Users of Accounts

Question 1

There are different groups of people who will want to find out about how well a business is performing and to do so they may look at the financial statements (the accounts) of the business

Name the 5 main interested parties and their reasons for interest

Answer 1

1) owners/shareholders

To work out their level of return they are receiving on their investments so they can identify whether it should be kept or sold

2) suppliers

To work out if they are likely to be paid if they offer credit to a company

3) Banks

To identify whether a company is a good credit risk for agreeing a loan request

4) staff

To look at the security of their jobs and whether they are likely to receive a bonus based on the success of the company

5) customers

To check that the company is likely to still be training in a year or two when the customer wants to buy further supplies

Question 2

What are the general aims of the accounting system of a business?

Answer 2

To identify how well the business has performed in the period. This means establishing what they have sold and the costs they have incurred and so the profit (or loss) that they have earned

To identify things the business owns (such as machinery or vehicles) and the things the business owes (such as bank loans and unpaid tax)

To help understand what has happened to the cash flow of the business. Many profitable businesses go bankrupt because they do not generate enough cash flow to pay their bills when they are due.

To communicate these things to users of the accounts in a clear manner as is possible

Question 3

What is the definition of an asset?

Answer 3

An asset is something that is owed by the business this would include property, vehicles, computers, stock or goods for resale, cash at the bank and amounts owed to the business by customers

Question 4

What is the definition of a fixed ( or non-current) assets?

Answer 4

A fixed asset is an asset which will be own for more than one year, for example the business delivery van that maybe own for a number of years

Question 5

What is the definition of a current asset?

Answer 5

A current assets will be owned for less than one year, for example some books in the storeroom of a bookshop for selling to customers in the next few weeks

Question 6

What is the definition of liability?

Answer 6

Liability is something that is Owed by the business to someone else. This would include bank loans, overdraft, amounts owed to suppliers for goods and unpaid tax (such as VAT)

Question 7

What is the definition of income?

Answer 7

Income include sales made by the business to their customers. This can be for the sale of physical products (such as car manufacturer selling a car) or for a provision of services (such as an airline taken a passenger to Spain) sales also referred to as revenue, income or turnover

Question 8

What is the definition of an expense?

Answer 8

And expense is a cost incurred by the business such as purchase of goods, salaries or rent

Question 9

What is the definition of a debtors / Trade receivables?

Answer 9

A debtor is someone who owes the business money, such as a credit customer

Question 10

What is the definition of a creditor/trade payables?

Answer 10

A creditor is someone the business owes money to such as a credit supplier

Question 11

Use the following words to identify classification of the below

Asset, liability, expense, income

1) rent paid this month
2) Computer equipment for the office
3) customer outstanding balance owed to the shop
4) electricity bill for a three month period
5) 1500 units of stock in the warehouse
6) loan from the bank
7) £100 in the business bank account
8) purchase of 100 envelopes for the post room

Answer 11

1) Expense
2) Asset
3) Assets
4) expense
5) assets
6) liability
7) asset
8) expense

Question 12

What is the definition of expenditure?

Answer 12

Expenditure is money going out of the business bracket you are paying an amount to someone else) there are two types of expenditure Capital expenditure and revenue expenditure

Question 13

What is the definition of capital expenditure?

Answer 13

Capital expenditure is when you are spending money to acquire an asset that will be own for several years for example buying a machine for the factory

Question 14

What is the definition of revenue expenditure?

Answer 14

Revenue expenditure is where you are spending money in a way that will only affect the business in short-term for example paying salaries for a month

Question 15

What is the definition of income?

Answer 15

Income is money coming into the business for example being paid money by someone else there are two types of income capital income and revenue income

Question 16

What is the definition of capital income?

Answer 16

Capital income is where you are generating income by selling an item that was treated as capital expenditure when it was purchased for example when disposing of an old machine from the factory

Question 17

What is the definition of revenue income?

Answer 17

Revenue income covers the majority of day-to-day sales of a business whether sold on cash or credit terms for example bookshop selling books

Question 18

Use the following words to identify classification of the below

Capital expenditure, revenue expenditure, capital income, revenue income

1) Receipts from credit customers
2) recipes from cash sales
3) Receipts from owner
4) Receipts from sale of a motor-vehicle
5) Purchase of a delivery van
6) Purchase of goods for resale to customers
7) purchase of postage stamps using petty cash

Answer 18

1) Revenue income
2) Revenue income
3) Capital income
4) Capital income
5) Capital expenditure
6) Revenue expenditure
7) revenue expenditure