Chapter 29 (accounting fundamentals)

Question 1

what are the Internal and external uses of accounting information?

Answer 1

Internal users:
-Business managers

External users:

• Banks
• Creditors, such as suppliers
• Customers
• Government and tax authorities
• Investors, such as shareholders in the company
• Workforce
• Local community

Question 2

how the source will use the accounting info: banks

Answer 2

• To decide whether to lend money to the business
• To assess whether to allow an increase in overdraft facilities
• To decide whether to continue an overdraft facility or a loan

Question 3

how the source will use the accounting info: Creditors, such as suppliers

Answer 3

• To see of the business is secure and liquid enough to pay off its debts
• To assess whether the business is a good credit risk
• To decide whether to press for early repayment of outstanding debts

Question 4

how the source will use the accounting info: Customers

Answer 4

• To assess whether the business is secure
• To determine whether they will be assured of future supplies of the goods they are purchasing
• To establish whether there will be security of spare parts and service facilities

Question 5

how the source will use the accounting info: Government and tax authorities

Answer 5

• To calculate how much tax is due from the business
• To determine whether the business is likely to expand and create more jobs and be of increasing importance to the country’s economy
• To assess whether the business is in danger of closing down, creating economic problems
• To confirm that the business is staying within the law in terms of accounting regulations

Question 6

how the source will use the accounting info: Investors, such as shareholders in the company

Answer 6

-To assess the value of the business and their investment in it
-To establish whether the business is becoming more or less profitable
-To determine what share of the profits investors are receiving
-To decide whether the business has potential for growth
If they are potential investors, to compare details with those from other businesses before making a decision to buy shares in a company
-If they are actual investors, to decide whether to consider selling all or part of their holding

Question 7

how the source will use the accounting info: Workforce

Answer 7

• To assess whether the business is secure enough to pay wages and salaries
• To determine whether the business is likely to expand or be reduced in size
• To determine whether jobs are secure
• To find out whether, if profits are rising, a wage increase can be afforded
• To find out how the average wage in the business compares with the salaries of directors

Question 8

how the source will use the accounting info: Local community

Answer 8

-To see if the business is profitable and likely to expand, which could be good for the local economy
-To determine whether the business is making losses and
whether this could lead to closure

Question 9

what Information does not have to be published in a company’s annual report and accounts are?

Answer 9

• Details of the sales and profitability of each good or service produced by the company and of each department or division
• The research and development plans of the business and proposed new products
• The precise future plans for expansion or rationalisation of the business
• Evidence of the company’s impact on the environment and local community – although this social and environmental audit is sometimes included voluntarily by companies
• Future budgets or financial plans

Question 10

whats is Window dressing?

Answer 10

Window dressing is presenting the company accounts in a favourable light – to flatter the business performance

Question 11

Common ways of window dressing include:

Answer 11

-ignoring the fact that some customers (debtors_ who have not paid for goods delivered may, in fact, never pay – they are ‘bad debts’
-giving stock levels a higher value than they are probably worth
-delaying paying bills or incurring expenses until after the
accounts have been published
-selling assets, such as buildings, at the end of the financial year, to give the business more cash and improve the liquidity position – these assets then be leased or rented back by the business
-reducing the amount of depreciation of fixed assets, such as machines or vehicles, in order to increase declared profit and increase asset values

Question 12

the Three main business accounts are?

Answer 12

1.The income statement:
The gross and net profit of the company. Details of how the net profit is split up (or appropriated) between dividends to shareholders and retained profits.

2.The balance sheet:
The net worth of the company. This is the difference between the value of what a company owns (assets) and what it owes (liabilities).

3.Cash-flow statement:
Where cash was received from and what it was spent on.

Question 13

what is The income statement

Answer 13

An income statement records the revenue, costs and profit (or loss) of a business over a given period of time

Question 14

what is the balance sheet?

Answer 14

Balance sheet is an accounting statement that records the

values of a business’s assets, liabilities and shareholders’ equity at one point of time

Question 15

what are Non-current assets?

Answer 15

Non-current assets are assets to be kept and used by the business for more than one year. Used to be referred to as ‘fixed assets’.

Question 16

what are Intangible assets?

Answer 16

Intangible assets are items of value that do not have a physical
presence, such as patents and trademarks

Question 17

what are Current assets?

Answer 17

Current assets are assets that are likely to be turned into cash
before the next balance-sheet date