Week 1 - Intoduction to Module

Question 1

Define Accounting

Answer 1

Often called the ‘language of business’

The process of identifying (select relevant economic transactions), analysing, recording (bookkeeping & summarising info) and communicating (preparing financial statements) economic transactions (reliable and relevant financial information)
Reliable and relevant information put together so users (e.g. shareholders and managers) can make an informed decision (accountants may also help users interpret the info)

Question 2

How has the modern accountants role changed from the role of a typical accountant?

Answer 2

Modern day accountants need to make decisions alongside the typical role of bookkeeping

Question 3

What are the 2 types of accounting?

Answer 3

1) Managerial/Management Accounting
2) Financial Accounting

Question 4

What is Management/Managerial Accounting?

Answer 4

For internal users
Information for decision making and control of an organisation’s operations

Question 5

What is Financial Accounting?

Answer 5

For external users
Published financial statements and other financial reports- uploaded to companies house

Question 6

State in more detail the difference between financial and management accounting

Answer 6

Financial accounting:
- focus is mainly external
- reports have a general purpose
- reports give broad overview
- have to adhere to accounting standards and other regulations
- reports published either once or twice a year
- reports mainly look at past
- information mainly include quantitative data (money)- focus on objective and verifiable data

Management accounting:
- focus is mainly internal
- reports have a specific purpose
- reports are quite detailed
- don’t have to adhere to accounting standards and other regulations- no restrictions
- reports are written up whenever they are required
- reports look at both past and future
- information also contains non-financial info with less focus on objective and verifiable data

Question 7

Who uses management accounting data and give examples of how they might use it?

Answer 7

Internal users of an organisation:
1) Marketing Department- e.g. to know at what value to price goods at so that it maximises the organisations income whilst also not deterring customers
2) Finance Department- e.g. to know if the organisation has enough cash to pay dividends to shareholders- profit figures etc
3) Human Resources Department (HR)- e.g. to know whether the organisation can afford to give pay raises this year
4) Management Department- e.g. to know which product lines are most profitable and if any should be eliminated

Question 8

Who uses financial accounting data?

Answer 8

External users:
1) Investors- to have the necessary information (profit, income etc) to determine whether to invest in a company and which company to invest into (which of the competitors in the industry)- to determine the leading organisation in the industry etc
2) Creditors (lender)- to see if organisations will be able to pay their debts as they are due- investors will also pay attention to this info as they won’t invest in a company who is on the verge of bankruptcy if they cannot pay their debts

Question 9

What did the accounting profession develop and what was its purpose?

Answer 9

The accounting profession developed a conceptual framework to help bring consistency to accounting concepts and practices

It also helped:
1) to determine the users of financial statements
2) the information needs of these users
3) the type of financial statements which would best satisfy their needs
4) the characteristics of these financial statements to help meet those needs

Question 10

What are the 2 main accounting standards boards?

Answer 10

1) International Accounting Standards Board (IASB)
2) Financial Accounting Standards Board (FASB)

Question 11

How many main elements are there in accounting?

Answer 11

5

Question 12

List the main elements in accounting

Answer 12

1) Assets
2) Liabilities
3) Equity
4) Income
5) Expenses

Question 13

What is an Asset?

Answer 13

A resource controlled by the entity (organisation, individual etc) from which future economic benefits (money via rent, appreciation of asset value etc) are expected to flow to the entity (organisation, individual etc)
Value of Asset = Liabilities (loans etc) + Equity (money which is yours)

Question 14

What is a Liability?

Answer 14

Entity’s (organisation, individual etc) obligation to transfer economic benefits (money etc) as a result of past events (loans taken out from bank … debt etc)
Liability (loans etc) = Value of Assets – Equity (money which is yours)

Question 15

What is Equity?

Answer 15

The amount remaining after liabilities (bank loans etc) are taken away from the total value of assets- think to dads example of when he took the equity out of one property and put it into another- he calculated the total value of the asset (house) and took away the loan he owed the bank which left him with the money that was his (equity)
Assets – Liabilities = Equity

Question 16

What is Income?

Answer 16

Increase in equity (assets minus liabilities)

Question 17

What are Expenses?

Answer 17

Decrease in equity (assets minus liabilities)

Question 18

How many accounting concepts/rules/conventions are there?

Answer 18

6

Question 19

List the accounting concepts/rules/conventions

Answer 19

1) Business entity
2) Historical cost
3) Going concern
4) Accruals
5) Consistency
6) Materiality

Question 20

What is a Business Entity?

Answer 20

The assumption that the business is separate from it’s owner/owners- treated as 2 separate parties

Question 21

What is Historical Cost?

Answer 21

When transactions are recorded at the cost when they occurred- e.g. assets are recorded at the price they were purchased not at the current value

Question 22

What is Going Concern?

Answer 22

The entity (business/organisation/company etc) will continue operation for the foreseeable future- will be able to meet financial obligations (loans etc) when they become due- won’t become bankrupt for the foreseeable future

Question 23

What are Accruals?

Answer 23

When revenue and costs are recognised as they earned or incurred and not as money is received or paid- means that when revenues/costs earned/incurred, it is recorded in the accounts

Question 24

What is Consistency in terms of accounting?

Answer 24

Presentation and classification of items in financial statements should stay the same (follow the same accounting methods, procedures etc) from 1 accounting period to the next
Allows readers of the financial statements to make meaningful comparisons between years

Question 25

What is Materiality in terms of accounting?

Answer 25

Materiality refers to the impact of an omission (exclusion) or misstatement (error) of information in a company’s financial statements on the users of those statements

If it is probable that users of the financial statements would have altered their actions if the information had not been omitted (left out) or misstated, then the item is considered to be material

If users would not have altered their actions, then the omission or misstatement is said to be immaterial

Question 26

How many components are there of financial statements?

