Topic 1: Introduction to Financial Accounts (Part 1)

Question 1

Define Accounting

Answer 1

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.

Question 2

What are the two areas accounting falls into?

Answer 2

Financial accounting

Management accounting

Question 3

Define Finance

Answer 3

The management of money and includes activities such as investing, borrowing, budgeting, lending, saving and forecasting.

Question 4

What is finance all about?

Answer 4

Is about where businesses get its money from, how it raises money.

Question 5

What is capital?

Answer 5

Is the money that goes into a business.

Question 6

What is equity?

Answer 6

Is ownership of an asset of value
OR
The amount the shareholders have invested

Question 7

What are the major differences between financial and management accounting?

Answer 7

Nature of the reports produced
Level of detail
The regulation
Reporting interval
Time orientation
Range and quality of info

Question 8

Difference of MA to FA

Answer 8

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

Question 9

Difference of FA to MA

Answer 9

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.

Question 10

Who are the main users of financial info relating to a business?

Answer 10

Competitors
Investment analyst
Government
Employees & their representative
Lenders
Customers
Owners
Managers
Suppliers
Community representative

Question 11

What are the 3 key financial statements?

Answer 11

Statement of cash flows
Income statement
Statement of financial position

Question 12

Define the 3 financial statements

Answer 12

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

Question 13

What are the four main forms of business?

Answer 13

Sole traders
Partnerships
Private limited company (Ltd)
Public limited company (Plc)

Question 14

Define the four main forms of business

Answer 14

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

Question 15

What is the difference between limited and unlimited business?

Answer 15

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.

Question 16

What are the advantages of listing the company on the stock exchange?

Answer 16

Easier to raise funds
Costs less
Raises profile
Broadens investor base
Can help attract and retain employees (share incentives)

Question 17

What are the disadvantages of listing the company on the stock exchange?

Answer 17

Increased vulnerability to takeover
More management time involved
More closer monitoring of actions & decisions

Question 18

What is SoFP important use?

Answer 18

Snapshot: Final day of the accounting period - calc how much is owned and owned

Shows assets and liabilities

Shows capital and reserves

Question 19

What is the difference between capital and reserves?

Answer 19

Capital: owners investment/money raised (equity)

Reserves: Profit retained from previous period

Question 20

What is the most commonly used layout for SoFP?

Answer 20

NCA + CA + TA - NCL + CL = Equity

Question 21

Define overdraft

Answer 21

Is a short term unsecured loan which can be demanded back by the bank at a time of their convenience

Usually very expensive

Question 22

Recap of SoFP formula

Answer 22

Net Assets = Total Equity
what is owned = how is it paid for

NA = FA + CA - CL -NCL

Question 23

What is non-current (fixed) assets? (SoFP assets)

Answer 23

Non-current (fixed) assets: Assets and property owned by a business that are not easily converted to cash.

Question 24

What are the types of non-current (fixed) assets? (SoFP assets)

Answer 24

Tangible: Typically physical assets or property owned by a company

Intangible: Are non-physical assets
but offer economic value to the company.

Question 25

Give examples of the types of non-current (fixed) assets (tan and intan)

Answer 25

Tangible: Land, plant & machinery, buildings, inventory etc.

Intangible: Patents, copyright, licenses, brands, goodwill etc. (can only go on balance sheet if bought)