Topic 2 - Regulation

Question 1

What is the purpose of accounting?

Answer 1

To provide financial information for decision making.

Question 2

What is accounting?

Answer 2

The process of identifying, measuring, recording and communicating the economic transactions and events of a business operation.

Question 3

What is the accounting process?

Answer 3

• Identifying: taking into consideration all transactions which affect a business entity
• Measuring: quantifying in monetary terms
• Recording: analysing, recording, classifying and summarising transactions
• Communicating - preparing accounting reports, analysing and interpreting

Question 4

What are the roles of accountants?

Answer 4

• Commercial accountants
• Public accountants
• Government accountants
• Not-for-profit accountants

Question 5

What is the conceptual framework?

Answer 5

Consists of a set of concepts to be followed by preparers of financial statements and standard setters.

Question 6

What is the purpose of financial reporting?

Answer 6

To provide financial information about the reporting entity that is useful to existing and potential investors lenders and other creditors in making decisions about providing resources to the entity

Question 7

Financial reporting allows users to evaluate and predict the entity’s what?

Answer 7

• ability to generate cash in the future
• future borrowing needs and how future profits and cash flows will be distributed among those with an interest in the entity
• likely success in raising further finance and meeting commitments when they fall due
• Investing, financing and operating activities.

Question 8

What are the elements of the four main financial statements?

Answer 8

Revenues, Expenses, Assets, Liabilities and Equity

Question 9

Explain the two accounting concepts.

Answer 9

• Accounting Period Concept: The life of a business entity can be divided into artificial periods
• Accounting Entity Concept: Owner’s transactions are separate from entity’s transactions

Question 10

Explain the four accounting principles.

Answer 10

• Monetary Principle: Items included in accounting records must be able to be expressed in monetary terms (e.g. $)
• Cost Principle: All assets are initially recorded in the accounts at their purchase price or cost
• Full Disclosure Principle: all circumstances and events that could make a difference to decision-making process should be disclosed in the financial statements.
• Going Concern Principle: business will remain in operation for the foreseeable future.

Question 11

Explain the two fundamental qualitative characteristics.

Answer 11

• Relevance: Accounting information is relevant if it makes a difference in a decision. Affected by materiality (i.e. likely to influence decision making)
• Faithful Representation: Accounting information must reflect the actual events and transaction being represented. Users can trust or depend on the information presented in financial statements.

Question 12

Explain the accounting constraints.

Answer 12

• Timeliness: information may be irrelevant if there is a long delay in reporting
• Cost: cost versus benefit of providing it

Question 13

What are the four conceptual framework sections?

Answer 13

• Objective of general purpose financial reports
• The reporting entity
• Definition of elements of financial statements
• Concepts, principles and qualitative characteristics

Question 14

Who are the primary users of general purpose financial reports?

Answer 14

Equity investors (contribute resources e.g. cash) and lenders (contribute resources e.g. banks)

Question 15

What does the Statement of Profit or Loss report on?

Answer 15

Reports revenues less expenses for a particular period of time

Question 16

What does the Statement of Changes in Equity report on?

Answer 16

Reports total comprehensive income for the period and other changes in equity

Question 17

What does the Statement of Financial Position report on?

Answer 17

Reports assets, liabilities and equity at a particular point in time

Question 18

What does the Statement of Cash Flows report on?

Answer 18

Reports information regarding cash receipts and cash payments for a particular period of time

Question 19

What is the purpose of the Statement of Profit and Loss?

Answer 19

To report the entity’s success or failure over a period of time

Question 20

What is retained earnings?

Answer 20

The accumulated profit which hasn’t been distributed to shareholders.

Question 21

What is the accounting equation?

Answer 21

Assets = Liabilities + Equity

Question 22

What is the order in which statements must be prepared?

Answer 22

• Statement of Profit or Loss
• Statement of Changes in Equity
• Statement of Financial Position
• Statement of Cash Flows

Question 23

What are the three components of faithful representation?

Answer 23

• Complete depiction
• Neutral
• Error Free

Question 24

What are the four enhancing qualitative characteristics?

Answer 24

Comparability, Verifiability, Timeliness and Understandability.

Question 25

What is comparability?

Answer 25

Using consistent accounting methods so information is easily comparable with other entities using the same accounting principles.

Question 26

What is Verifiability?

Answer 26

Direct (invoices) or indirect (calculations and assumptions) provide evidence

Question 27

What is Timeliness?

Answer 27

Information must be provided in a timely manner so that its relevance is not lost

Question 28

What is Understandability?

Answer 28

Users are assumed to have a reasonable knowledge of business and economic activities and accounting Relevant complex financial information should not be omitted because it is difficult to understand

Question 29

What is the formula for a calculation of retained earnings?

Answer 29

Opening balance of retained earnings + Profit (-Loss) - Dividends = Closing balance of retained earnings