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accounting > Unit 3 Key Theory > Flashcards

Unit 3 Key Theory Flashcards

1
Q

Financial Accounting definition

A

The preparation of external accounting reports for external users

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2
Q

Users of financial accounting

A
  • Individuals outside the business entity (organisation) who still use accounting information
    • Shareholders
    • Potential investors in a business
    • Creditors
    • ATO
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3
Q

Regulation for Financial Accounting

A
  • Financial reports must comply with Accounting Standards
  • Financial reports must comply with Corporations Act 2001 and legislation set down by ASIC
  • Listed companies must also follow the ASX listing rules
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4
Q

Examples of Financial Accounting documents

A
  • Balance Sheet
  • Statement of Cash Flows
  • Statement of Profit and Loss
  • Statement of Changes in Equity
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5
Q

Purpose of Financial Accounting

A
  • Documents enable users to make decisions about
    • their allocation of scarce resources
    • financial position, financial performance and the cash flow position of an entity
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6
Q

Management Accounting definition

A

Preparation of internal accounting reports for internal users

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6
Q

Frequency of financial accounting reports

A

Should be produced every accounting period

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7
Q

Users of management accounting

A
  • Individuals inside the business entity (organisation)
    • Business managers
    • Employees
    • Owners
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8
Q

Regulation for Management Accounting

A

No real regulation for documents

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9
Q

3 Examples of Documents produced by management accounting

A
  • Budgets - such as Cash Budgets, Sales Budgets, Purchases Budget
  • Performance reports comparing and assessing actual; results against budgeted results
  • Internal audit reports - providing management with info about compliance with policies and procedures
  • Internal employee valuation report
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10
Q

Purpose of management accounting

A

To help a business plan for the future, evaluate previous performances and evaluate internal policies and conduct of employee

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11
Q

Frequency of reports for management accounting

A

Produced when needed and required by management

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12
Q

5 Roles/Duties of an Accountant in Managing a Business

A
  • Preparation of financial statements - balance sheet
  • Preparation of budgets - cash budget
  • Calculation of the cost of a new product
  • Calculation of the cost of a new product
  • Calculation of the break even point of a product
  • Preparation of the payroll of a business
  • Periodic review of the internal control system of a business
  • Preparation of individual and company income tax returns
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13
Q

What is auditing

A

Defined as the checking of the external accounting reports of a business to ensure that these reports are correct and complete and/or to ensure efficiency of operating systems and policies of a business

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14
Q

What is internal auditing

A

The checking of the operating systems of a business to ensure that they are working properly; usually done by an employee

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15
Q

WHat are 3 purposes of internal auditing

A
  • Review of the efficiency of the internal control system - set of rules which prevent fraud and protects assets of a business
  • Review of efficiency of other systems such as supply chain - steps involved in purchasing and selling of inventory
  • A check that the policies of the business are being followed and that the business is complying with all laws
  • Detection of errors made in the accounting system
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16
Q

What is external auditing

A

The process in which an external auditor conducts an independent review of a business and protects the users of the financial statements prepared by a business

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17
Q

What are 3 purposes of external auditing

A
  • To express an opinion to whether or not financial statements of a public company give a true and fair view of the financial position of the company
  • To express an opinion to whether or not financial statements of a public company comply with the AASB Accounting Standards
  • To give confidence to shareholders and potential investors in public companies that the financial statements of the company accurately reflect the financial performance and health of the company
  • To inform ASIC of any breach of the Corporations Act and of any failure by a reporting entity to comply with the AASB Accounting Standards
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18
Q

What are ethics

A

a set of principles that help people decide what is right or wrong

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19
Q

4 Ethical Dilemmas faced by Business Managers

A
  • Exploitation of employees - may be required to work excessive hours of unpaid overtime
  • Exploitation of overseas workers - a business operating in a 3rd world country may take advantage of employees by paying them very low wages and having poor working conditions
  • Exploitation of investors - shareholders may be exploited if management of a company decides to invest company money into high risk ventures
  • Breaches of confidentiality - manager may be asked to pass on confidential business info to a friend who is working for a competitor
  • Exploitation of foreign consumers - cigarette company selling products in poorly educated countries which have no knowledge of dangers of smoking
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20
Q

What is CSD

A

the process of communicating the social and environmental effects of an organization’s economic actions to stakeholders and society

21
Q

What is CSR and 3 areas it concerns

A

how a company goes about its business operations while ensuring that they have an acceptable impact on the community. This impact concerns multiple areas, such as, effect of the company on the environment, how well it treats its employees and its contribution to society.

