A - What is accounting?
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What are the three steps of accounting?
Collect and record data > Process data to produce useful information > Communicate or report info to interested parties
Name the six providers of accounting information?
- Sole traders
- Ltd / Plc
- Public sector
- Clubs and societies
- Not-for-profit organisations
Why do entities undertake the accounting function? (Name 4 reasons)
- Record money going in and out
- Support decision making
- Report activities and profit derived from these activities (performance)
- Financial position (assets and liabilities)
- Help assess benefit to society
- Control a company (e.g. discipline, training, planning)
- Plan for future
- A basis for taxation
- Supports legal relationships (business documentation support)
Name the users of accounting information (seven).
- Public (others)
Why might investors use a companies accounts?
- See return on capital and risk inherent in their investment (long term resources)
- Stewardship of resources (how well are managers generating profit)
- Share-trading/voting decisions (entitled to a say)
- Ascertain future prospects (dividends)
Why might employees use a companies accounts?
- Security - is job safe?
- Pay - is it profitable? Good pay? Possibility of pay rise?
- Promotions and opportunities (training)
- Benefits and discounts
Why might lenders use a companies accounts?
- Ability to repay capital and interest
- Security of loan - in case of business failing, could assets be sold to repay loan
Why might suppliers use a companies accounts?
- Credit worthiness of the organisation to pay (extend credit, cash flow, time to pay)
- Time typically taken to pay suppliers (e.g. supermarkets take ages)
Why might customers use a companies accounts?
- Security of supply - likely to continue or find new supplier?
- Dependancy relationship - warranty fulfilled?
Why might government and their agencies use a companies accounts?
- Regulation of companies
- National statistics
Why might the public use a companies accounts?
- Future prospects
- Range of activities of the company
- Expansion plans
Name the five utilities of financial information.
Consistency of methods used in preparing accounts and disclosure of methods used relate to which utility of financial information?
Judgement of sensibility of rigorously applying accounting concepts relates to which utility of financial information?
Predictive value and conformity value to evaluate relate to which utility of financial information?
What five factors are required to ensure accounts are reliable?
- Faithful representation - reporting the substance of transactions
- Neutral - Unbiased to all user groups
- Free from material error - correct info
- Complete - providing a rounded picture
- Prudence - Not being overly optimistic, don't overstate assets and profits
Limitations of accounting informations (six)
- One source
- Reflects past
- Inexact science
- Non-quantifiable items
- Unstable currencies
- Input affects output (GIGO)
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