Week 1

Question 1

The nature of accounting and its main functions

Answer 1

Accounting is the ‘language of business’.

Accounting is an information system
Designed to communicate financial information
To interested users
For making economic decisions

Financial statements:
Are the outcome of the accounting process
Are a primary information source for users
Are useful for many decisions

Question 2

The evolution of accounting to meet organisational and society needs

Answer 2

Accounting evolves as society and business changes.
Some of these changes include

Rapid developments in information and communication technologies
Increasing demand for a range of information about organisational impact( financial and non –financial)
Globalisation of business
Development of international regulations and standards

Question 3

Accounting fulfils two distinct roles

Answer 3

1. Stewardship role (discharge accountability)
2. Decision-usefulness role

Traditionally, accounting focused more on providing stewardship.

More recently, accounting seems to be focused more on decision-usefulness role

Question 4

4 Steps of accounting

Answer 4

Identification - (Internal/external)

Measurement - Quantification in monetary terms ($)

Recording - Recording; classification; summarisation

Communication - Accounting reports, Analysis and interpretation

Question 5

5 Accounting assumptions

Answer 5

Economic entity
Going concern
Time period
Accrual basis assumption 
Monetary unit

Question 6

Economic entity

Answer 6

: financial activities of a business can be separated from those of the business’ owner(s) and other entities

Question 7

Going concern

Answer 7

: financial activities of a business can be separated from those of the business’ owner(s).

Question 8

Time period

Answer 8

economic information can be meaningfully captured and communicated over short periods of time.

Question 9

Accrual basis assumption

Answer 9

The effects of transactions are recognised when they occur, not when the cash is received/paid

Question 10

Monetary unit

Answer 10

accountants assume that the dollar is the most effective means to communicate economic activity.

Question 11

Fundamental quantitative characteristics

Answer 11

Relevance

Faithful representation

Question 12

Relevance

Answer 12

the capacity of accounting information to make a difference in decisions
Can influence economic decisions by users
Have a predictive role and confirmative or feedback role

Question 13

Faithful Representation

Answer 13

Information presented faithfully- without bias(Neutral), free from error and complete

Question 14

The purpose of accounting

Answer 14

The purpose of accounting is to identify, measure and communicate economic information about a particular entity to interested users.

Question 15

Enhancing qualitative characteristics

Answer 15

Comparability
Verifiability
Understandability
Timeliness

Question 16

Comparability

Answer 16

The ability to use accounting information to compare or contrast the financial activities of different companies.

Question 17

Verifiability

Answer 17

Different, independent observers can reach consensus that information faithfully represents what it claims to

Question 18

Understandability

Answer 18

The ability of accounting information to be understandable to those who have a reasonable understanding of business

Question 19

Timeliness

Answer 19

Information is provided in a timely manner as it is more likely to influence decision-making

Question 20

The income statement

Answer 20

One of the first questions asked of any business is whether it makes money. Stated differently in ‘accounting’ words, is the business profitable? Does it generate more resources than it uses?
Accounting provides answers to these questions with a financial statement called an income statement. An income statement reports a company’s revenues and expenses. Reports financial performance over a specific time period

Question 21

The balance sheet

Answer 21

Reports financial position of an entity at a specific point in time
Shows assets, liabilities and equity of the entity
Represents the accounting equation
Assets = Liabilities + Equity
The balance sheet is also known as the statement of financial position

Question 22

The Cash Flow Statement

Answer 22

The income statement reports in income earned and expenses incurred – NOT on cash flows
A statement of cash flows is therefore necessary to report on the cash inflows and outflows of the entity
This allows users to assess the sources and applications of cash
Also the ability of the entity to remain solvent

Question 23

The statement of changes in equity

Answer 23

A statement of changes in equity shows the change in a company’s equity, particularly in retained earnings over a specific period of time. Owners of a business are usually interested in how their equity is growing as a result of profitable operations. They are also interested in how that equity is distributed in the form of dividends. Such information is reported on the statement of changes in equity. A statement of changes in equity shows the change in a company’s retained earnings over a specific period of time.

Question 24

Basic structure of the statement of changes in equity:

Answer 24

Retained earnings, beginning balance
+/– Net income/Loss (profit or loss)
– Dividends
= Retained earnings, ending balance

Question 25

Statement of changes in equity example

Answer 25

Photo in favourites on phone 23/7/18

Question 26

Generally Accepted Accounting Principles

Answer 26

Generally Accepted Accounting Principles (GAAP) are the accounting standards, rules, principles and procedures that comprise authoritative practice for financial accounting.
In Australia we follow the International Financial Reporting Standards (IFRS), with some modification. The Australian Accounting Standards are developed by the Australian Accounting Standards Board.

Question 27

Types of transactions

Answer 27

External
Internal
Non-Transactional events

Question 28

External

Answer 28

Involve an outside party
Exchange of economic resources and/or obligations
Sale of inventory, Purchase of supplies

Question 29

Internal

Answer 29

Transformation of economic resources

Use of office supplies

Question 30

Non-Transactional events

Answer 30

Not usually recorded, but may be in the future

Receiving an order from a customer

Question 31

Not usually recorded, but may be in the future

Receiving an order from a customer

Answer 31

Assets = Liabilities + Equity
Transactions result in changes in assets, liabilities and owners equity
Every accounting transaction must affect at least two accounts. This requirement is known as the dual nature of accounting.
After each transaction is recorded the accounting equation must remain balance

Question 32

Cost principle

Answer 32

. We record items at historical cost. This saves the subjective opinion of what they are ‘worth’. It may also include conservatism in not anticipating profits.

Question 33

Matching principle

Answer 33

We record revenue when earned and match it to the period in which it was earned

Question 34

Time period assumption

Answer 34

An entity cannot randomly change its time period. This also violates ‘consistency.’ An entity should use the same accounting methods year to year and disclose when they change methods.

Question 35

Revenue recognition principle

Answer 35

Revenue should be recorded in the period during which it is earned.

Question 36

Example of violation of the revenue recognition principle

Answer 36

The revenue recognition principle has been violated. A receivable and the increase in shareholder’s equity cannot be recorded until the service has been provided and the revenue is earned.

Question 37

Retained earnings end calculation

Answer 37

Retained earnings beginning + Profits – Dividends = Retained earnings end

Question 38

Classify bonds payable

Answer 38

Non current liability