Chapter 1: Accounting Function

Question 1

What is an organisation? (1)

Answer 1

Organisations are social arrangements for the controlled performance of collective goals.

Social arrangement= a group of people.

Controlled performance= systems or procedures to ensure goals.

Collective goals= eg a business has the goal of making money.

Question 2

What are the types of control an organisation can use? (7)

Answer 2

1. Organisational structure (showing roles and responsibilities).
2. Target setting (expectations are clear).
3. Direct supervision (by managers).
4. Culture (eg where mistakes aren’t tolerated).
5. Self control (employees work independently and take responsibility for results).
6. Control systems (eg comparing actual costs to the budget and calculating variances).
7. Specific control processes (eg PLCA reconciliation may identify purchase invoice errors).

Question 3

What does an organisational structure involve? (5)

Answer 3

1. Division of responsibility (some companies may be split based on location or work).
2. The degree of decentralisation.
3. Scalar chain length (line of authority from top to bottom).
4. Span of control (how many employees a manager is responsible for).
5. Tall or flat (tall having many levels of management, flat having fewer levels with wider spans of control).

Question 4

What is a centralised/ decentralised company? (2)

Answer 4

Centralised= authority is kept at the top eg a manufacturer to ensure consistency and quality.

Decentralised= authority is passed down eg a tech company can better react to changes.

Question 5

What does authority mean in an organisation? (1)

Answer 5

If an organisation is to function as a cooperative system some people must have control over others.

Question 6

What does responsibility mean in an organisation? (1)

Answer 6

Individuals are held accountable for their personal performance and the work assigned to them.

Question 7

What does accountability mean in an organisation? (1)

Answer 7

Individuals must explain and justify any failure to fulfil their responsibilities to their superiors in the hierarchy.

Question 8

What is accounting? (1)

Answer 8

The systematic recording, reporting and analysis of financial transactions within a business.

Question 9

What is financial accounting? (2)

Answer 9

The processing and recording of all transactions as they occur including sales, purchases and all movements of money.

Annual accounts and financial statements are prepared to accounting standards for use by HMRC and shareholders.

Question 10

What is management accounting? (2)

Answer 10

The preparation of internal accounting information to assist management in formulating policies, planning and controlling the organisation.

Reports aid in decision making and usually include budgets, variance analysis and KPI monitoring.

Question 11

What is an integrated accounting systems and what are it’s benefits? (4)

Answer 11

It’s combines the needs of internal and external users of the accounts.

1. The system is more common and cheaper to operate than multiple systems.
2. It can provide a greater consistency of data.
3. The system can increase confidence in the data.

Question 12

How is a finance department divided? (1)

Answer 12

There may be a manager responsible for each section eg sales ledger, purchase ledgers, payroll etc.

Question 13

How is a management accounting department divided? (1)

Answer 13

It may be split with accountants as supervisors of sections responsible for keeping different cost records eg materials, production, marketing etc.

Question 14

How is the accounts office affected by centralisation? (2)

Answer 14

There may be a single accounts department at head office.

The department may also be split with each site responsible for their own finances.

Question 15

What are the advantages (3) and disadvantages (2) of a centralised accounts office?

Answer 15

1. With centralisation there is an opportunity to employ specialist staff and more advanced systems.
2. In one office supervision may be improved.
3. Staff are more flexible and can handle peak loads easier.
4. Day to day control over systems maybe lost causing delays in communication.
5. Head office maybe regarded with suspicion and be considered out of touch.

Question 16

What are the main roles of finance? (2)

Answer 16

1. It is a resource to help meet objectives.
2. Financial controls are used to plan and control the implementation of strategies and financial indicators (used to access performance).

Question 17

What are some department relationships? (4)

Answer 17

1. The marketing department will rely on a sales analysis by region to formulate advertising strategies.
2. The personnel department need to know if any changes to employee details.
3. Department managers will expect reports from IT to ensure information is relevant.
4. The statistician will have to provide information on production output, quality variations, sales efficiency, market research etc.

