S1L7 Accruals And Prepayments

Question 1

What are accounting adjustments necessary for?

Answer 1

• If the trial balance does not balance
• To comply with the key accounting conventions and assumptions

Question 2

Should a suspense account be included on a trial balance?

Answer 2

No

Question 3

What does the IASB framework set out?

Answer 3

The concepts which underlie the preparation of financial statements

Question 4

Define the accruals or matching assumption in accounting.

Answer 4

Expenses/income should be matched to the period they relate and to the income/expenses they generate

Question 5

Define the going concern assumption

Answer 5

Assume entity will continue to trade for the foreseeable future

Question 6

List other key accounting assumptions.

Answer 6

• Consistency
• Prudence
• Materiality
• Offsetting
• Comparative information
• Substance over form
• Neutrality
• Completeness

Question 7

What does the consistency assumption refer to?

Answer 7

Consistency of accounting treatment or presentation

Question 8

What does the prudence assumption entail?

Answer 8

Slow to recognise profits/gains, quick to anticipate losses

Question 9

Explain the materiality assumption.

Answer 9

Influences economic decision making of users

Question 10

What is meant by the offsetting assumption?

Answer 10

Report items separately

Question 11

What is the purpose of comparative information in financial statements?

Answer 11

Disclose previous period

Question 12

Define the substance over form assumption.

Answer 12

Report reality, not legal form

Question 13

What does neutrality in accounting mean?

Answer 13

Free from bias

Question 14

What is the completeness assumption?

Answer 14

No material omissions

Question 15

What is the business entity concept?

Answer 15

Separation of owner from the business

Question 16

What does the money measurement concept state?

Answer 16

Only deal with items to which a monetary value can be attributed

Question 17

Define the historical cost concept.

Answer 17

Transactions recorded at cost when occurred

Question 18

What is the stable monetary unit assumption?

Answer 18

Assume value of unit is constant, e.g. £ or $

Question 19

What does realisation refer to in accounting?

Answer 19

Recognise income and profits when realised

Question 20

What is the duality concept?

Answer 20

Every transaction has two effects

Question 21

What adjustments are needed due to key accounting concepts?

Answer 21

• Accruals and prepayments
• Inventory and the cost of sales
• Bad and doubtful debts
• Depreciation

Question 22

What do accruals and prepayments adjust for?

Answer 22

To match expenses to the period they relate

Question 23

Why is inventory important in accounting?

Answer 23

To match sales with actual cost of those sales

Question 24

What is the purpose of accounting for bad and doubtful debts?

Answer 24

To be prudent in recognising debts that may not be recoverable

Question 25

What is depreciation in accounting?

Answer 25

To match cost of a non-current asset over its useful economic life

Question 26

How is cash flow calculated?

Answer 26

Cash flow = cash in – cash out

Question 27

How is profit calculated?

Answer 27

Profit = income – expenses

Question 28

What is included in income?

Answer 28

Value of goods and services sold during a period

Question 29

What does expenses refer to in accounting?

Answer 29

Value of goods and services consumed in generating income

Question 30

True or False: Profit is a measure of cash flow.

Answer 30

False

Question 31

What is the aim of matching/accruals?

Answer 31

To show expenditure in the period to which it belongs, not when payment is made

Question 32

What types of expenses often ‘overhang’ more than one accounting period?

Answer 32

• Rent
• Rates
• Insurance
• License costs
• Electricity
• Telephone
• Accountancy/audit fees

Question 33

When should an expense be recognised?

Answer 33

When the goods or services are consumed

Question 34

What are accruals?

Answer 34

Expenses incurred but not yet invoiced

Question 35

What are prepayments?

Answer 35

Expense paid in advance