Topic 1 - Intro

Question 1

Main purpose of accounting

Answer 1

Communication of information for decision-making.

Question 2

Two types of accounting

Answer 2

Financial - preparation of reports for external stakeholders.
Management - preparation of reports for internal management.

Question 3

Statement of Profit or Loss (SOPL) info + shorthand name

Answer 3

“Income statement”
Over a year

Revenue from operating
Expenses from operating
Profit or loss
Other income or expenses
(Most include comprehensive income)

Question 4

Statement of Financial Position (SOFP) info + shorthand name

Answer 4

“Balance Sheet”
At one point in time

Assets
Liabilities
Capital

Question 5

Revenue

Answer 5

Income earned in the period from operating
Income from e.g. interest is “other income”

Question 6

Expenses

Answer 6

Yearly running costs, used up in period reported

Question 7

Profit or Loss

Answer 7

Total income made in period less total expenses incurred in period

Question 8

Assets

Answer 8

Items of value owned by the business e.g. stock, vehicles, receivables, money in bank
Current assets - to be turned to cash (or consumed/sold) within 1 year (inc. cash)
Non-current assets - all other assets (use/keep for over 1 year

Question 9

Liabilities

Answer 9

Obligations to transfer resources to a third party e.g. loan, trade payables
Current liabilities - due to be settled within 1 year/incurred as part of operating
Non-current liabilities - payables in periods over 1 year

Question 10

Equity

Answer 10

Residual interest in assets after deducting liabilities

Question 11

Primary users

Answer 11

Investors - future trends
Investment analysts - “
Lenders - will business repay
Creditors - “

Question 12

Other users

Answer 12

Customers - prices/not closing
Competitors
Employees - salaries
Government - tax
Community reps (meh)

Question 13

Regulation frameworks and standards

Answer 13

IASB (International Accounting Standards Board) - sets standards + made conceptual framework
IFRS (International Financial Reporting Standards) created by IASB - compulsory to follow in UK, used globally

Question 14

Conceptual Framework

Answer 14

Describes the objective of and concepts for financial statements

Helps preparers make consistent policies
Helps all parties understand standards

Question 15

Going concern concept

Answer 15

The business will continue operating into the future
Assets will be valued (and in SOFP) at appropriate vale (e.g. historic cost or fair value) NOT SCRAP.
Reason business won’t continue - assets valued at Net Realisable Value (value on sale)

Question 16

Accruals concept

Answer 16

Allocate expenses + income to the period they relate to
Account for revenue when earned not when cash received
Account for purchases when received not when paid for

Question 17

Matching concept/principle

Answer 17

When measuring profit, costs should be set against the revenue they generate at the point in time this arises

Question 18

Prudence concept

Answer 18

No profits included that aren’t earned
Expenses are complete and not understated

Question 19

Materiality concept

Answer 19

Only material items should be presented in financial statements
Only apply accounting standards to material items

Question 20

Recognition + criteria for it

Answer 20

Items recognised in SOFP/SOI if:
item meets definition of an element
item meets criteria for recognition

criteria: transaction recognised if it provides relevant information about the element, and the element can be faithfully represented

Question 21

Elements (5)

Answer 21

Assets
Liabilities
Ownership interest (Equity)
Income
Expenses

Question 22

Measurement methods (2)

Answer 22

Historical cost
Current value

Question 23

Historical cost (concept (CF))

Answer 23

Reflects the actual cost price billed of revenue charged for items

Question 24

Current value (market value (CF))

Answer 24

Fair value - the price received/paid
Value in use for assets based on present cash flow values
Current cost - cost of equivalent assets + transaction cost

Question 25

Principal qualitative characteristics of financial info

Answer 25

Relevance (influence decision-making)
- predictive or confirmatory value (or both)

Faithful representation
- complete, neutral, free from error

Question 26

Enhancing qualitative characteristics of financial info

Answer 26

Comparability - users can see similarities + differences
Verifiability - direct and indirect (counting cash + checking inputs to model)
Timeliness - information is provided in sufficient time for decision making
Understandability - presented clearly + concisely