Week 1

Question 1

What can accounting be defined as?

Answer 1

The process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by by users of that information

Question 2

Accounting began because people needed to:

Answer 2

• Record business transactions
• Know how much they owed others and much others owed them

Question 3

What is financial accounting?

Answer 3

Financial Accounting is the branch of accounting that is concerned with recording business transactions, preparing financial statements that report on how an entity has performed and, reporting on its financial position.

Question 4

What are the objectives of Financial accounting

Answer 4

• Letting people and entities know:
  
  • if they are making a profit or loss
  • what an entity is worth
  • What a transaction was worth to them
  • how much cash they have
  • How wealthy they are
  • how much they are owed
  • how much they owe
  • enough information so that they can keep financial check on activities

Question 5

What is the primary objective of financial accounting?

Answer 5

To provide information for decision making. The information is primarily financial, but it can include data on volumes, for instance the number of cars sold in a month by a car dealership

Question 6

What is book-keeping?

Answer 6

Until about 100 years ago, records of all accounting data was kept manually in books, this is why the part of accounting that is concerned with recording data is often known as book keeping
Nowadays it is stored electronically

Question 7

Possible users of Financial Accounting information?

Answer 7

• Managers: day-to-day decision makers
• Owner(s) of the business: They want to be able to see whether or not the business is profitable
• A prospective buyer: When the owner wants to sell a business, the buyer will want to see such information
• The bank: If the owner wants to borrow money for use in the business, then the bank will need such information
• A prospective partner
• Investors
• Creditors

Question 8

What is the accounting equation?

Answer 8

• By adding up what the accounting records say belongs to a business and deducting what they say the business owes, you can identify what a business is worth according to those accounting records. This is known as the accounting equation

Question 9

What is the link between assets and capital?

Answer 9

• The amount of the resources supplied by the owner is called capital.
• The actual resources that are then in the business are called assets
• This means that when the owner has supplied all of the resources, the accounting equation can be shown as: CAPITAL = ASSETS

Question 10

What about liabilities?

Answer 10

• Usually, however, people other than the owner have supplied some of the assets.
• Liabilities is the name given to the amounts owing to these people for these assets
• The accounting equation has now changed to: CAPITAL = ASSETS - LIABILITIES

Question 11

What do assets consist of?

Answer 11

• Property of all kinds, such as buildings, machinery, inventories of goods and motor vehicles
• Other assets include debts owed by customers and the amount of money in the business’ bank account

Question 12

What do liabilities consist of?

Answer 12

• Liabilities include amounts owed by the business for goods and services supplied to it and for expenses incurred by it that have not yet been paid for
• They also include funds borrowed by the business

Question 13

What is capital?

Answer 13

• Capital is often called the owner’s equity or net worth
• It comprises the funds invested in the business by the owner plus any profits retained for use in the business less any share of profits paid out of the business to the owner

Question 14

What is the balance sheet?

Answer 14

• The accounting equation is expressed in a financial report called the balance sheet
• ## It is also known as the statement of financial position

Question 15

The introduction of capital in the balance sheet?

Answer 15

On May 1 2024, B.Blake started in business and deposited £60,000 into a bank account opened specially for the business.
- The balance sheet would show:
Assets: Cash at bank. £60,000
Capital £60,000

• Assets always come above capital in a balance sheet

Question 16

Purchase of an asset in the balance sheet?

Answer 16

On May 3 2024, Blake buys a kiosk for £32,000 and pays for it through the business bank account:
Balance sheet as of 3 May 2024
Assets £
Shop 32,000
Cash at bank. 28,000
=60,000
Capital 60,000

• The two parts of the balance sheet ‘balance’.

Question 17

The purchase of an asset and the incurring of a liability

Answer 17

• On May 6 2024, Blake buys some goods on time for £7,000 from D.Smith. ‘On time’ means that Blake has not yet paid for them but will do so at some time in the future.
• The effect of this is that a new asset, inventory is acquired, and a liability for the goods is created

Question 18

What are creditors and what is a trade payable?

