Week 1 - Introduction, the accounting entity and the financial statements

Question 1

What is the main purpose of accounting?

Answer 1

Communication of information for decision-making

Question 2

What are the two categories of accounting

Answer 2

1. Management decisions within organisations (internal)
2. External stakeholders’ decisions about organisations (external)

Question 3

What is the accounting category of management decisions within organisations (internal)

Answer 3

Management accounting and control

Question 4

What is the accounting category of external stakeholders’ decisions about organisations (external)

Answer 4

Corporate reporting/ financial accounting

Question 5

What does the nature of information and decisions assess?

Answer 5

Economic/ financial performance and position

Question 6

What does the nature of information and decisions assess after economic/ financial performance and position?

Answer 6

Social impacts and dependencies

Question 7

Few examples of financial questions accounting can answer

Answer 7

1. Has the business made a profit/ loss?
2. Is there enough cash to pay salaries
3. Is the business growing?
4. Which product is the most successful
5. How much does the business owe?
6. What is the value of the business
7. Possible financial impacts from risks and opportunities

Question 7

What does the nature of information and decisions assess after economic/ financial performance and position, and social impacts and dependencies

Answer 7

Broader impact, environmental impact and dependencies

Question 8

What are the 3 types of business/ entity

Answer 8

1. Sole trader
2. Partnership
3. Company

Question 9

What is a sole trader?

Answer 9

• one individual owns and operates a business
• business is unincorporated
• individual responsible for the debts of the business
• creditors have a claim over the individuals’ personal assets if the business cannot pay
• the owner/ individual bear unlimited liabilities to the creditors

Question 10

What is an unincorporated business?

Answer 10

a business that isnt seen as legally separate from the individual

Question 11

What type of liability does a sole trader have

Answer 11

the owner/ individual bear unlimited liabilities to the creditors

Question 12

What is unlimited liability

Answer 12

the business owner/owners are personally responsible for all of the debts of the business

Question 13

What is a partnership?

Answer 13

• the business is run and owned by two or more individuals
• can be unincorporated or incorporated

Question 14

What happens when a partnership is unincorporated?

Answer 14

the partners are jointly responsible for the debts of the business and creditors have claim over their personal assets if the business cannot pay (unlimited liabilities)

Question 15

What happens when a partnership is incorporated?

Answer 15

the partnership is considered to be a separate legal entity and its called a company. The partners have limited liabilities and creditors can only get access to the funds that the partner has invested in the business, not their personal assets.

Question 16

What is a company?

Answer 16

• own their own assets and can take action on their own behalf
• incorporated by law as separate legal entities
• either public limited companies or private limited companies

Question 17

What is an owner of a company called?

Answer 17

• shareholders or equity holders, have limited liabilities for the companys debt
• shareholders will only lose the value of their shares if the company goes bankrupt
• shareholders liability is limited to the amount invested in the company when buying the shares

Question 18

Who are the two users we are communicating with in financial accounting?

Answer 18

primary users and other users

Question 19

What are the three types of primary users?

Answer 19

1. investors (both current and future)
2. lenders
3. other creditors (eg owe money to supplier)

Question 20

What are the 6 other users included in financial accounting?

Answer 20

1. customers
2. competitors
3. employees
4. government
5. investment analysis
6. community representatives

Question 21

What is the broad purpose of financial accounting?

Answer 21

is decisions about commencing, continuing or ceasing a relationship with an organisation

Question 22

What financial information is most useful for investors?

Answer 22

profitability and prospects

Question 23

What financial information is most useful for governments?

Answer 23

firms ability to pay tax

Question 24

What financial information is most useful for banks and lenders?

Answer 24

how the business will repay debts

Question 25

What financial information is most useful for customers and employees

Answer 25

whether the business will carry on trading

Question 26

What is the main objectives of
(external) financial reports according to the international accounting standards board (2018)

Answer 26

“the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity”

Question 27

What are the 3 stages in financial accounting to satisfy investors, lenders and other creditors informative demands?