22
Q

Nature of CSR

A
  • Under section 674 of the Corporations Act 2001
    • A business has statutory liability for breaches of the listing rules where the information which could affect market prices is not generally available
23
Q

3 Difficulties in preparing CSD reports

A
  • There is little guidance for accountants on what should be included in a CSD report, as a result of a lack of official framework or structure on these reports
  • Many of the items likely to be included in CSD reports may not be able to be accurately measured
  • Accountants may lack the knowledge required to prepare CSD reports
    • For example, CSD reports may include environmental impact by a company through fossil fuel use and pollution which are not the area of expertise of an accountant
24
Q

4 uses/advantages of preparing CSD reports

A
  • Appealing to environmental/social groups - allows environmental and social groups to assess and commend the performance of a company in a CSD report. This is very beneficial as these groups are often very powerful and influential
  • Boosting public relations - All companies want to be seen as good corporate citizens in the public’s eyes, thus, it is important for companies to be showing they are optimistic and sustainable through these CSD reports
  • Financial Benefit - Reporting on positive social and environmental impacts of a company can attract financial benefits through potential investors, employees and customers as they are seen in a “good light” and a catalyst for change; people want to invest in companies which can demonstrate that they act in a socially responsible manner
  • Increased employee morale and performance - CSD reports improve morale as employees are likely to be happy to work for a company with a strong social conscience; this increased employee satisfaction within the company can then result in improved work performance
25
Q

Costs/Disadvantages of having CSR or a company acting responsibly

A
  • The cost of community support projects - sponsoring local teams or donating to charity
  • The cost of producing CSD reports
  • The cost of protecting the environment - purchasing energy saving material
26
Q

Explain why appropriate Level of Investment in Non-Current Assets is essential

A
  • Businesses must have sufficient NCAs to return profits through use in daily operations.
  • However, too large of an investment in non-current assets will mean that a business has assets that are not being used efficiently and can cause liquidity crises
  • Not enough NCAs can limit scope of business opportunities
27
Q

Explain why approporiate management of short term debt is essential

A

Short Term Debt

  • Comes from sources such as short loans, accounts payable and credit cards
  • Should be paid of quickly especially to financial institutions to increase credit score
  • Interest is often high on short term debts so utilization of interest-free periods should be a criteria to avoid excessive costs
  • Short Term Debts are current liabilities (within 12 month period) and should be paid off within a year
28
Q

Explain why approporiate management of long term debt is essential

A
  • Comes from sources such as bank loans and mortgages
  • Payments are often every fortnight or month and should be kept up to date and paid as they come
  • Interest rates are not that high but still must be paid off as it comes
  • Company should make sure long term debt is not excessive as it can lead to long-term financial burden
29
Q

Explain why approporiate management of equity capital is essential

A
  • A healthy capital structure reflects a low level of debt and a large amount of equity is a positive sign of investment capital.
  • Too much equity however can lead to poor dividend return if profits are low
  • Not enough equity capital means debt financing is necessary, increasing gearing and financial costs
30
Q

Explain why approporiate management of accounts recievable is essential

A

Businesses should have a set of rules in place to try ensure that only good customers are sold products on credit and that money owing from debtors is collected efficiently such as:

  • Business may conduct credit checks on new customers before agreeing to sell inventory on credit - reduces chance of bad debts
  • A monthly statement should be sent to all debtors setting out the transactions that have taken place during the month and amount owing at the end of the month - keeps customer and business accountable
  • Overdue debtor accounts should be followed up as soon as payment date is exceeded
31
Q

Explain why approporiate management of cash is essential

A
  • Handling of cash should be separated from the recording of cash transactions - employees cannot steal money and make a false entry into accounting records
  • All cash receipts should be banked daily - minimizes amount of cash which could be stolen off business premises
  • All payments should be approved by a senior employee, and large payments should be approved by two employees - reduces fraud and unauthorized payments
32
Q

Explain why approporiate management of inventory is essential

A
  • Handling of inventory should be separated from the recording of inventory transactions - employees cannot steal inventory and make a false entry into accounting records
  • Inventory should be stored in a secure location, access to inventory should also be restricted - reduces risk of inventory being stolen
  • Inventory records should be maintained using the perpetual inventory system over periodic inventory system - provides information on fast moving items of stock, reduces possibility of business running out of inventory
33
Q

What is comapny insolvency

A
  • Defined as a company not being able to pay its debts as they become due covered by Corporations Act 2001
34
Q

3 Duties of a Company Director in Relation to Insolvency

A
  • Director of a company must be aware, at all times, of the financial health of a company
  • When a company incurs a debt, the director must consider whether the company can repay this debt
  • Director must ensure that the company does not trade when insolvent
35
Q

