1) Accounting - it is the process of identifying, recording and communicating
economic events to the users
2) Role of accounting – it is a means of communication as it provides information
to see where the company has been by looking at past performance, to see
where the company is now by looking at the current performance and to gain
an insight on what the future prospects are.
3) Corporate governance – it is a system by which companies are directed or
controlled, managed and administered. The ASX has issued a few guidelines
called “Corporate Governance Principles and Recommendations” in 2003
which was revised in 2007 to guide the companies and prevent corporate
4) a) Internal users of data – refers to the employees, mainly managers of the
company who care about the short-term and long-term solvency, profitability,
turnover rates and other factors that affect the company’s ability to perform
b) External users of data – they refer to the shareholders (profitability/ability
to pay high dividends), creditors (risk of granting credit or lending money
(bankers)), tax authorities (whether the company complies with the tax laws),
potential investors (whether they should buy or sell shares), suppliers (risk of
granting credit), customers (honour their warranties), employees (pay rises)
and other parties that are interested in the company for various purposes.
5) Agent theory – when the principal delegates authority to the agent to act in
the principal’s best interest.
6) Sustainability reporting/socially responsible reporting – It is the management
and reporting of non-financial performance. the triple bottom line includes
a) Social bottom line – related to working conditions, safety and security,
entity’s support and contribution to community services.
b) Economic bottom line – entity’s profitability and business strategy
c) Environmental bottom line – how an entity’s products or operation impact
7) Conceptual framework – it is a system of interrelated objectives and
fundamentals that lead to consistent standards.
8) A reporting entity – it is an entity where it is reasonable to expect the
existence of users that depend on the company’s general purpose financial
statements to enable them to make economic decision. Do they need the
information and do they have the power to get it. If they need the information
and don’t have the power to get it then they are dependent users and the
entity is a reporting entity. Factors that make an entity a reporting entity a) Separation of management from economic interest
b) Financial characteristics
c) Economic/Political influence
9) The objective of financial reports is to provide information about the
profitability, performance and cash flows of the entity and build accountability
on the part of the entities.
10)Monetary unit assumption – it explains that only transactions expressed in
monetary terms can be included in accounting records.
Economic unit assumption – it states that the transactions or the activities of
the entity must be kept separate from that of the personal owner.
11)Assets – it refers to a future economic benefit that arose from a past
transaction and it is controlled by the entity.
12)Liabilities – it refers to a present obligation that will result in outflow of
economic benefits as a result of a past event.
13)Owner’s equity – it refers to the residual amount remaining after subtracting
the outside liabilities from the assets.
14)Income – it refers to the increase in the economic benefits arising from factors
other than contribution in owners usually leading to increase in assets or
decrease in liabilities.
15)Expenses – it refers to the decrease in economic benefits arising from factors
other than contributions to owners usually resulting to decrease in assets or
increase in liabilities.
16)Recognition criteria (a) Is it probable to take place and (b) Can it be reliably
1) Confirmatory – confirm or correct past information
2) Predictive – help managers form predictions
b) Faithful representation
1) Accuracy – the information should be free from error.
2) Substance over form – should be more concerned with economic
substance rather than legal form.
3) Completeness – all relevant information within the bounds of
materiality and cost should be available.
4) Neutrality – the information should be free from bias
a) Verifiability – the information should have the ability to be checked and
should result in accuracy. b) Comparability – it should be able to be compared with other information
c) Understandability – the information should be disclosed under the
impression that users have basic accounting information.
d) Timeliness – to provide information in a timely manner to ensure that
relevance of information is not lost.
a) Materiality – determining if the information is likely enough to affect the
decision of the manager.
b) Cost Vs. Benefit – the cost of obtaining the data should not exceed the
benefits of having the data.
20)Sales returns and allowances is a contra revenue account to sales. The normal
balance of the sales returns and allowances account is debit. A contra account
is used instead of sales to record the amounts of goods sold that are being
21)Office supplies/ stationary supplies are prepaid expenses.
22)STATEMENT OF FINANCIAL POSITION
a) Cash and cash equivalents
b) Trade and other receivables
d) Other current assets
Non – current assets
b) Plant, property and equipment
d) Other non-current assets
a) Trade and other payables b) Current tax payable
c) Short term borrowings
d) Other current liabilities
a) Long term borrowings
b) Long term provisions
c) Other non-current liabilities
a) Other Reserves
b) Retained earnings
23)In the 10 column worksheet, accumulated depreciation is entered in the credit
side of the balance sheet. However, in the statement of financial position,
accumulated depreciation is entered on the debit side as a negative balance (
24)Financial assets – cash, accounts receivable, investment securities and
investment in debt.
25)a) Income statement for a service organisation
Sales revenue XXX
Less: Operating Expenses
Office expenses XXX
Insurance expenses XXX
b) Income statement for a retail organisation
Sales revenue XXX
Less: Cost of goods sold XXX
Gross Profit XXX
Less: Operating Expenses
Other expenses XXX
Profit XXX 26)Cash flow statement
Statement of cash flows Current year($) Previous year($)
Cash flows from operating activities
Receipts from customers
Payments to suppliers, govt. and employees
Income tax paid
Net cash flow from operating activities
Cash flows from investing activities
Proceeds from the sale of fixed assets
Proceeds from the purchase of fixed assets
Net cash flow from investing activities
Cash flows from financing activities
Proceeds from the issue of shares
Payments for shares bought back
Proceeds from borrowings
Repayment of borrowings
Distributions to minority interests
Net cash flow from financing activities
Total cash flows from all activities ( net increase or
Cash and cash equivalents at the beginning of the
Cash and cash equivalents at the end of the year
27)Why is cash flow statement needed and how is it different from income
a. Evaluate entity’s ability to generate future cash flows and provide an
indication of the future solvency of the entity.
b. Evaluate management decisions (Investing/financing decisions)
c. Determine the ability to pay dividends to shareholders and meet
d. Compare profit/loss for the year and net cash provided (used) by
28)Cash cycle – average time taken between acquiring stock for resale and
collecting the cash from their sale, that is the time taken to generate outflows. Cash cycle = stock turnover + asset turnover ( in terms of days)
29)Limitations of ratio analysis
a) Estimates – the data has estimates like for depreciation and hence the