MN-2573-_Midterm_revision

Midterm Test Revision

• Test Date: Monday 18th March

• Start Time: 13:00 pm

• Duration: 1 hour

• Format: Online quiz on Canvas

• Location: No need to be on campus

• Questions: 20 multiple choice questions

• Weeks to revise: Week 1 to Week 5

Required Topics for Test

• Topics covered in lectures 1 to 5 are required

• Benefit from seminar questions related to these topics

Definition of Accounting

• Accounting:

  • Process of identifying, measuring, and communicating economic information.

  • Aids users in making informed judgments and decisions.

  • Involves collecting, analyzing, and communicating financial information.

Users of Financial Information

• Types of Users:

  • Customers

  • Businesses

  • Government

  • Public

  • Competitors

  • Managers

  • Employees

  • Owners

  • Suppliers

  • Lenders

  • Investment analysts

  • Reference: Atrill and McLaney pp2

Qualitative Characteristics of Accounting Information

• Fundamental Qualities:

  • Relevance

  • Faithful Representation

Relevance

• Information must influence decisions.

• Must possess predictive and confirmatory value.

• Needs to meet materiality threshold.

• Example of Materiality:

  • A £0.5m error in an expense item on a £500m profit is not material (0.1%).

  • A £10m error on a £20m profit is material (50%).

Faithful Representation

• Must include:

  • Completeness

  • Neutrality

  • Freedom from errors

Additional Qualities of Accounting Information

• Enhancing Qualities:

  • Comparability: Users can compare a company's performance over time or with competitors.

  • Verifiability: Information can be verified by auditors or through external comparisons.

  • Timeliness: Information should be available in good time for decision-making.

  • Understandability: Terminology should be simplified for user comprehension.

Main Elements of Financial Statements

• Elements:

  • Assets

  • Liabilities

  • Equity

  • Revenue

  • Expenses

Assets

• Recognition Criteria:

  • Must have potential future economic benefits.

  • Economic benefits arise from past transactions.

  • Business must control the resource.

  • Asset must have a measurable cost/value.

• Common assets: cash, inventory, plant & equipment.

Liabilities

• Recognition Criteria:

  • Evidence of outflow (cash or resources).

  • Obligation from past transactions.

  • Measurable obligation.

• Common liabilities: accounts payable, notes payable, salaries/wages payable.

Equity

• Represents ownership interest.

• Includes:

  • Share capital

  • Retained profits/losses

  • Recognition is related to assets/liabilities.

Revenue and Expenses

• Revenue: Income from sales of goods/services.

• Expenses: Costs incurred to earn income.

• Relationship:

  • Statement of Profit or Loss shows revenue and expenses:

  • Profit (or loss) = Revenue - Expenses.

Accounting Equation

• Basic Structure:

  • Assets = Liabilities + Equity

Extended Equation

• Profit (Loss) during a period = Total revenue - Total expenses.

Methods of Depreciation

• Depreciation Definitions:

  • Straight-Line Method: Allocates depreciation evenly.

  • Reducing-Balance Method: Applies a fixed percentage leading to decreasing annual depreciation.

Record Keeping and Adjustments

• Accrual-Basis Accounting: Transactions recorded in the periods they occur.

• Matching Convention: Expenses matched with their related revenues.

• Accrued Expenses: Costs incurred not yet paid or billed.

Financial Statements

• Statement of Financial Position:

  • Displays assets, liabilities, and equity.

• Income Statement:

  • Reports on income and expenses over a period.