3 Types of Insolvency

A

Voluntary Administration
Recievership
Liquidation

36
Q

Explain voluntary administration and its advantage

A
  • Directors of a company that is insolvent or heading towards insolvency may appoint an external administrator known as a voluntary administrator
  • A voluntary administrator will assess the health of a company, report to the creditors and recommend if the company should be liquidated or returned to director control
    • Gives company time to work out its future as creditors cannot take action to recover money owing without court or administrator approval
37
Q

Explain Recievership

A
  • A receiver is usually appointed by a secured creditor who has not been paid on time
  • They then will sell secured assets of a company to repay the creditor
38
Q

Explain liquidation and its steps

A

Occurs when an external person is appointed to:

  1. Collect and sell off assets of an insolvent company
  2. Distribute the money to the creditors and the shareholders
  3. Investigate the conduct of the directors and other company officeholders and report anything of concern to ASIC
  4. Close the company
39
Q

Explain the Order of Repayment of Creditors of a Company

A
  • Assets of a company in liquidation are often distributed to stakeholders in the following order:
    1. The fee and costs of the liquidator
    2. Employee entitlements owing - wages, superannuation and annual leave
    3. The secured creditors
    4. The unsecured creditors
    5. Shareholders
40
Q

Explain 2 Short Term Invetment Options

A
  • Cash Management Trusts - where one company manages property for the benefit of one or more other parties
    • A cash management trust manages the money of investors where interest in paid on the money deposited with the trust
  • Term Deposits - money invested with a bank or other financial institutions, for a fixed period of time at a fixed interest rate
41
Q

Explain 3 Long Term Investment Options

A
  • Shares in Companies Listed on the ASX
  • Term Deposits - money invested with a bank or other financial institutions, for a fixed period of time at a fixed interest rate
  • Debentures - loan to a company
    • Has a right to sell the property of the company if loan isn’t repaid on time
  • Unsecured Notes - loan to a company
    • Has a right to sell the property of the company if loan isn’t repaid on time
42
Q

Explain 4 Short Term Sources of Finance

A
  • Bank Overdraft - allows business to withdraw more money from its bank account than has been deposited in the bank account
  • Credit Terms offered by Suppliers - a trading business may be able to negotiate 30 day or more payment terms from a supplier of inventory
  • Factoring of Debtors - where a business sells its accounts receivable to a factoring company to receive immediate cash from the factoring company
  • Commercial Bills - a form of a loan which bill of exchange issued by a bank or by a company for a period of time
43
Q

Explain 4 Long Term Sources of Finance

A
  • Share Capital - Only public companies can raise money by issuing shares to the public
  • Bank Loan - A business can borrow money from the bank for periods of 5 years or more
    • Debentures - loan from a company
      • Has a right to sell the property of the company if loan isn’t repaid on time
  • Unsecured Notes - loan from a company
    • Has a right to sell the property of the company if loan isn’t repaid on time
44
Q

Explain Lease Finance + 2 types

A
  • Lease Finance - An agreement to rent an item (plant or equipment) for a fixed number of months or years
    • Finance Lease: Business has the right to purchase the item at the end of the lease agreement
    • Operation Lease: Business must return item to creditor/financer at end of the lease agreement
45
Q

4 Reasons why its important to business plan

A
  • To reduce costs and risks
  • To achieve goals and objectives
  • To gain a competitive edge
  • To assess performance
46
Q

4 Main Business Strategies

A
  • Cost Leadership
  • Product Differentaiation
  • Strategic Initiatives
  • Performance Management
47
Q

Explain Cost leadership and 3 ways it can be achieved

A
  • A situation in which a business has lower costs than its competitors and is able to sell its products at lower prices than its competitors
  • Can be achieved by:
    • Setting up a chain of large retail shops
    • Buying large volumes of product at low prices
    • Having a management team that is focused on finding other costs
48
Q

Explain Product Differeniation

A

Occurs when a business offers customers a product that has superior benefits to competing products

49
Q

Explain Strategic Initiatives

A

A major plan of a business that, once implemented, is likely to have a significant impact on the future of a business

50
Q

Explain Performance Management

A

The process in which the employees of a business are made aware of the level of performance expected of them, involving the periodic review of their performance

51
Q

Cash Accounting vs Accrual Accounting

A

Cash Accounting

  • A method of profit calculation in which income is recognised as existing when cash is received and an expense is recognised as existing when it is paid

Accrual Accounting

  • Method of profit calculation in which income is recognised as existing when a service has been carried out or when inventory has been sold. A expense is recognised as existing when it is consumed

accounting (13 decks)

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