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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
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Name the six providers of accounting information?
- Sole traders
- Partnerships
- Ltd / Plc
- Public sector
- Clubs and societies
- Not-for-profit organisations
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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)
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Name the users of accounting information (seven).
- Investors
- Lenders
- Suppliers
- Government
- Customers
- Empolyees
- Public (others)
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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)
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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
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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
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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)
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Why might customers use a companies accounts?
- Security of supply - likely to continue or find new supplier?
- Dependancy relationship - warranty fulfilled?
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Why might government and their agencies use a companies accounts?
- Regulation of companies
- Taxation
- National statistics
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Why might the public use a companies accounts?
- Prosperity
- Future prospects
- Range of activities of the company
- Expansion plans
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Name the five utilities of financial information.
- Relevance
- Reliability
- Comparability
- Understandability
- Maeriability
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Consistency of methods used in preparing accounts and disclosure of methods used relate to which utility of financial information?
Comparability
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Judgement of sensibility of rigorously applying accounting concepts relates to which utility of financial information?
Materiability
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Predictive value and conformity value to evaluate relate to which utility of financial information?
Relevance
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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
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Limitations of accounting informations (six)
- One source
- Reflects past
- Inexact science
- Non-quantifiable items
- Unstable currencies
- Input affects output (GIGO)
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