Workshop 1 Accounting

Question 1

Statement of financial position (balance sheet)

Answer 1

A snapshot of a business at a particular point in time. Tells us information on assets, equity and liabilities.

Question 2

Income statement

Answer 2

Tells us information on the revenue and expenses of a business that contribute towards it making a profit.

Question 3

Statement of cash flows

Answer 3

Tells us information on the cash flows in and out of a business.

Question 4

What are the objectives of financial accounting?

Answer 4

1. To provide information to users about a business’s financial performance (wealth gained over a period).
2. To provide information to users about a business’s financial position (total wealth at any point in time).

Question 5

What are the 2 fundamental characteristics accounting information should possess?

Answer 5

Relevance and faithful representation.

Question 6

What are the 4 sequential stages of an accounting information system?

Answer 6

1. Information identification.
2. Information recording.
3. Information analysis.
4. Information reporting.

Question 7

For information to have a faithful representation it needs to be…

Answer 7

Complete, neutral, free from bias and free from error.

Question 8

What improves the quality of information?

Answer 8

Comparability, timeliness, verifiability and understandability.

Question 9

What is an asset?

Answer 9

Something you own, i.e. phone, laptop etc.

Question 10

What are non-current assets also known as?

Answer 10

Fixed assets

Question 11

What are non-current assets?

Answer 11

Assets held for the long term. They are usually purchased so a business is able to deliver its goods and services to its customers.

Question 12

What are tangible non-current assets?

Answer 12

Assets we can see and touch. Examples: land, buildings and machinery. They are initially recorded in the statement of financial position.

Question 13

What are intangible non-current assets?

Answer 13

Assets we cannot see or touch. Examples: licenses, patents, brands, investments.

Question 14

What is depreciation?

Answer 14

A process which spreads the purchase cost of an asset over the asset’s life. All tangible assets should be depreciated except land.

Question 15

What are the 2 types of depreciation?

Answer 15

Straight-line and reducing balance.

Question 16

What is amortisation?

Answer 16

Spreads the purchase cost of an intangible asset over the asset’s life.

Question 17

What are current assets?

Answer 17

Assets that have a lifespan of less than 12 months. Examples: inventory, trade receivables, cash.

Question 18

What is a liability?

Answer 18

Something a business owes.

Question 19

What is a current liability?

Answer 19

A liability that must be paid within 1 year of the financial statement date. Examples: trade payables, accruals, bank loans, overdrafts.

Question 20

What are accruals?

Answer 20

Expenses or revenues that are recognised on the income statement before cash is exchanged. They reflect economic activities as they occur rather than when cash transactions take place.

Question 21

What are trade receivables?

Answer 21

Money owed to the business, takes place when customers buy products or services on credit. So they pay at a later date.

Question 22

What are trade payables?

Answer 22

Money a business owes to its suppliers, takes place when a business purchases supplies on credit.

Question 23

What is a non-current liability?

Answer 23

A liability that is due for payment after more than 1 year of the financial statement date. Example: loans, long-term debt.

Question 24

What are provisions?

Answer 24

Estimates of possible liabilities that may arise but there is uncertainty over the amount owed and timing. Found under current and non-current liabilities. Examples: warranty claims, legal claims.

Question 25

What is equity also known as?

Answer 25

Capital.

Question 26

What is equity?

Answer 26

The portion of a company’s assets that belongs to its owners, shareholders, or partners. Examples: retained profit, share capital.

Question 27

Share capital

Answer 27

The shares that we have issued to our shareholders.

Question 28

Working capital equation.

Answer 28

current assets- current liabilities

Question 29

Assets equation

Answer 29

liabilities + equity

Question 30

Equity equation

Answer 30

Assets- liabilities

Question 31

Dual aspect convention

Answer 31

States that every financial transaction has equal and opposite effects and affects at least 2 accounts. 1 account receives a debit and another receives a credit, this ensures books remain balanced.

Question 32

Prudence convention

Answer 32

Places greater emphasis on recognising expected losses than expected profits. It suggests that there are uncertainties or risks involved in estimating profits or asset values.