Aoshieane Gopali

5th November 5, 2020

Memory Recall Questions

1. Define business accounting.
- Business accounting is the systematic and proper keeping track of all the financial
transaction, recording, analyzing and interpreting it for good will and future
purpose of an organization.
2. Why accounting is important in an organization.
-Business accounting is vital component of any organization because the
accountants analyze it which leads the business owner to make better decision.
Overall, the business accounting keeps record of all incomes, expenditures,
investors etc. which aids the company to grow and do better performance.
3. What do you understand with financial statements? 
- Financial statements are published documents conveying a company's corporate
activity and financial performance.  Financial statements are often audited by
government agencies, accountants, firms, etc. to ensure accuracy and for tax,
financing, or investing purposes.

4. Who are the users of financial statements?

- The financial statements are used by owners, investors, market analysts,
management, the government, general public and creditors to evaluate a
company's financial health and earnings potential. 
5. Differentiate between Income Statement and Statement of Financial Position.
- Income Statement shows the financial performance of the business over a period
of time whereas, Statement of Financial Position shows the financial position of
business at a point in time.

6. Differentiate between:
 a. Assets and Expense: Asset refers to the properties owned by a business whereas
expenses is the amount of resources that have already been consumed in
the operations of a business.
b. Payments and Expense: Payment is the disbursement of money usually in the
form of cash or check whereas expenses are cost that have been used up in the
process of operating business.
c. Cash and Profit: Cash is the amount of money that the organization earns
whereas Profit is the amount of money which is left over after all expenses.
d. Current and Non-Current Assets: Current Assets is expected to be used or
consumed within one year whereas, Non-Current assets is employed over the long
term. CA is held principally for trading purpose and non-CA is acquired to
generate revenues.
e. Current and Non-Current Liabilities: Liabilities that are expected to settle within
a year is called current liabilities (e.g.: trade payables, acquired expenses).
Liabilities that are not expected to be settled within the operating cycle or within a
year after the balance sheet date. (Examples: long term debt, medium term loan)

7. What is tool used for interpretation of accounting information?

-
8. List out the five major categories of ratios used for interpretation of accounting
information. 
- The five major categories of ratios used for interpretation of accounting information
are:

 Liquidity Ratios
 Activity Ratios
 Debt Ratios
 Profitability Ratios
 Market Ratios
Home Assignment:
1. Agency problem / theory. How this problem expedite the importance of accounting
information?
- The agency problem is a conflict of interest inherent in any relationship where one
party is expected to act in another's best interests. In corporate finance, the agency
problem usually refers to a conflict of interest between a company's management
and the company's stockholders.
Accounting plays a vital role in running a business because it helps you track income
and expenditures, ensure statutory compliance, and provide investors, management,
and government with quantitative financial information that can be used in making
business decisions. In the past, there used to be lots of fraud and business scams
where shareholders lose their invested amount in the company or their money gets
misused by the board of directors. At that time there used to be proper accounting
but not the proper accounting information to the shareholders. Due to a lack of
accounting information of the company where the shareholders invest their money
they were then cheated, so the agency problem expedited the importance of
accounting information. In today’s date also we cannot say that this problem has
been eradicated but the problem has been reduced a lot.

2. Users of financial statements with examples.

- There are many users of the financial statements produced by an organization. The
following list identifies the more common users and the reasons why they need
this information:

 Company management. The management team needs to understand the

profitability, liquidity, and cash flows of the organization every month, so that
it can make operational and financing decisions about the business.
 Competitors. Entities competing against a business will attempt to gain
access to its financial statements, in order to evaluate its financial condition.
The knowledge they gain could alter their competitive strategies.
 Customers. When a customer is considering which supplier to select for a
major contract, it wants to review their financial statements first, in order to
judge the financial ability of a supplier to remain in business long enough to
provide the goods or services mandated in the contract.
  Employees. A company may elect to provide its financial statements to
employees, along with a detailed explanation of what the documents contain.
This can be used to increase the level of employee involvement in and
understanding of the business.
 Governments. A government in whose jurisdiction a company is located
will request financial statements in order to determine whether the business
paid the appropriate amount of taxes.
 Investment analysts. Outside analysts want to see financial statements in
order to decide whether they should recommend the company's securities to
their clients.
 Investors. Investors will likely require financial statements to be
provided, since they are the owners of the business and want to understand the
performance of their investment.
 Lenders. An entity loaning money to an organization will require
financial statements in order to estimate the ability of the borrower to pay back
all loaned funds and related interest charges.

2. Qualities of accounting information with examples. 

- The qualities of accounting information are:

- Understandability

This implies the expression, with clarity, of accounting information in such a way
that it will be understandable to users - who are generally assumed to have a
reasonable knowledge of business and economic activities

Relevance

This implies that, to be useful, accounting information must assist a user to form,
confirm or maybe revise a view - usually in the context of making a decision (e.g.
should I invest, should I lend money to this business? Should I work for this
business?)

Consistency
This implies consistent treatment of similar items and application of accounting
policies

Comparability

This implies the ability for users to be able to compare similar companies in the
same industry group and to make comparisons of performance over time. Much of
the work that goes into setting accounting standards is based around the need for
comparability.

Reliability

This implies that the accounting information that is presented is truthful, accurate,
complete (nothing significant missed out) and capable of being verified (e.g. by a
potential investor).

Objectivity
This implies that accounting information is prepared and reported in a "neutral"
way. In other words, it is not biased towards a particular user group or vested
interest