Topic 1A: Nature, Principles and Scope of Financial Statements.

Question 1

What is financial reporting?

Answer 1

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

Question 2

What is financial accounting (and why is it useful to management)?

Answer 2

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

Question 3

What is management accounting?

Answer 3

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

Question 4

What is the statement of profit or loss?

Answer 4

A record of income generated and expenditures incurred over a given period. Shows whether the business has had more revenue then expenditure

Question 5

What is revenue?

Answer 5

The income generated by the operations of a business for a period

Question 6

What are expenses?

Answer 6

The cost of running the business for the same period

Question 7

What is income?

Answer 7

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

Question 8

What are expenses?

Answer 8

Decreases in assets or increases in liabilities that result in decrease in equity, other than those relating to distribution to holders of equity claims

Question 9

What is the form of the statement of profit and loss?

Answer 9

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

Question 10

What is the difference between statement of profit and loss for both financial and management accounting in terms of form (length of time)?

Answer 10

Whereas financial accounting is yearly, management accounting would want to be monthly.

Question 11

How long is the statement of profit or loss for?

Answer 11

A whole year

Question 12

What is the statement of financial position?

Answer 12

A list of all the assets owned and the liabilities owed by a business at a particular date

Question 13

What is an asset?

Answer 13

A present economic resource controlled by the entity as a result of past events.

Question 14

What is a liability?

Answer 14

Something owed to somebody else - a present obligation of the entity to transfer economic resource as a result of a past event

Question 15

What is capital or equity?

Answer 15

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

Question 16

What does capital take the form of in a limited liability company?

Answer 16

Shares

Question 17

What is shares capital known as?

Answer 17

Equity

Question 18

What is equity?

Answer 18

The residual interest in the assets of the entity after deducting all of its liabilities

Question 19

Statement of financial position is produced as at…

Answer 19

…one particular date

Question 20

What are prepayments?

Answer 20

These are paid for goods and services in advance

Question 21

What is capital?

Answer 21

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.

Question 22

What are drawings?

Answer 22

These are taken out of the business by the owner

Question 23

What is the accounting equation?

Answer 23

Assets = liabliities + capital)

Question 24

What are accruals?

Answer 24

Services that have not yet been paid for

Question 25

What are non-current assets?

Answer 25

Assets held and used by the business over the long term

Question 26

What are current assets?

Answer 26

Assets not held over long term, usually listed in order of liquidity (closeness to cash)

Question 27

What is the essence of the statement of financial position vs statement of profit and loss?

Answer 27

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