Topic 1A: Nature, Principles and Scope of Financial Statements. Flashcards
What is financial reporting?
A means of recording, analysing and summarising transactions of a business, whereby the transactions are recorded and analysed in the books of prime entry, before the total then being posted to the ledger accounts and the trasanctions summarised in the financial statements
What is financial accounting (and why is it useful to management)?
A method of reporting the financial performance and financial position of a business. More backwards looking (how has the business performed over the past 12 months - historic information) - they are of interest to management with the principal function to satisfy the need of person not involved in running the business
What is management accounting?
A management information system that analyses data to provide a basis for managerial action. The concern is to present accounting information in the form most helpful to management - this is because the information needs of management go far beyond those of other account users and managers have the resp of planning and controlling the resources of the business so needed more detail information. Forward looking
What is the statement of profit or loss?
A record of income generated and expenditures incurred over a given period. Shows whether the business has had more revenue then expenditure
What is revenue?
The income generated by the operations of a business for a period
What are expenses?
The cost of running the business for the same period
What is income?
Increase in assets or decreases in liabilities that result in increases in equity other than those relating to contribution from holders of equity of claims
What are expenses?
Decreases in assets or increases in liabilities that result in decrease in equity, other than those relating to distribution to holders of equity claims
What is the form of the statement of profit and loss?
The statement of profit or loss forms part of the published annual financial statements of a limited liability company fro the period of a year, commencing from the date of the previous year statements
What is the difference between statement of profit and loss for both financial and management accounting in terms of form (length of time)?
Whereas financial accounting is yearly, management accounting would want to be monthly.
How long is the statement of profit or loss for?
A whole year
What is the statement of financial position?
A list of all the assets owned and the liabilities owed by a business at a particular date
What is an asset?
A present economic resource controlled by the entity as a result of past events.
What is a liability?
Something owed to somebody else - a present obligation of the entity to transfer economic resource as a result of a past event
What is capital or equity?
The amounts invested in the business by the owner are amounts that the business owes to the owner. This kind of liability is called capital
What does capital take the form of in a limited liability company?
Shares
What is shares capital known as?
Equity
What is equity?
The residual interest in the assets of the entity after deducting all of its liabilities
Statement of financial position is produced as at…
…one particular date
What are prepayments?
These are paid for goods and services in advance
What is capital?
This is money that is put into the business by the owner which is owed to the owner. Gets bigger every year if making a profit.
What are drawings?
These are taken out of the business by the owner
What is the accounting equation?
Assets = liabliities + capital)
What are accruals?
Services that have not yet been paid for
What are non-current assets?
Assets held and used by the business over the long term
What are current assets?
Assets not held over long term, usually listed in order of liquidity (closeness to cash)
What is the essence of the statement of financial position vs statement of profit and loss?
Statement of financial position is to show worth at a particular point in time, whereas profit or loss over the course of time between the two snapshots
