Topic 1 Self-study questions

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Accounting

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Apr 3, 2024

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Self-study questions Introduction to Accounting Complete these questions to develop your understanding of the lecture content. Question 1 Differentiate between financial and management accounting. Question 2 Broadly speaking, internal users are within an entity (in a privileged position) and external users are outside of an entity (with no privileges). If Emma works on a casual basis in the bakery department of her local supermarket, what kind of user would she be classified as? Explain. Question 3 Justify why internal users should have access to more information, such as cost price of individual items of stock they sell, while external users receive limited information. Question 4 Given the main purpose of accounting, identify the general consequence to users of a business failing to comply with any of the six qualitative characteristics. Question 5 Provide a list of assets, liabilities, incomes and expenses that an individual may have. Try to think of at least three of each. Question 6 Tom has commenced a small business as an Uber driver, using his own vehicle to drive passengers to their destinations. (a) Apply the definition of assets from the Conceptual Framework to justify the recording of the motor vehicle as an asset in Tom’s business records. (b) Apply the definition of income from the Conceptual Framework to justify the recording of fees received from a passenger for a trip they took in Tom’s business records. Question 7 A hair salon owned by Adam has a well-known stylist working there part time. Adam argues that he should be able to record the stylist as an asset, because Adam knows his business success is directly attributable to the stylist’s services. Explain why the employee is not considered an asset to the business.

Self-study questions SUGGESTED SOLUTIONS Introduction to Accounting Question 1 The two main streams of accounting can be differentiated in a number of ways. Financial accounting information is primarily prepared for external users (for example prospective investors or the tax office) and as such is subjected to regulation and reporting standards. These rules stipulate a prescribed format for the reports, along with designated time periods for reporting. Financial accounting reports on the past - the information presented is a summary of historical data that has already occurred - and is represented by financial (numerical) data. Management accounting helps internal users make decisions with respect to the effective use of an entity’s resources in achieving business goals. Management accounting reports have no prescribed format, but need to be up to date to be effective. Information can be prepared as often as required, and need not be limited to numerical data. Such information is often based on current issues within the business and is used to help guide future decisions. Question 2 Generally speaking, internal users work within the business and have access to any information they need. External users are those on the outside who must wait for the release of information about performance and position. However, some employees are considered external users despite working within a business, due to the nature of their position and inability to access information. Emma, as a casual employee, would fall into this category as she would not be in a privileged position to access confidential information. Question 3 Internal users need information to run the business day by day. They need both management accounting (costing) information as well as basic financial results. It would be unreasonable for them to make decisions with financial accounting information alone, and just as unreasonable to release detailed management accounting information to external users. Question 4 The main purpose of accounting is to provide information for decision making. The qualitative characteristics exist to help to ensure that financial accounting information released to external users assists them in decision making. Non-compliance with any of the qualitative characteristics could hamper this process and lead to poor decisions being made. Question 5 Below is a suggested list. Many more examples could be included.

ASSETS Cash Computer Vehicle Jewellery LIABILITIES Credit card Bank Loan HECS-HELP debt Money owed to parents INCOMES Wages from job Bank interest Government allowance Dividends EXPENSES Rent Travel Food and drinks Mobile phone usage Question 6 (a) A motor vehicle represents an economic resource to Tom’s business as it is used to generate income by taking passengers to their destinations. It would have been purchased or acquired by Tom in a past event and is assumed to be controlled by Tom. Accordingly, the motor vehicle would fit the definition of asset in Tom’s business records. (b) Uber fees received from passengers increase the economic resources of Tom’s business by increasing cash. They will directly increase Tom’s equity since income contributes to profit. The fees would not have been contributed by Tom as the business owner. Accordingly, the fees would meet the definition of income in Tom’s business records. Question 7 One aspect of the definition of ‘asset’ refers to control. An employee is uncontrollable, as they have the ability to resign when they desire, even if that involves a financial penalty or loss. Despite the stylist being a main contributor to clientele, the stylist cannot be recognised as an asset in the business records of Adam’s hair salon.

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