Week 1 - Introduction to financial accounting and statement of financial position Flashcards
What is accounting?
It is a systematic process of identifying, recording, measuring, classifying, verifying, summarising, interpreting and communicating financial information
What is the purpose of accounting? (2)
- Provide useful account information
- Assist users into making informed decisions
What is the process of accounting? (3)
1 - Identification: select economic events transactions
2 - Recording: record, classifying and summarise
3 - Communication: Prepare accounting reports
Users of accounting information (10)
- Owners, managers, employees and their representatives
- Competitors, suppliers, customers
- Lenders, Government, investment analysts
What is management accounting?
Provides information for managers of an organisation who direct and control its operations
What is financial accounting?
Financial counting provides information to shareholders, creditors and others who are outside the organisation
What are the differences between financing and management accounting?
- Legal framework
- Nature of reports
- Detail
- Time focus
- Domain
- Frequency
- Users
- 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
Which two qualities should information posses?
Fundamental or enhancing
Fundamental - qualities information should possess (2)
- Relevance - predictive value and confirmatory value
- Faithful representation - completeness, neurality, freedom from error
Enhancing - qualities information should possess (4)
- Comparability
- Timeliness
- Vertifiability
- Understand ability
What does a statement of financial position (SoFP, SFP, Balance sheet) show?
It shows what the accumulated wealth of a business at the end of a period and what form it takes
What does an income statement (profit and loss account/statement) show?
It shows how much profit was generated and measure financial performance after a period
What does a cash flow statement show?
It shows what cash movements took place and breaks down the reasons for changes in cash during a specific period
What are the major accounting conventions influencing restatement of financial position? (5)
- Dual aspect convention
- Going concern convention
- Historic cost convention
- Prudence convention
- Business entity convention
What does a statement of financial position position report?
It reports the assets of the business and the claims against the business (liabilities and equity)
What is the equation that statement of financial position relies on?
Assets (resources held by the company) = liabilities + equity
Characteristics of assets (3)
- 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
Differences between current and non-current assets in terms of:
- nature
- duration
- examples
- 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
Characteristics of liabilities (3)
- Present obligation to be repaid
- As a result of past events
- Will result in the outflow of economic benefit from the organisation
What are non current liabilities?
Are long term loans such as mortgages, debentures and bank loans
Examples of current liabilities (3)
- Payables (creditors)
- Accruruals
- Maturing long term debt (less than one year until repayment)
What is equity? (2)
- This is the ownership’s claim on total assets
- Equity represents how much of the assets (after liabilities) the owners actually own
Assets (after liabilities) that equity represents (4)
- Shares (nominal value)
- Share premium account
- Reserves (could be retained earnings)
- Retained earnings: the accumulation of past profits and losses of the business
Standard classifications of assets (4)
- Intangible assets
- Property, plant and equipment
- Long-term investments
- Current assets
Standard classifications of equity and liabilities (3)
- Equity
- Non-current liabilities
- Current liabilities
