Week 1 - Introduction to financial accounting and statement of financial position

Question 1

What is accounting?

Answer 1

It is a systematic process of identifying, recording, measuring, classifying, verifying, summarising, interpreting and communicating financial information

Question 2

What is the purpose of accounting? (2)

Answer 2

• Provide useful account information
• Assist users into making informed decisions

Question 3

What is the process of accounting? (3)

Answer 3

1 - Identification: select economic events transactions

2 - Recording: record, classifying and summarise

3 - Communication: Prepare accounting reports

Question 4

Users of accounting information (10)

Answer 4

• Owners, managers, employees and their representatives
• Competitors, suppliers, customers
• Lenders, Government, investment analysts

Question 5

What is management accounting?

Answer 5

Provides information for managers of an organisation who direct and control its operations

Question 6

What is financial accounting?

Answer 6

Financial counting provides information to shareholders, creditors and others who are outside the organisation

Question 7

What are the differences between financing and management accounting?

• Legal framework
• Nature of reports
• Detail
• Time focus
• Domain
• Frequency
• Users

Answer 7

• Financial accounts must follow prescribed formats but management accounting has no prescribed formats
• Financial accounting reports tend to be general purpose where as management accounting reports tend to be a specific purpose
• Financial accounting tends to be a brand overview suitable for comparisons but management is more detailed and relevant to one user
• Financial accounting has a historical perspective where as management has accounting has a future emphasis
• Primary focus for financial accounting is the whole organisation where as the primary focus for management is individual segments
• Financial accounting is annually, bi-annually but management accounting is monthly, weekly or daily
• Financial accounting is used by external shareholders and management accounting is used by managers

Question 8

Which two qualities should information posses?

Answer 8

Fundamental or enhancing

Question 9

Fundamental - qualities information should possess (2)

Answer 9

• Relevance - predictive value and confirmatory value
• Faithful representation - completeness, neurality, freedom from error

Question 10

Enhancing - qualities information should possess (4)

Answer 10

• Comparability
• Timeliness
• Vertifiability
• Understand ability

Question 11

What does a statement of financial position (SoFP, SFP, Balance sheet) show?

Answer 11

It shows what the accumulated wealth of a business at the end of a period and what form it takes

Question 12

What does an income statement (profit and loss account/statement) show?

Answer 12

It shows how much profit was generated and measure financial performance after a period

Question 13

What does a cash flow statement show?

Answer 13

It shows what cash movements took place and breaks down the reasons for changes in cash during a specific period

Question 14

What are the major accounting conventions influencing restatement of financial position? (5)

Answer 14

• Dual aspect convention
• Going concern convention
• Historic cost convention
• Prudence convention
• Business entity convention

Question 15

What does a statement of financial position position report?

Answer 15

It reports the assets of the business and the claims against the business (liabilities and equity)

Question 16

What is the equation that statement of financial position relies on?

Answer 16

Assets (resources held by the company) = liabilities + equity

Question 17

Characteristics of assets (3)

Answer 17

• Must be as a result of past events
• Measurable in monetary terms
• Expected to result in in the future inflow of economic benefit to the organisations

Question 18

Differences between current and non-current assets in terms of:

• nature
• duration
• examples

Answer 18

• Non-current assets are long term in nature where as current assets are short term in nature
• Non current assets are more than one business cycle (cycle is usually a year) but current assets are expected to be sold in a year (normally to do with business operations)
• Non current can be tangible or intangible e.g tangible such as land, buildings, plant and machinery motor vehicles or intangible such as goodwill, patents and trademarks examples of current assets are inventory (stock), receivables, banks, cash, payments

Question 19

Characteristics of liabilities (3)

Answer 19

• Present obligation to be repaid
• As a result of past events
• Will result in the outflow of economic benefit from the organisation

Question 20

What are non current liabilities?

Answer 20

Are long term loans such as mortgages, debentures and bank loans

Question 21

Examples of current liabilities (3)

Answer 21

• Payables (creditors)
• Accruruals
• Maturing long term debt (less than one year until repayment)

Question 22

What is equity? (2)

Answer 22

• This is the ownership’s claim on total assets
• Equity represents how much of the assets (after liabilities) the owners actually own

Question 23

Assets (after liabilities) that equity represents (4)

Answer 23

• Shares (nominal value)
• Share premium account
• Reserves (could be retained earnings)
• Retained earnings: the accumulation of past profits and losses of the business

Question 24

Standard classifications of assets (4)

Answer 24

• Intangible assets
• Property, plant and equipment
• Long-term investments
• Current assets

Question 25

Standard classifications of equity and liabilities (3)

Answer 25

• Equity
• Non-current liabilities
• Current liabilities