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29 Cards in this Set
- Front
- Back
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What are the three basic activities in accounting? |
Identify, Record and Communicate |
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Define Financial Reporting |
Using financial information which is useful to the business to help make decisions about providing capital |
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Give two examples of internal and external users of financial reporting. |
INTERNAL - management, owners, employees EXTERNAL - creditors, customers, investors |
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What are the three types of statements in accounting and what do they show? |
Statement of Profit and Loss (Income Statement) - shows income and expenses Statement of Financial Position (Balance Sheet) - assets = liability + equity Statement of Cash Flow - shows receipts and payments |
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Define The Conceptual Framework. |
Establishes concepts that underline financial reporting |
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What are the two measurement principles? |
Historical cost - companies record the assets of their assets Fair Value Principle - assets and liabilities are recorded at a fair value |
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What are the two assumptions, based on the Conceptual Framework? |
Monetary Unit - record only transaction data that can be expressed in terms of money Economic Entity - activities of the entity are kept separate from its owner |
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What are the two fundamental characteristics for financial information? |
Relevance - provides info with predictive and confirmatory value Faithful representation - info depicts what really happens |
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Define materiality |
A item becomes a material when its size influences the decision of external users |
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Give two ways characteristics of financial accounting can be enhanced |
Comparability - use of the same accounting principles Understandability - info presented clearly and concisely Timeliness - info should be available before it loses the capacity to influence decisions Verifiability - independent measures using same method |
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Define the Statement of Financial Position |
Reports the assets, liabilities and equity |
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What is the accounting equation? |
ASSETS = LIABILITIES + EQUITY |
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What are assets? |
- Resources controlled by the business - Non current assets + current assets = total assets |
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Define non - current assets. |
Long-term investments and are useful for more than one year |
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What are intangible and tangible assets? |
Intangible - no physical substance e.g trademark Tangible - physical substance e.g land |
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What are current assets? |
Short term and useful for less than one year Can be converted to cash within one year e.g inventory cash |
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What are liabilities? |
Obligations of the business, can be current and non-current. Current - payable within a year Non-current - long term, not due within the presenting accounting year` |
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Define equity. |
Ownership claim on total assets |
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Define revenue and give examples of sources of revenue |
Revenue - results from business activities entered into for the purpose of earning income Common Sources - sales, fees, services and interest |
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Define dividends. |
The distribution of cash or other assets to shareholders |
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Define Horizontal Analysis |
Technique used for evaluating a series of financial statement data over a period of time |
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Define Vertical Analysis |
Technique that expresses each financial statement item as a percent of a base amount |
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Define Ratio Analysis |
Expresses the relationship among selected items of financial statement data |
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What is the equation for current ratio? |
Current Ratio = Current Assets/Current Liabilities |
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What is the equation for the acid test and what does it measure? |
Acid Test = (Current Assets-Inventories)/Current Liabilities Acid Test measures the liquidity of a firm |
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What is the equation for gearing ratio and what does it measure? |
Gearing Ratio = (long term liabilities x100)/ share capital + reserves + long term liabilities Indicates the level of financial risk to which a company is subjected |
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Give one limitation of ratio analysis |
Value of assets may not reflect current value May exclude important asssets |
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Define Revenue |
Results from business activities Purpose of earning income |
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Define Expenses |
Cost of assets consumed or services used in the process of earning revenue e.g salaries expense, rent expense |
