topic1 the framework of accounting

Question 1

financial accounting definition

Answer 1

-external reporting for companies
-converts business activities to a common language
-IASB(international accounting standards board) does conceptual framework for financial reporting
-principle based NOT rules
-acts as a key so can compare companies making decisions

Question 2

reasons for financial accounting

Answer 2

-put figures into context
-help make sense of figures
-make decisions(investors, lenders, government)

Question 3

objectives of financial accounting

Answer 3

-provide info about the reporting entity useful to investor
-provide info about effects of transactions

Question 4

transactions can be categorised into 2 key statements what are these?

Answer 4

-statement about financial performance(statement of profit or loss, what has happened over the accounting period: may also be referred to as income statement)
-statement about financial position(what does the company OWN and OWE: assets and liabilities, may be referred to as balance sheet)

Question 5

define assets

Answer 5

-present economic resource(produce economic benefits) controlled by the entity as a result of past events
-non current assets(used more than once e.g. property)
-current assets(within 12 months e.g. bank, cash)

Question 6

define liability

Answer 6

-present obligation of the entity to transfer an economic resource as a result of past events
-non current liabilities(settled in more than 12 months e.g. loans)
-current liabilities(settled within 12 months e.g. tax payables)

Question 7

define equity/capital

Answer 7

-equity is the residual interest in the assets of the entity after deducting all its liabilities
-equity=net assets
-represents residual worth of business
-unincorporated business=capital
-limited company=equity

Question 8

define income

Answer 8

-increases in assets/decreases in liabilities resulting in increase in equity

Question 9

define expenses

Answer 9

-decreases in assets, or increases in liabilities this results in decreases in equity
-drawings are not an expense

Question 10

accruals

Answer 10

-reflect transactions when they occur
-matching of income

Question 11

going concern

Answer 11

presume company will continue for foreseeable future at least 12 months

Question 12

separate entity concept

Answer 12

business is separate from owners

Question 13

historical cost

Answer 13

assets being shown in financial statements at original price paid

Question 14

IASB conceptual framework splits qualitative characteristics into 2 categories what are these?

Answer 14

-fundamental qualitative characteristics
-enhancing qualitative characteristics
USED WHEN PREPARING FINANCIAL ACCOUNTS

Question 15

fundamental qualitative characteristics

Answer 15

-relevance: materiality(threshold of significance relevant to the organisation)
-faithful representation: reliability, true and fair picture; substance over legal form, completeness; all relevant info included, neutrality; free from bias exercising prudence, free from error; accurate

Question 16

enhancing qualitative characteristics

Answer 16

-comparability: apply consistency
-verifiability: able to evidence/prove values or estimates
-timeliness: prompt and up to date in time to influence decisions
-understandability: must be understood to be of any use