Topic 1: Introduction to Financial Accounts (Part 1) Flashcards
Define Accounting
Is the financial info to do with the past and present and to a certain extent in terms to forecast the future success of the business.
OR
Is the process of recording financial transaction pertaining to a business.
What are the two areas accounting falls into?
Financial accounting
Management accounting
Define Finance
The management of money and includes activities such as investing, borrowing, budgeting, lending, saving and forecasting.
What is finance all about?
Is about where businesses get its money from, how it raises money.
What is capital?
Is the money that goes into a business.
What is equity?
Is ownership of an asset of value
OR
The amount the shareholders have invested
What are the major differences between financial and management accounting?
Nature of the reports produced Level of detail The regulation Reporting interval Time orientation Range and quality of info
Difference of MA to FA
NR: Tend to be specific purpose
LD: Often very detailed
R: Unregulated
RI: As short as required by managers
TH: Uses projected future info as well as past info
RQI: Contains financial and non financial info. Uses info that cannot be verified
Difference of FA to MA
NR: Tend to be general purpose
LD: Usually broad overview
R: Subject to accounting regulation
RI: Usually annual or bi-annual
TH: Almost always historical
RQI: Focus on financial info. Emphasis on objective, verifiable evidence.
Who are the main users of financial info relating to a business?
Competitors Investment analyst Government Employees & their representative Lenders Customers Owners Managers Suppliers Community representative
What are the 3 key financial statements?
Statement of cash flows
Income statement
Statement of financial position
Define the 3 financial statements
SoFP (Balance sheet): Assets & liabilities at the end of the reporting period, different layouts depending on business layouts
IS (Profit & Loss): How much money is coming in (income) and out (expenditure) during the reporting period
CFS: During the year how much cash is going in and going out of the business
What are the four main forms of business?
Sole traders
Partnerships
Private limited company (Ltd)
Public limited company (Plc)
Define the four main forms of business
Sole traders: Individuals who are in business but there’s no difference between their money and the businesses money
Partnerships: Formal arrangement by two or more parties to manage and operate a business and share its profits. (no difference between their money and the businesses money)
Ltd: Does not publicly trade shares and is limited to a maximum of 50 shareholders
Plc: Shares are traded on the stock exchange
What is the difference between limited and unlimited business?
Unlimited: business owner or owners are personally responsible for all of the debts of the business
Limited: Business owners’ liability for debts is restricted to the amount they put into the business.
What are the advantages of listing the company on the stock exchange?
Easier to raise funds Costs less Raises profile Broadens investor base Can help attract and retain employees (share incentives)
What are the disadvantages of listing the company on the stock exchange?
Increased vulnerability to takeover
More management time involved
More closer monitoring of actions & decisions
What is SoFP important use?
Snapshot: Final day of the accounting period - calc how much is owned and owned
Shows assets and liabilities
Shows capital and reserves
What is the difference between capital and reserves?
Capital: owners investment/money raised (equity)
Reserves: Profit retained from previous period
What is the most commonly used layout for SoFP?
NCA + CA + TA - NCL + CL = Equity
Define overdraft
Is a short term unsecured loan which can be demanded back by the bank at a time of their convenience
Usually very expensive
Recap of SoFP formula
Net Assets = Total Equity
what is owned = how is it paid for
NA = FA + CA - CL -NCL
What is non-current (fixed) assets? (SoFP assets)
Non-current (fixed) assets: Assets and property owned by a business that are not easily converted to cash.
What are the types of non-current (fixed) assets? (SoFP assets)
Tangible: Typically physical assets or property owned by a company
Intangible: Are non-physical assets
but offer economic value to the company.
