Week 1 Flashcards
What is the difference between internal and external management?
Internal users: Managers who run the business, they have access to more info such as internal budgets
External users:
- People who provide resources: investors, lenders, creditors, employees
- recipients of goods and services: customers
- Parties performing a review: regulatory agencies, media, government
What is the use of a general purpose financial report?
They are developed to meet the financial needs of a wide range of users (internal). Doesn’t depict value of entity but can be used to estimate value.
AASB developed accounting standards and the conceptual framework (defines elements of financial report)
What are the qualitative characteristics?
- Relevance: information that is capable of making a change in decision making
- Faithful representation: objective, complete and free from error
- Materiality: If some thing is left out it is capable of changing decision making
- Comparability: with other years
- Verifiability: can these reports be proved
What is the objective of AASB 101?
The objective of this is it requires the general purpose report to contain:
- statement of financial position
- statement of profit and loss and other incomprehensive income
- statement of changes in equity
- statement of cash flows
- Notes (separation of current and non-current)
What is differential reporting?
This is the concept whereby generally larger entities have to prepare financial reports according to standards, whereas others do not have to adhere to standards
- This is done as larger companies usually have an unlimited amount of actual/potential stakeholders and thus the only way to solve the information asymmetry b/w managers and the public is through reports
What is the difference between a reporting entity and a disclosing entity?
A reporting entity is one that is required or chooses a GPFR
A disclosing entity is one that must comply with strict accounting standards and must produce reports every half and full years.
What kinds of liability responsibility does a public company have?
A public company has limited liability i.e. protected from loss of capital. Example: if a company offers $2 shares and the investor pays $2 for it then if the company goes bankrupt they wouldn’t have to pay anything back. However, if they only pay $1 and the company goes bankrupt, then they need to pay $1 back for the company.
A public company has more reporting to do than a proprietary company
What three conditions can a proprietary company be?
- can be small or large
- cannot raise funds from public
- usually 1 or 2 shareholders
Define financing activities, operating activities and investing activities
Financing activity: Business must take money to make money. They get funds from borrowing money from lenders or selling shares to investors. Share capital is the total amount paid by shareholders for shares
Operating activities: Revenue or sales and other increases in equity that arise form the ordinary activity of the business. Expenses are the cost of assets consumed or services used in the process of generating revenue.
Investing activities: involves purchasing resources (assets) an entity needs in order to operate e.g. computer, trucks. Many of the entity’s assets are produced through investing. However, other are produced through operating e.g. accounts receivable.
What are the characteristics of an asset?
- it is a present economic resource that occurred as a result of a past transaction/event
- economic resource has a right to obtain potential economic benefits
others cannot take advantage of this you obtain it
What is the definition for a liability?
A liability is a present obligation to transfer of economic resources as a result of a past event
What is the definition of equity?
The difference between assets and liability
What is the equation for assets?
Assets= Liabilities + Equity
What subheadings does equity consist of?
`Share capital: original share holding
retained earnings: excess of revenue and expenses
reserves
Where does the debit and credit transactions go on a T-account (the increase or decrease in liabilities, assets or equity ?
Debit goes on the left hand ide of the T-account
Credit- right hand side of account
