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Stage 2 Accounting > Topic 1: Environment of Accounting > Flashcards

Topic 1: Environment of Accounting Flashcards

1
Q

What is the Accounting Assumptions and Doctrines?

A

Rules and guidelines that accountants follow when recording, reporting and interpreting financial information.

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2
Q

What is the monetary assumption?

A

The Dollar is the basic unit of accounting.

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3
Q

What are some advantages of using the monetary assumption?

A
  • Can be added, subtracted, multiplied and divided

- Allows us to make comparisons between different firms and years

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4
Q

What are some limitations of using the monetary assumption?

A
  • Over time, the value of the dollar is not consistent

- Many non-financial aspects that cannot be reported in dollar terms - Quality of Staff, Location of the business

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5
Q

What are objective values?

A

Verifiable evidence/proof is available

Examples: Receipts/invoices

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6
Q

What are subjective values?

A

Estimation is made to the value of an item

Examples: Reputation, doubtful doubts, depreciation

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7
Q

What is qualitative information?

A

Information that can’t be put into $ terms

Examples - location, competitors

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8
Q

What is quantitative information?

A

Aspects that can be put into $ terms

Examples - reports, banks, motor vehicles

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9
Q

What is an entity?

A

Something that exists in its own right

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10
Q

What does the Accounting Entity Assumption assume?

A

Assumes that the business is considered a separate reporting entity from its owners and all other entities.
*Is the same for all businesses - sole-traders, partnerships and companies

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11
Q

What is the Legal Entity assumption?

A

Looks at who is responsible for the debts of the business

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12
Q

Who are sole-traders?

A

Business is owned and run by one person

Owner has unlimited liability

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13
Q

What are business partnerships?

A

Business is run and owned by 2-20 people, where profit is divided
Owners have unlimited liability

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14
Q

What are companies?

A

Legal entity existing under law in its own right.
Owners: Shareholders - limited liability (not responsible for debts), can lose initial investment.
Management: Board of Directors

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15
Q

What does Ltd refer to?

A

Refers to limited liability of companies

* Implies business is a company

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16
Q

What are retained profits and what is its purpose?

A

Retained Profit is company profit that is held back from distribution to shareholders.
Purpose: To increase productivity/expand for the future (increase profits)

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17
Q

What does Earnings Yield Ratio Measure?

A

Measures the company’s performance
Calculates return generated on the whole profit figure
* 2 Decimal Places

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18
Q

What is the Dividend Yield Ratio and what does it measure?

A

measures the actual return for the shareholder for their investment in the company.

  • Takes retained profits into account
  • 2 Decimal Places
19
Q

How is the Earnings Yield Ratio Calculated?

A

Earnings per ordinary Share:
Net Profit for ordinary shareholders / No. of Ordinary Shares = $
Earnings Yield:
$ / Market Price per Ordinary Share = %

20
Q

How is the Dividend Yield Ratio Calculated?

A

Dividend per Ordinary Share:
Total Ordinary Dividend / No. of Ordinary Shares = $
Dividend Yield:
$ / Market Price per Ordinary Share = %

21
Q

What is the primary role of accountants?

A

To make managers and users informed and therefore responsible for effective decision making in respect to the resources of the business

22
Q

Who are internal users?

A

Those with direct financial interest in the business and make decisions which ensure the smooth running and profitability of the business.
Examples: Owners/Partners, Board of Directors, Managers (Within the business)

23
Q

Who are external users?

A

Those with indirect financial interest and make decisions to maximise their own personal interests.
Examples: Current/Potential Investors, Employees, Banks (outside the business)

24
Q

Are accountants Internal or External users? Why/Why not?

A

Neither Internal or External users because they do not make decisions for the business.
Only give recommendations.

25
Q

What is the Conceptual Framework?

A

Guides accountants in the practices and procedures of recording and reporting.
Ensures consistency - able to make comparisons

26
Q

Summarise the Conceptual Framework with regard to Accounting Conceptual Framework, Statements (SAC’s) and Standards:

A

Accounting Conceptual Framework - Document of Rules and guidelines
Statements (SAC’s) - Deal with one aspect of accounting
Standards - Actual definitions and procedures of rules and guidelines

27
Q

What are the requirements of the accounting entity?

A

Reporting Entities produce:
3 general purpose reports (Balance Sheet, Income Statement and Statement of Cashflows) on whole overall position of the business
*Special purpose reports - focus on one aspect of a business

28
Q

What are the four Qualitative Characteristics of accounting reports?

A
  1. Relevance
  2. Faithful Representation
  3. Comparability
  4. Understandability
29
Q

Define Relevance:

A

Information must be meaningful, significant and timely to be included in the financial report - relates to decision-making needs of users is included.

30
Q

Define Faithful Representation:

A 
All Financial information must accurately reflect the true financial position of the business. 
3 main attributes: 
- Complete 
- Error-Free 
- Unbiased
31
Q

Define Comparability:

A

The ability to compare a business over successive periods

* Consistent accounting methods should be used from one accounting period to the next.

32
Q

Define Understandability:

A

Financial information must be presented in a form which anyone can understand NOT just accountants.

33
Q

What are the advantages of a Computerised Accounting System?

A

Speed of Processing - Computers process thousands of transactions at incredible speed.
Error Reduction and Automatic Postings - Mathematical calculations are automatically tallied.

34
Q

What are the disadvantages of a Computerised Accounting System?

A

Power Failures - Requires frequent back-ups

Computer Viruses - files can be destroyed

35
Q

What is the criteria used to access ethical behaviour?

A

Morally doing what’s right
Honesty
Confidentiality

36
Q

What are social issues associated with businesses?

A

Negatively Impact:

  1. Individuals - Loss of Jobs
  2. The Community - Not supporting local jobs
  3. The Environment - Pollution
37
Q

What are the 4 essential steps in the Accounting Process and describe each one:

A
  1. Source Documents - collect 3 pieces of useable data (date, amount & who)
  2. Process of Record - Summarise and classify data into journals and ledgers
  3. Prepare Reports - Prepare 3 general purpose reports (Income statement, Balance Sheet and Cashflow Statement)
  4. Analyse and Interpret - Determine trends and results using ratios (extra info to help make better decisions)
38
Q

What are the advantages of being a Sole Trader?

A
  • Owner keeps 100% of Profit

- Full decision making Power

39
Q

What are the disadvantages of being a Sole Trader?

A
  • No one to share the workload with

- Owners have unlimited liability

40
Q

What are the advantages of being a Partnership?

A
  • Share Workload

- Potential to generate more beneficial ideas

41
Q

What are the disadvantages of being a Partnership?

A
  • Profits must be split amongst partners

- Owners have unlimited liability

42
Q

What are the advantages of being a Company?

A
  • Shareholders (Owners) have limited liability

- Easier to raise capital through issue of new shares

43
Q

What are the disadvantages of being a Company?

A
  • Costly process in lodging documents

- Stringent reporting requirements enforced by law

Stage 2 Accounting (9 decks)

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