Week 1 and 2

Question 1

What is accounting?

Answer 1

Recording, classifying, Analysing, and summarizing, Reporting

Question 2

What are the objectives of accounting? (4)

Answer 2

-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.

Question 3

What are the fields of accounting? (2)

Answer 3

-Managerial and cost accounting
-Financial Accounting

Question 4

What does managerial accounting involve? (3)

Answer 4

• 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

Question 5

What does financial accounting involve?

Answer 5

• developing information for
  external decision makers such as:
  i. shareholders,
  ii. Government and its agencies
  iii. Suppliers, customers, and other interested parties.

Question 6

What are the main features of financial accounting information? (3)

Answer 6

-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.

Question 7

what are the limitations of financial accounting information? (5)

Answer 7

-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.

Question 8

Who are the users of financial information? (8)

Answer 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

Question 9

What do financial statements do?

Answer 9

They provide information about the financial activities and position of a firm.

Question 10

what are the Important financial statements? (3)

Answer 10

-Balance Sheet
-Income Statement or Profit and Loss Account
-Cash Flow Statement

Question 11

What does a balance sheet do?

Answer 11

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.

Question 12

What’s the formula for assets?

Answer 12

Assets = Owners’ Equity + Liabilities

Question 13

What are assets?

Answer 13

Assets are economic resources or properties owned by the firm.

Question 14

What are the types of assets? (2)

Answer 14

-Non-current assets (Fixed Assets)
-Current assets

Question 15

What are non-current assets?

Answer 15

These are long-term assets.

Question 16

What are the types of non-current assets? (2)

Answer 16

-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.

Question 17

What are current assets?

Answer 17

-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

Question 18

What are liabilities?

Answer 18

A liability is a firm’s obligation to pay cash or provide goods or services in the future. Two types of liabilities are

Question 19

What are the types of liabilities? (2)

Answer 19

-Current liabilities
-Long-term liabilities

Question 20

What are current liabilities?

Answer 20

-Current liabilities are payable within a year in the normal course of business. They include:
-Accounts payable (creditors)
-Outstanding expenses
-Advance payments from customers

Question 21

What are long-term liabilities?

Answer 21

-Long-term liabilities are payable for a period exceeding one year. They include:
-Borrowings from banks and other
financial institutions etc.
-Debentures/bonds

Question 22

What are Shareholders’ Funds or Equity?

Answer 22

Shareholders’ funds or equity is the sum of share capital plus reserves. Also called net worth.

Question 23

What is share capital?

Answer 23

Share capital is the owners’ contribution divided into shares. A share is a certificate acknowledging the amount of capital contributed by the shareholder.

Question 24

What are reserves?

Answer 24

Reserves, surplus, or retained earnings are undistributed profits.

Question 25

What information does an income statement provide? (3)

Answer 25

-revenues,
-expenses
-resulting profit or loss.

Question 26

What is revenue?

Answer 26

Revenue is the amount received or receivable within the accounting period from the sale of the firm’s goods or services.

Question 27

Where does operating revenue come from?

Answer 27

Operating revenue - arises from main operations of the firm

Question 28

Where does non-operating revenue come from?

Answer 28

non-operating revenue -arises from other activities.

Question 29

What are the types of revenue? (2)

Answer 29

-Operating revenue
-Non-operating revenue

Question 30

What is an expense?

Answer 30

Expense is the amount paid or payable within the accounting period for generating revenue.

Question 31

What are the types of expenditure?

Answer 31

Revenue expenditure which appears in the Income Statement, e.g. salaries and wages, rent, fuel, etc.
Capital expenditure which appears in the balance sheet as assets.

Question 32

What’s the formula for gross profit?

Answer 32

Gross profit = sales – cost of goods sold

Question 33

What’s the formula for net profit?

Answer 33

Net profit = Gross profit – operating expenses

Question 34

What are operating expenses?

Answer 34

Operating expenses = all other expenses except COGS and taxation.

Question 35

Define generally accepted accounting principles.

Answer 35

-These are rules or assumptions that are used to prepare the financial statements.
They help the accounts to be objective and therefore be helpful to the different users with their various needs.

Question 36

Name 8 accounting principles (11).

Answer 36

-Going concern concept
-Consistency concept
-Matching concept
-Prudence concept
-Business entity concept
-Objectivity principle
-Historical Cost concept
-Realization or Revenue Recognition Principle
-Materiality concept
-Substance over Form concept
-Duality concept

Question 37

What does the going Concern concept do?

Answer 37

This allows the financial statements to be prepared on the assumption that the business will continue with its operations into the foreseeable future.

Question 38

What does the consistency concept do?

Answer 38

This allows similar items to be treated in the same manner within the same accounting period and in subsequent periods.

Question 39

What does the Matching/Accruals concept do?

Answer 39

Revenue should be matched with the expenses incurred so as to earn that revenue in the same accounting period.

**Note that under accrual accounting, profits, losses, costs, and expenses are recognized as they are earned or incurred, rather than when cash is received or paid

Question 40

What does the Prudence concept do?

Answer 40

This concept prevents profits or revenues from being anticipated except where there is a high degree of certainty. Provision is made for all costs and losses whether the amount is known for certain or is only the best estimate.

Question 41

What does the Business entity concept do?

Answer 41

This implies that the affairs of the business are treated as being quite separate from the non-business activities of its owner (s). The items and transactions recorded in the books of accounts of a business are therefore restricted to those of the business only.

Question 42

What does the Objectivity principle say?

Answer 42

financial information should be supported by independent and unbiased evidence. This ensures that the financial reports are reliable and contain verifiable information.

Question 43

What does the Historical Cost principle say?

Answer 43

Cost is usually the basis for the valuation of assets. This means the assets are shown at cost price and the current market value of the assets is ignored.

Question 44

What does the Realization or Revenue recognition principle say?

Answer 44

This states that revenue should be recognized when earned. For realization to take place, the following should be observed :
-Goods or services must have passed to
the buyer
-The buyer has accepted liability to pay
for the goods/services
-The monetary value of the goods or
services have been established

**Note that It is not the time when the order is received or the customer pays for the goods that the revenue is recognized but when the goods have been delivered and accepted by the buyer.

Question 45

What are the requirements for the realization or revenue recognition principle? (3)

Answer 45

-Goods or services must have been passed to the buyer
-The buyer has accepted liability to pay
for the goods/services
-The monetary value of the goods or services has been established

**Note that It is not the time when the order is received or the customer pays for the goods that the revenue is recognized but when the goods have been delivered and accepted by the buyer.

Question 46

What does the Materiality principle say?

Answer 46

Financial statements should disclose all items that are material enough to affect decisions - only those items that are of interest to the users of financial statements should appear.

Question 47

What does the Substance over Form principle say?

Answer 47

Transactions and other events should be accounted for and presented in accordance with their substance and financial reality and not merely with their legal form. E.g. An asset bought on hire purchase is recorded in the books (financial reality) even though all the installments are not yet paid for.

Question 48

What does the Dual Aspect concept say?

Answer 48

There are two aspects of accounting. One is represented by the assets of the business while the other by the claims or liabilities against the assets. These two aspects must always equal each other. Double entry refers to the dual aspect.

Question 49

What is the dual aspect concept represented by?

Answer 49

It is represented by the accounting equation which is also referred to as the balance sheet equation. It is shown as:

Assets = Liabilities + Owners Equity (or Capital)

A = L + C

Question 50

What is capital, or owners equity?

Answer 50

The funds invested by the owners of a business.