Accounting Principles and Financial Reporting Practice Flashcards

These vocabulary flashcards cover fundamental accounting concepts including the accrual principle, asset types, inventory valuation methods, and criticisms of financial reporting based on the provided lecture notes.

Accrual principle

The principle stating that revenue should be recognised when earned and expenses when incurred regardless of when cash is received or paid.

Trade receivables

Amounts owed to the business by customers who bought goods or services on credit; these are recognised as current assets.

Accrued expenses

Expenses that have been incurred during the accounting period but have not yet been paid for or invoiced by the year end, reported as current liabilities.

Prepayment asset

The remaining balance of an advance payment that relates to future periods rather than the current accounting period.

Non-current assets

Assets that a business intends to keep and use for more than one accounting period, usually longer than $12$ months, providing long-term economic benefits.

Unearned income

Arises when a customer pays in advance before the business has delivered goods or services; it is recognised as a current liability.

FIFO (First-In First-Out)

An inventory valuation method assuming the oldest inventory purchased is sold first, meaning closing inventory is valued using the most recent purchase prices.

LIFO (Last-In First-Out)

An inventory valuation method assuming the most recent inventory purchased is sold first; it is prohibited by $IFRS$ and results in outdated inventory values.

Cash expenses

Expenses that have already been paid during the accounting period, such as wages or rent paid in cash.

Dividends

Payments made by a company to its shareholders from profits earned by the business, representing a distribution of earnings rather than an operating expense.

Intangible assets

Non-physical non-current assets that provide economic benefits over more than one accounting period, such as patents, software, trademarks and licences.

Equity

The owners' claim in the business, including share capital and retained earnings, which normally does not need to be repaid.

Debt

Amounts borrowed from lenders such as banks or bondholders that create financial obligations including interest payments and repayment of the principal amount.

Profit due to owners

The profit earned during a single accounting period after all expenses and taxes have been deducted.

Retained earnings

The accumulated profits kept within the business over time after dividends have been paid to shareholders; these form part of total equity.

Depreciation

The process of allocating the cost of a tangible non-current asset over the accounting periods in which it provides economic benefit.

Amortisation

The process of allocating the cost of a finite-life intangible asset over its useful life.

Revenue recognition principle

Under $IFRS$, revenue should be recognised when earned, meaning when the business has satisfied its performance obligation by delivering goods or services.

Matching principle

The accounting principle where expenses are recognised in the same period as the revenue they helped generate to avoid distorting reported profit.

Fair value accounting

An accounting approach that adjusts asset values to reflect current market conditions rather than reporting at historic cost less depreciation.

Capital employed

The long-term funding invested in the business, equal to non-current liabilities plus equity, commonly used when calculating $ROCE$.

Gross profit

The profit earned after deducting cost of sales from revenue, showing the margin from core trading activities before operating expenses.

Share capital

Money invested by shareholders into the company, representing a component of equity that comes directly from owners.

Current assets

Economic resources expected to be converted into cash, sold, or consumed within one year, such as cash, inventory, and trade receivables.

Historic cost accounting

A limitation of financial reporting where assets may be reported at outdated values that differ significantly from current market values.

External auditors

Independent professionals who examine whether accounts give a "true and fair view" and comply with accounting standards to improve confidence in financial statements.

Preparer bias

A criticism of financial reporting where management has incentives to present performance favourably to increase bonuses or maintain share prices.