Week 1 and 2 Flashcards
What is accounting?
Recording, classifying, Analysing, and summarizing, Reporting
What are the objectives of accounting? (4)
-Ascertain profits - proper records enable accurate calculation of profits.
-Ascertain value of assets and liabilities.
-Provide financial information about a business to the users.
-Maintain proper financial control of the business.
What are the fields of accounting? (2)
-Managerial and cost accounting
-Financial Accounting
What does managerial accounting involve? (3)
- information for decision-making for the day-to-day running of the business.
- information to help managers make future decisions
- performance evaluations, forecasts, and projections
What does financial accounting involve?
- developing information for
external decision makers such as:
i. shareholders,
ii. Government and its agencies
iii. Suppliers, customers, and other interested parties.
What are the main features of financial accounting information? (3)
-Is usually given at annual intervals and is summarized unlike in management accounting.
-There is a legal obligation to produce financial accounting information.
-The information is usually historical in nature as it is a review of the past performance.
what are the limitations of financial accounting information? (5)
-Financial statement information is usually in quantitative terms. Nonquantified information is ignored.
-It is historical whereas many users prefer forecasts to assist in decision making.
-Preparation of financial statements involves judgment and can be subjective. This may be unreliable.
-Financial statements are historical and ignore current values.
-The monetary unit keeps on changing its value but this is not reflected in the
financial statements.
Who are the users of financial information? (8)
Internal users;
- Managers and other employees
External users:
- Shareholders – existing and potential
- Government and its agencies
- Suppliers and other trade creditors
- Customers
-Competitors
- Financial analysts and stock brokers
- The public
What do financial statements do?
They provide information about the financial activities and position of a firm.
what are the Important financial statements? (3)
-Balance Sheet
-Income Statement or Profit and Loss Account
-Cash Flow Statement
What does a balance sheet do?
A balance sheet indicates the financial position of a firm at a specific point in time. It contains information about the firm’s assets, liabilities and equity.
What’s the formula for assets?
Assets = Owners’ Equity + Liabilities
What are assets?
Assets are economic resources or properties owned by the firm.
What are the types of assets? (2)
-Non-current assets (Fixed Assets)
-Current assets
What are non-current assets?
These are long-term assets.
What are the types of non-current assets? (2)
-Tangible non-current assets are physical assets like land, buildings, plants, and machinery. These are recorded at acquisition costs and are depreciated.
-Intangible non-current assets are the firm’s rights and claims, such as goodwill, patents, copyrights, etc.
What are current assets?
-These are those that can be converted into cash within a year in the normal course of business. They include:
-Cash and bank balances
-Accounts receivable
-Inventory
-Prepayments
What are liabilities?
A liability is a firm’s obligation to pay cash or provide goods or services in the future. Two types of liabilities are
What are the types of liabilities? (2)
-Current liabilities
-Long-term liabilities
What are current liabilities?
-Current liabilities are payable within a year in the normal course of business. They include:
-Accounts payable (creditors)
-Outstanding expenses
-Advance payments from customers
What are long-term liabilities?
-Long-term liabilities are payable for a period exceeding one year. They include:
-Borrowings from banks and other
financial institutions etc.
-Debentures/bonds
What are Shareholders’ Funds or Equity?
Shareholders’ funds or equity is the sum of share capital plus reserves. Also called net worth.
What is share capital?
Share capital is the owners’ contribution divided into shares. A share is a certificate acknowledging the amount of capital contributed by the shareholder.
What are reserves?
Reserves, surplus, or retained earnings are undistributed profits.