Topic 1: Environment of Accounting Flashcards
What is the Accounting Assumptions and Doctrines?
Rules and guidelines that accountants follow when recording, reporting and interpreting financial information.
What is the monetary assumption?
The Dollar is the basic unit of accounting.
What are some advantages of using the monetary assumption?
- Can be added, subtracted, multiplied and divided
- Allows us to make comparisons between different firms and years
What are some limitations of using the monetary assumption?
- 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
What are objective values?
Verifiable evidence/proof is available
Examples: Receipts/invoices
What are subjective values?
Estimation is made to the value of an item
Examples: Reputation, doubtful doubts, depreciation
What is qualitative information?
Information that can’t be put into $ terms
Examples - location, competitors
What is quantitative information?
Aspects that can be put into $ terms
Examples - reports, banks, motor vehicles
What is an entity?
Something that exists in its own right
What does the Accounting Entity Assumption assume?
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
What is the Legal Entity assumption?
Looks at who is responsible for the debts of the business
Who are sole-traders?
Business is owned and run by one person
Owner has unlimited liability
What are business partnerships?
Business is run and owned by 2-20 people, where profit is divided
Owners have unlimited liability
What are companies?
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
What does Ltd refer to?
Refers to limited liability of companies
* Implies business is a company
What are retained profits and what is its purpose?
Retained Profit is company profit that is held back from distribution to shareholders.
Purpose: To increase productivity/expand for the future (increase profits)
What does Earnings Yield Ratio Measure?
Measures the company’s performance
Calculates return generated on the whole profit figure
* 2 Decimal Places
What is the Dividend Yield Ratio and what does it measure?
measures the actual return for the shareholder for their investment in the company.
- Takes retained profits into account
- 2 Decimal Places
How is the Earnings Yield Ratio Calculated?
Earnings per ordinary Share:
Net Profit for ordinary shareholders / No. of Ordinary Shares = $
Earnings Yield:
$ / Market Price per Ordinary Share = %
How is the Dividend Yield Ratio Calculated?
Dividend per Ordinary Share:
Total Ordinary Dividend / No. of Ordinary Shares = $
Dividend Yield:
$ / Market Price per Ordinary Share = %
What is the primary role of accountants?
To make managers and users informed and therefore responsible for effective decision making in respect to the resources of the business
Who are internal users?
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)
Who are external users?
Those with indirect financial interest and make decisions to maximise their own personal interests.
Examples: Current/Potential Investors, Employees, Banks (outside the business)
Are accountants Internal or External users? Why/Why not?
Neither Internal or External users because they do not make decisions for the business.
Only give recommendations.
What is the Conceptual Framework?
Guides accountants in the practices and procedures of recording and reporting.
Ensures consistency - able to make comparisons
Summarise the Conceptual Framework with regard to Accounting Conceptual Framework, Statements (SAC’s) and Standards:
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
What are the requirements of the accounting entity?
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
What are the four Qualitative Characteristics of accounting reports?
- Relevance
- Faithful Representation
- Comparability
- Understandability
Define Relevance:
Information must be meaningful, significant and timely to be included in the financial report - relates to decision-making needs of users is included.
Define Faithful Representation:
All Financial information must accurately reflect the true financial position of the business. 3 main attributes: - Complete - Error-Free - Unbiased
Define Comparability:
The ability to compare a business over successive periods
* Consistent accounting methods should be used from one accounting period to the next.
Define Understandability:
Financial information must be presented in a form which anyone can understand NOT just accountants.
What are the advantages of a Computerised Accounting System?
Speed of Processing - Computers process thousands of transactions at incredible speed.
Error Reduction and Automatic Postings - Mathematical calculations are automatically tallied.
What are the disadvantages of a Computerised Accounting System?
Power Failures - Requires frequent back-ups
Computer Viruses - files can be destroyed
What is the criteria used to access ethical behaviour?
Morally doing what’s right
Honesty
Confidentiality
What are social issues associated with businesses?
Negatively Impact:
- Individuals - Loss of Jobs
- The Community - Not supporting local jobs
- The Environment - Pollution
What are the 4 essential steps in the Accounting Process and describe each one:
- Source Documents - collect 3 pieces of useable data (date, amount & who)
- Process of Record - Summarise and classify data into journals and ledgers
- Prepare Reports - Prepare 3 general purpose reports (Income statement, Balance Sheet and Cashflow Statement)
- Analyse and Interpret - Determine trends and results using ratios (extra info to help make better decisions)
What are the advantages of being a Sole Trader?
- Owner keeps 100% of Profit
- Full decision making Power
What are the disadvantages of being a Sole Trader?
- No one to share the workload with
- Owners have unlimited liability
What are the advantages of being a Partnership?
- Share Workload
- Potential to generate more beneficial ideas
What are the disadvantages of being a Partnership?
- Profits must be split amongst partners
- Owners have unlimited liability
What are the advantages of being a Company?
- Shareholders (Owners) have limited liability
- Easier to raise capital through issue of new shares
What are the disadvantages of being a Company?
- Costly process in lodging documents
- Stringent reporting requirements enforced by law