Answer 27

1. identifying - business/ economic activities
2. measuring - measure these activities
3. communicating - put these measurements/ numbers into some statements that the users can communicate with each other

Question 28

What happens in the 1.identifying stage in financial accounting to satisfy investors, lenders and other creditors informative demands?

Answer 28

collect data on business transactions

Question 29

What happens in the 2.measuring stage in financial accounting to satisfy investors, lenders and other creditors informative demands?

Answer 29

asses the monetary value of business items and then recording them using double-entry bookkeeping

Question 30

What happens in the 3.communicating stage in financial accounting to satisfy investors, lenders and other creditors informative demands?

Answer 30

summarise the information in financial statements, then interpret the information so it can be understood by users

Question 31

What are the 5 broad elements in financial accounting?

Answer 31

(accounting entity, then ->)
1. income
2. expenses
3. assets
4. liabilities
5. equity capital

Question 32

What is the accounting entity?

Answer 32

focus of the decision making
(could be company, business, or any entity, all the company/ business transactions are related to this entity)

Question 33

What is income

Answer 33

the value received when goods and/or services delivered to customers

Question 34

What are expenses?

Answer 34

costs consumed in delivering goods/ services to customers

Question 35

Wha are assets?

Answer 35

resources controlled by the entity that are of future value

Question 36

What is a liability?

Answer 36

obligations to transfer resources to third parties

Question 37

What is equity capital

Answer 37

owners investment in the equity

Question 38

Assets equations

Answer 38

Assets = Liabilities + Equity Capital

Question 39

What can we sometimes call Assets - Liabilities

Answer 39

Net assets

Question 40

What is the profit equation

Answer 40

Profit = income - expenses

Question 41

Where does profit go to?

Answer 41

Equity capital

Question 42

What is the equity capital equation?

Answer 42

Equity capital = Amounts paid in by owners + Profit - Amounts withdrawn by owners

Question 43

What are the three core financial statements?

Answer 43

1. Statement of profit or loss/ Income Statement
2. Statement of Financial Position/ Balance Sheet
3. Statement of Cash Flows

Question 44

What does the Statement of Profit or Loss/ Income Statement cover?

Answer 44

All income and expenses DURING an accounting period
ie all components of the period’s profit figure (over a period)

Question 45

What does the Statement of Financial Position/ Balance Sheet include?

Answer 45

all assets, liabilities and equity capital
AS AT THE END of the accounting period (specific point in time)

Question 46

What does the Statement of Cash Flows/ Cash Flow Statement include?

Answer 46

Sources of cash generation and cash use DURING an accounting period
Reconciles cash balances at the beginning and end of the accounting period

Question 47

What is another word for financial accounting

Answer 47

Financial Reporting

Question 48

What is another word for Management Accounting?

Answer 48

Managerial Accounting

Question 49

Link between financial statements

Answer 49

1. First start with a Balance Sheet at the beginning of Y1 (assets, liabilities, equity a company has at the beginning of the period)
2. Over the period the business/ company may make some profits.
   So shown in the Statement of Profit or loss
3. End of first year, will have a new Balance Sheet that will include the profit the company earned over the year into this one
4. End of year 1 position is the beginning of Y2, over year 2 make some profits
5. End of year 2 we need to include the profits earned over the year 2 to the Balance Sheet

Question 50

Link between financial statements with Cash flow statement

Answer 50

1. Since cash is an asset, we need to record cash in the Balance Sheet
   So we will have a cash position at the start of Y1
2. Over the year spend and receive some cash which will be shown in the statement of cash flows
3. End of Y1 will have a new cash position that is shown in the new balance sheet
4. Over the second year we have another cash flow statement that tells us how much cash generated and how much cash spent and this cash position is going to include the cash number in the 3rd Balance sheet at the end of Y2

Question 51

Net profit equation

Answer 51

Net profit = Total Income - Total expenses

Question 52

What are the three limitations of financial statements?

Answer 52

1. Accounting information in the financial statements is mainly backward looking and provides largely historical information
2. Accounting and financial statements dont capture non-financial aspects of the business, such as the value of human inputs
3. Financial statements involve a substantial degree of classification, aggregation and allocation (results in costs and revenues which may differ to each sometimes being aggregated)