Week 6 - Financial accounting

Question 1

Why disclose financial accounting information?

Answer 1

Governments require large organisations to prepare general purpose financial statements.
To ensure financial stakeholders receive reliable info.
To promote investors confidence in capital markets.

Question 2

Whom to disclose financial accounting information to?

Answer 2

Stakeholders with an interest / current or potential investors / lenders and other creditors.

Question 3

What to disclose within financial accounting information?

Answer 3

Accounting standards setters determine the information needed by users.

Question 4

How to disclose financial accounting information?

Answer 4

Accounting standards stipulates the types of financial information that needs to be prepared.

Question 5

What is the objective of financial reporting, as determined by the conceptual framework for financial reporting?

Answer 5

To provide financial information about the reporting entity that is useful to stakeholders in making decisions.

Question 6

What are General purpose financial statements (GPFS)

Answer 6

Financial statements that comply with accounting standards and are intended for users of financial information who are unable to command the preparation of financial statements.

Question 7

What are Special purpose financial statements (SPFS)

Answer 7

Financial statements designed to meet the needs of a specific group of stakeholders. Does not need to comply with accounting standards.

Question 8

What is the entity concept?

Answer 8

Personal transactions of the owner are kept separate from those of the organisation.

Question 9

What is the accounting period convention?

Answer 9

Time period over which the transactions or events are collected.

Question 10

What is the Monetary unit convention?

Answer 10

Transactions and events in relation to a monetary value.

Question 11

What is the going concern concept?

Answer 11

The assumption that they business will continue for the foreseeable future.

Question 12

What is the accrual basis concept?

Answer 12

The effects of a transaction or event is recognised when they occur. Cash does not need to change hands.

Question 13

What is cash accounting?

Answer 13

The effects of transactions are recognised when cash changes hands.

Question 14

What is a balance sheet and what is included in it?

Answer 14

Provides information about the financial position of an organisation at a point in time.
Assets = Liabilities + Owners equity

Question 15

What is an income statement and what does it include?

Answer 15

Also known as profit & loss statement / statement of financial performance.
Provides information about the financial performance of an organisation for a period of time.
Income - Expenses = Profit.

Question 16

What are Assets?

Answer 16

Economic resources expected to benefit the business.

Something the business owns or has control of.

Question 17

What are known as current assets?

Answer 17

Assets that are held in the short-term. They will be sold, consumed or exhausted in 12 months.

Question 18

What are tangible assets

Answer 18

Assets that have a physical substance.

Question 19

What are non-tangible assets?

Answer 19

No physical substance.

Question 20

What are liablities?

Answer 20

What the business owes to creditors.

They represent a claim on the business assets.

Question 21

What is owners equity?

Answer 21

The owners claim to the assets of the business.

It represents the amount of assets leftover after liabilities have been paid.

Question 22

What is income / Revenue?

Answer 22

They are amounts received or receivable that result from selling goods and services to customer.
Increase in assets or decrease in liability.
Increase in equity, not through owner contribution (capital).

Question 23

What is an expense?

Answer 23

They are amounts paid or payable for purchasing goods and services.
Decrease in assets or increase in liability.
Decrease in equity, not through owners drawings.

Question 24

What is profit?

Answer 24

Income less expense = profit

Question 25

What are the two accounting equations?

Answer 25

Assets = liabilities + owners equity
Equity = Assets - liabilities

Question 26

What is the expanded accounting equations?

Answer 26

Assets = liabilities +[(income - expense) + capital - drawings.
OR
Asset + expense + drawings = liabilities + income + capital.

Question 27

What is the double entry effect on transactions?

Answer 27

Every event will result in 2 transactions
Example:
Increase to asset, will result in either (1) decrease to another asset (2) increase to liability or equity.
A = L + OW - MUST ALWAYS BALANCE.