Question 18

What is a system? (2)

Answer 18

A system is a set of interacting elements responding to inputs to produce outputs.

Every system is a way of viewing a group of components and the way they interact.

Question 19

What is the system’s environment and boundary? (2)

Answer 19

The system’s environment is the set of elements that affect a system but don’t control it.

The system’s boundary is its limit.

Question 20

What is the accounting system and what is it’s environment? (2)

Answer 20

The accounting system receives inputs from other systems eg production and converts it into meaningful financial data (the output).

Anything outside the accounting system is the environment (the wider organisation).

Question 21

What are control systems? (2)

Answer 21

Control is the activity that monitors changes or deviations from the original plans which is exercised by managers.

Control systems include quality control, stock control and budgetary control.

Question 22

What are the elements of a control system? (5)

Answer 22

1. Standard= the aim of the system.
2. Sensor/ detector= measures the system output.
3. Comparator= compares the information from the standard and the sensor.
4. Effector/ activator= initiates the control action eg a switch.
5. Feedback= the information taken from the output and used to adjust the system.

Question 23

An example of the control system is in variance analysis:

Answer 23

1. Costs are developed and a budget is produced (the standard).
2. Actual costs are measured (the sensor).
3. Actual costs are compared to the budget in the form of variance analysis (the comparator).
4. Managers decide if variances need investigating (the activator).
5. Managers take appropriate action eg changing the budget (the feedback).

Question 24

What do the best systems include? (6)

Answer 24

1. There should be a smooth workflow with no bottlenecks.
2. Movement of staff should be kept to a minimum.
3. Duplication of work should be avoided.
4. The most effective use of attributes should be made.
5. Simplicity in systems should be sought after as complications lead to mistakes.
6. Machines should be used to help staff.

Question 25

What is a cost effective system? (1)

Answer 25

The benefit should outweigh mistakes or the cost of implementation.

Question 26

What are office procedures? (2)

Answer 26

Every organisation has systems that outlines how to perform a task associated with the receipt, recording, arrangement, storage, security and communication of information. These are usually explained by office manuals.

Question 27

What are the advantages to office manuals? (4)

Answer 27

1. It helps with the induction of new staff. 2. Supervision is easier. 3. It assist the organisation with pinpointing areas of responsibility. 4. Once written down procedures are easier to adapt with changing circumstances.

Question 28

What are the disadvantages to office manuals? (3)

Answer 28

1. The expense in cost and time in preparing the manuals. 2. Office manuals need to be constantly updated incurring additional expenses. 3. Instructions maybe followed too strictly, there needs to be flexibility so employees can deal with new circumstances.

Question 29

What are the 2 parts of a system review? (2)

Answer 29

1. An overview of the office: The office’s purpose, what actually happens, who does what, quality of performance and the staff’s methods and techniques. 2. A detailed examination of the procedures.

Question 30

The law constantly effects a company’s decision making, what are the principles of government regulations? (4)

Answer 30

1. To protect business= laws limiting market share dominance. 2. To protect consumers= customer protection regulations cover packaging, labelling, hygiene and advertising. 3. To protect employees= laws govern staff recruitment and health and safety for working conditions. 4. To protect the interest of society against damaging business behaviour= eg protecting the environment.

Question 31

Financial statements are prepared in accordance with the legal framework and IFRS issued by the board. What are the framework’s categories? (2)

Answer 31

1. Fundamental qualitative characteristics= relevance and faithful representation. 2. Enhancing qualitative characteristics= comparability, versatility, timeliness and understanding.

Question 32

What are the components of the accounting function? (4)

Answer 32

1. Financial accounting. 2. Management accounting. 3. Treasury management= the management of working capital, cash, financing, foreign currency and tax. 4. Internal audit= examines and evaluates the organisation’s risk management process and systems of control then making recommendations for improvement.