Answer 26

5

Question 27

What are the components of financial statements?

Answer 27

1) Statement of financial position (balance sheet)
2) Statement of profit and loss (income statement) and other comprehensive income (gains and losses on assets that are not reflected in the income statement)
3) Statement of changes in equity
4) Statement of cash flows
5) Accounting policies and explanatory notes

Question 28

What is the purpose of financial statements?

Answer 28

To provide info about financial position, financial performance and cash flows of an entity (organisation etc) that is useful to a wide range of users when making economic decisions

Financial statements also allow comparisons to be made with the entity’s performance in previous accounting periods (by looking at past financial statements) and also the performance of other entities (by looking at their financial statements)

Question 29

What is the IFRS?

Answer 29

International Financial Reporting Standards (IFRS)

Question 30

What characteristics does the IFRS identify of useful financial information (statements etc)?

Answer 30

2 Qualitative Characteristics:
1) Fundamental Qualitative Characteristics
2) Enhancing Qualitative Characteristics

Question 31

How many main types of profit making business entities are there?

Answer 31

3

Question 32

What are the main types of profit making business entities?

Answer 32

1) Proprietorship/sole trader
2) Partnership
3) Corporation/Limited Company

Question 33

Provide details about the fundamental qualitative characteristics of financial information/statements

Answer 33

Fundamental Qualitative Characteristics- required for info to be useful
- includes relevance (info is relevant if it influences stakeholder/user decisions)- info should help predict future events (e.g. next years profit) and confirm past events (e.g. last years profit) which can help to distinguish how accurate past predictions were with actual profit takings allowing to more accurately predict future figures
- includes faithful representation (financial statements must capture the overall substance of economic activity of the entity- e.g. if goods are provided to a retailer by a manufacturer and then the same goods are subsequently returned, then no sale of goods should be recorded as they were
returned shortly after
- info should also be complete, neutral- free from bias and free from error- estimates must be properly prepared despite not being 100% accurate)

Question 34

Provide details about the enhancing qualitative characteristics of financial information/statements

Answer 34

NOTE- the following 4 qualities cannot make accounting info useful BUT can only enhance usefulness of info which is already relevant, faithfully represented, accurate and free from bias
Enhancing Qualitative Characteristics- enhances usefulness of accounting info
- includes comparability (info is better if it is readily comparable with the entity’s own financial statements/info of previous periods and comparable with financial info/statements of other entities) e.g. figures such as profit, level of sales etc
- includes verifiability-(independent and knowledgeable experts should be able to reach agreement that info is faithful and they find similar results when measuring an item)
- includes understandability (accounting info prepared for and easy to understand by stakeholders (assumed user has reasonable accounting knowledge and willing to invest time to study reports) BUT some info too complex to be presented in easily digestible form BUT this info should still be included)- info should be as clear and concise as possible
- includes timeliness (financial info/statements should not be out of date but of recent or present economic activity to allow users to make informed decisions)- should be available in time to users to make decisions- lack of timeliness = less usefulness

Question 35

What is a Proprietorship/Sole trader?

Answer 35

• generally owned by 1 person
• usually small service type business e.g. newsagent
• unlimited liability (owner receives any profits, suffers any losses and is personally liable for all debts)- no separation between owner and entity (legally owner and business treated as one and the same)

Question 36

What is a General Partnership?

Answer 36

• owned by 2 or more people- partnership agreement
• usually retail and service type business
• unlimited personal liability (owners/shareholders share responsibility for debts in the case that a business fails or to settle any legal proceedings if for example, a lawsuit due to employee injury on the job) BUT here more than 1 owner
• profits of the business will be shared between partners BUT not necessarily in equal measure

Question 37

What is a Public Limited Company (plc)?

Answer 37

• ownership divided into shares
• owner separate to entity … limited liability (protects owners from personal responsibility for its debts or liabilities- liability limited to investment in company which is the amount of company shares they have)
• owner protected under state corporation law
• BUT these entities have greater scrutiny over their financial situation- have to legally produce annual accounts and submit them to Companies House

Question 38

Give details about the accounting information required from a sole trader

Answer 38

• do not need to submit accounts to Companies House
• BUT accounting info needed by government/HMRC (His Majesty’s Revenue and Customs) for tax collecting purposes
• accounting info needed by bank if money needs to be lent
• accounting info also needed by person intending to buy business when existing owner retires for example

Question 39

What is a Private Limited Company (Ltd) and how does it differ from a Public Limited Company (plc)?

Answer 39

• private limited company cannot offer its shares to the public (appropriate for family controlled business)
• public limited company is allowed to offer shares to public BUT has to satisfy more difficult regulations
• a private limited company can be shortened to (Ltd) and a public limited company can be shortened to ‘plc’

Question 40

Define Finance

Answer 40

Like accounting exists to help decision makers- concerned with ways in which funds for a business are raised and invested (funds raised from owners and lenders and invested in resources e.g. equipment to create wealth)
Quality of financing and investment decisions can have major impact on business fortunes

Question 41

Briefly list the main users of accounting/financial information

Answer 41

1) Owners
2) Customers
3) Managers
4) Lenders
5) Competitors
6) Government
7) Investment analysts

Question 42

What is management accounting also known as?

Answer 42

Managerial accounting

Question 43

What obligations do accountants have?

Answer 43

1) They need to ensure that financial statements comply with statutory (act of parliament- law made by UK parliament), professional and listing requirements (requires accountant to possess technical expertise)

2) They also need to ensure that financial statements present the substance of the commercial transactions of the company- requires commercial awareness from the accountant and important that the accountant does not operate in isolation