The Nature and Purpose of Accounting Flashcards
How do you calculate the value added?
Value of Outputs - Value of Inputs
How do you evaluate a risk undertaken by an entrepreneur and his managing skills?
Value Added of investment A - Value Added of investment B
Which are the four types of monetary accounting information?
Operating information, financial accounting, management accounting and tax accounting.
What is is operating information needed for?
Day-to-day activities, i.e. hours worked by employees, inventory, amounts owed by customers and amount of money in bank
What is management accounting information used for?
Planning, implementation and control
By whom financial accounting information is used and for what?
It is used by external users such as investors, to decide wether to buy, sell or hold shares of the company
Which principles accounting must meet?
Relevance, objectivity and feasibility (ROF)
Which are the end products of financial accounting and how are they called?
They are called financial statements, and they are balance sheet, income statement and statement of cash flow.
What does the balance sheet show?
It shows information about the resources and obligations at an instant in time.
How is a balance sheet done?
It is divided in two sides left (assets) and right (liabilities and owner’s equity)
What are assets?
They are valuable resources owned by the company.
What are liabilities and owners equity?
Liabilities are obligations of the company to creditors and owners equity are sources of equity funds provided directly by equity investors (total paid in capital) or amount retained from profits (retained earnings)
What are assets equal to?
Assets are equal to the sum of liabilities and owners equity
What is the income statement?
It is a statement which explains how the income was earned
Basic income statement equation
Revenues - Expenses = Net Income
What does the income statement contain?
Sales revenue, cost of sales and gross margin
What is the sales revenue component in the income statement?
It’s the amount of products sold or delivered to customers
What is the cost of sales component in the income statement?
The cost of goods or services whose revenue is reported on the first line
Gross margin = ?
Sales revenue - Costs of sales
What is the operating expenses component in the income statement?
Operating expenses are expenses that the administration of a business incurs through its normal business operations, like rent or insurances
Income before taxes = ?
Gross margin - Operating expenses
Net income (or loss in case it is negative) = ?
Income before taxes - Taxes
What is a good report package filled of?
A balance sheet at the beginning of the period, an income statement for the period and a balance sheet at the end of the period.
