needs.
-The business needs cash for unforseen emergencies.
Why might a profitable business not have liquidity?
-The business may have difficulties collecting payments from credit customers.
-The business may have used up its cash to buy non-current assets.
-The business may have cash tied up in inventory which the business was unable to sell.
What is working capital?
It refers to the excess of current assets over the current liabilities.
What are the ways to improve Liquidity?
-Owners/Shareholders can contribute cash to the business
-Obtain a long-term loan
-Sell excess non-current assets for cash
-Negotiate for a better credit term with suppliers
-Find ways to reduce the business operating expenses
What is meant by efficiency in inventory management?
It refers to how efficient the business is at managing its inventory at an optimal level to meet customer demand.
What are the ways to improve efficiency in inventory management?
-Reduce selling price for slow-moving goods.
-Provide trade discounts to encourage credit customers to buy goods in bulk.
-Attract more customers through marketing campaign
-Use technological tools to improve the accuracy of the predictions of the customers to know when and how much inventory to buy.
What is meant by efficiency in trade receivables management?
It refers to how efficient the business is collecting payments from credit customers.
What are the ways to improve efficiency in trade receivables management?
-Monitor collection patterns regularly.
-Offer cash discounts to credit customers so that they will likely to pay early.
What are the purposes of a trial balance?
-It is to ensure arithmetic accuracy in recording.
-It is to facilitate in the preparation of the financial statements.
Give two examples of accounting information
-Trial balance
-Ledgers
Give 2 examples of non-accounting information.
-Industry Outlook
-Economic Outlook
Why is quick ratio a better indicator of business liquidity as compared to current ratio?
This is because the quick ratio excluded inventory and prepayments which are not easily converted into cash.
Explain why it is important for the business to manage trade receivables efficiently.
When a business has poor management of efficiency in trade receivables over time and collects payment longer than usual, the business would receive less cash and worsen its liquidity position.
What is a Scrap-value?
It refers to the amount that the business can receive at the end of the estimated useful life of a non-current asset.
What are the differences of the benefits of using a straight-line method and reducing balance method?
-When a business uses a straight-line method for depreciating the non-current assets, the non-current assets are expected to provide the same benefits over the useful life. Hence, depreciation is charged the same every year
-When a business uses a reducing-balance method for depreciating non-current assets, the non-current assets are expected to provide more benefits in the earlier years than in their later years. Hence, depreciation is charged in the earlier in the years than in their later years.
What is the meaning of the term ‘direct deposits’?
It refers to direct a receipt by the bank on behalf of the account holder.
What is the difference between cash transaction and credit transaction?
Cash transaction refers to the payment which is made immediately during a cash sale whereas credit transaction refers to the payment made to a later date during a credit sale.
What is Net book value?
It refers to the estimated future economic value of the non-current asset.
What reasons might there be or definitely be an allowance for impairment of trade receivables?
(Possible)
-Rumours that the business isnt doing well
-The business is unable to contact debtor
-Debts long overdue despite reminders
(Definitely)
-Deceased
-Bankrupt
What is Mark-up on cost?
The amount of gross profit earned for every dollar of the cost of sales.
What is Gross profit margin?
It indicates the gross profit earned for every dollar of sales.
What is Profit margin?
It refers to the amount of profit earned for every dollar of sales.
What is return on equity?
It refers to the amount of profits earned for every dollar of equity
What is Inventory turnover?
It measures the average rate of inventory being replaced in a year.
What is the difference between a non-current asset and a current asset?
A non-current asset can help to provide benefits for more than a year whereas a current asset provides benefits within the year.
A non-current asset cant be easily converted into cash whereas a current asset is easily converted into cash.
What is the difference between current liabilities and non-current liabilities?
Current liabilities are repaid within the year whereas non-current liabilities has more than 1 financial year to repay.
What is direct payments?
It refers to the payments or charges made by the bank on behalf of the account holder.
Why is a debit balance in the cash at bank account shown as a credit balance in the bank statement?
To the business, the money kept with the bank is treated as an asset as the money belongs to the business, hence a debit balance. However, to the bank, the money kept with the bank is seen as a liability, money owed to the business, hence a credit balance.
Why are internal controls needed to protect cash?
Cash is highly portable and has a high chance of getting stolen. Internal controls help to reduce the possibility of theft or the likelihood of error to ensure cash is well-protectedand accurately reported.