Answer 18

• A person to whom money is owed for goods is known as a creditor, and is described in the balance sheet as a trade payable
  Balance sheet as of May 6 2024:
  Assets £
  Shop 32,000
  Inventory 7,000
  Cash at bank 28,000
  =67,000
  Trade payables. (7,000)
  =60,000
  Capital 60,000

Question 19

Sale of an asset on time

Answer 19

• On 10 May 2024, goods that cost £600 were sold on time to J.Brown for the same amount
• The effect is a reduction in the amount of goods held, i.e inventory

Question 20

What is a debtor and what is a trade receivable?

Answer 20

• A person who owes the business money is a debtor, and is described in the balance sheet as a trade receivable
• Balance sheet as of 10 May 2024:
  Assets £
  Shop 32,000
  Inventory 6,400
  Trade Receivables 600
  Cash at bank 28,000
  =67,000
  Trade payables (7,000)
  =60,000
  Capital 60,000

Question 21

Sale of an asset for immediate payment?

Answer 21

• On 13 May 2024, goods that cost £400 were sold to D.Daley for the same amount. Daley paid for them immediately by debit card.
• Here, one asset, inventory is reduced, while another asset, cash at bank, is increased
  Balance sheet as of 13 May 2024
  Assets £
  Shop 32,000
  Inventory 6,000
  Trade receivables 600
  Cash at Bank. 28,400
  =67,000
  Trade Payables (7,000)
  60,000
  Capital 60,000

Question 22

The payment of a liability

Answer 22

On 15 May 2024, Blake pays D.Smith with £3,000 by internet transfer in part payment of the amount owing
- Balance sheet as of 15 May 2024:
Assets £
Shop 32,000
Inventory 6,000
Trade receivables 600
Cash at bank 25,400
= 64,000
Trade payables (4,000)
= 60,000
Capital 60,000

Question 23

Collection of an asset

Answer 23

• J.Brown how owed Blake £600 makes a part payment of £200 by cheque on 31 May 2024
• The effect is to reduce one asset, trade receivables and to increase another asset, cash at bank
• Balance sheet as of 31 May 2024:
  Assets £
  Shop 32,000
  Inventory 6,000
  Trade receivables. 400
  Cash at bank 25,600
  =64,000
  Trade payables 4,000
  = 60,000
  Capital 60,000

Question 24

What are non current assets?

Answer 24

• Assets which have a long life bought with the intention to use them in the business and not with the intention to simply resell them
• <1 year
• e.g fixed assets (land, machinery, equipment)
• e.g intangible assets (intellectual property and goodwill)

Question 25

What are current assets?

Answer 25

• Assets consisting of cash, goods for resale or items having a short life
• > 1 year
• For example, the amount of inventory goes up and down as it is bought and sold.

Question 26

What are current liabilities?

Answer 26

• Those liabilities which have to be paid within no more than a year from the date on the balance sheet
• e.g Interest payable
• Wages payable
• Customer prepayments
• Dividends payable
• Accounts payable

Question 27

What are non-current liabilities?

Answer 27

• Debts a business owes, but isn’t due to payment for at least 12 months
• Long term liabilities
• e.g Long term debt
• Pension fund liability
• deferred tax liability

Question 28

How are assets listed within the balance sheet?

Answer 28

• They are listed from top to bottom in order of their liquidity
• Current assets are obviously more liquid (>1year) and non-current assets are less (<1year)

Question 29

General order of accounts with current assets?

Answer 29

• Cash and Cash Equivalents
• Marketable securities
• Accounts receivable
• Inventory
• Prepaid expenses

Question 30

Importance of a balance sheet

Answer 30

• Help determine risk
• Used to secure capital: a company must provide a balance sheet to a lender in order to secure a business loan
• Managers can opt to use financial ratios to measure the liquidity, profitability, solvency, and cadence (turnover) of a company using financial ratios, and some financial ratios need numbers taken from the balance sheet
• Lure and retain talent

Question 31

Limitations of a balance sheet

Answer 31

• a balance alone may not paint the full picture of a company’s financial health.
• ## A balance sheet is limited due its narrow scope of timing. The financial statement only captures the financial position of a company on a specific day.