Discussion questions Easy

Chapter 1 Introduction to finance and accounting Discussion questions – Easy 1.1 What is the purpose of producing accounting information?Solution: The objective of providing accounting information is to enable users to make more informed decisions and judgements about the organisation concerned.LO1 Explain the nature and role of accounting 1.2 Why is it important to have a partnership agreement specifying the arrangement for allocating (dividing) profits between the partners?Solution: Without a formal partnership agreement, operating and administrative difficulties will inevitably arise. The resolution of such difficulties without an agreement may well be costly in time, financial performance and particularly inter-partnership relationships.LO2 List the main groups that use the accounting reports of a business entity, and summarise the different uses that can be made of accounting information 1.3 What type of accounting information is produced more frequently? Why?Solution: Management accounting information is provided on an ‘as needed’ basis for managers. Financial accounting reports, on the other hand, are prepared at less frequent, scheduled dates (e.g. year-end, quarterly or monthly).LO3 Compare and contrast financial and management accounting 1.4 List three reasons for starting a business. Explain which reason is most important and why.Solution: A business may be started for any number of reasons. To make a profit is probably the primary goal for most. Other reasons may include: to provide employment, to provide services or materials to a parent company or to provide community services. Which goal is most important will vary depending on the objectives of the business owner.LO4 Identify the main purpose of a business (while recognising a range of other influences), and explain the traditional risk–return relationship .Page 1 Accounting for Non-Specialists 7e Peter Atrill, Eddie McLaney, David Harvey (Solutions Manual All Chapters, 100% Original Verified, A+ Grade) 1 / 4

1.5 Identify the similarities and differences between the three major external financial reports (statement of financial position, statement of financial performance and statement of cash flows).

Solution: The following table highlights a number of the key similarities and differences among the major external financial reports.

Financial Report/ Aspect Income Statement/ Statement of Comprehensive Income Balance Sheet Statement of Financial Position Statement of Cash Flows Nature Flow report (for the period) Static report ( at the end of the period) Flow report (for the period) Basis of transaction Recognition Accrual Accrual Cash Related elements (account types) Income and expenses Assets, liabilities and owners’ equity All elements Focus

The increment in owners’ equity for the period from non-ownership transactions The financial position or wealth at a point in time The change in cash or cash equivalents for the period

LO5 Provide an overview of the main financial reports prepared by a business

1.6 Distinguish between ‘accounting entities’ and ‘legal entities’ as business structures.

Solution: For accounting purposes it is assumed that the business is separate from the owner(s). The business may be in the form of a sole proprietorship, partnership, company or other operating structure. This assumption is essential to facilitate transaction recording and reporting in relation to the business or operating activities of that entity.From the perspective of the law, most entity structures other than the company do not represent separate legal entities. That is, from the perspective of the law, there is no distinction between the business and the owners of the business. However, with the company entity structure, the business is granted the status of a ‘legal person’ and the rights and responsibilities that go with that status.

LO6 Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context

1.7 As business changes, accounting must change. Do you agree?

Solution: Given its goal of providing useful information it is crucial for accounting to change as business changes. Financial accounting will change more slowly than management accounting due to its regulated nature and the need for consistency and comparability.

LO7 Identify ways in which business and accounting have been changing, together with some current issues confronting businesses and their associated reporting, including current thinking on ethics in business .Page

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1.8 ‘Understandability’ is identified in the text as a key characteristic of accounting information. By whom should the financial reports be readily understood?

Solution: The Accounting Framework suggests the report users need to be both competent and diligent. Therefore, it is not assumed that financial reports will be readily read and understood by the lay readers, but rather that the readers will be proficient in accounting and finance (aptitude and application).

LO8 Explain why accounting information is generally considered to be useful, and why you need to know the basics of accounting

1.9 Distinguish between ‘planning’ and ‘control’.

Solution: Planning is concerned with providing direction for future activity. Control can be defined as compelling events to conform to the plan.

LO3 Compare and contrast financial and management accounting LO4 Identify the main purpose of a business (while recognising a range of other influences), and explain the traditional risk–return relationship LO6 Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context

1.10 Within the business, how can accounting facilitate control?

Solution: One simple way that accounting can facilitate control is through a comparison of planned or budgeted outcomes with actual results. Where variances occur managers can take actions to get the business back on track.

LO3 Compare and contrast financial and management accounting LO4 Identify the main purpose of a business (while recognising a range of other influences), and explain the traditional risk–return relationship LO6 Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context

1.11 How are annual budgets linked to the long-term plans of an organisation?

Solution: To achieve the long-term plans of an organisation, the management strategy would normally be to break down that plan into incremental targets or achievement hurdles.These incremental targets will normally be aligned with, or be labelled as the annual budget.Budgets are normally expressed in quantitative terms, including monetary amounts (e.g. sales dollars) and non-monetary measures (e.g. production efficiency percentage or the number of units produced).

LO3 Compare and contrast financial and management accounting LO4 Identify the main purpose of a business (while recognising a range of other influences), and explain the traditional risk–return relationship LO6 Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context

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Discussion questions – Intermediate

1.12 ‘Relevance’ and ‘reliability’ represent two key qualitative characteristics of accounting information. What do these two terms mean in an accounting context? Are they in conflict?

Solution: Relevance relates fundamentally to ‘bearing upon’ the decision at hand in either a confirmation or prediction capacity.Reliability relates to ‘faithfully representing’ what it purports to represent, and is a link to the dual ideas of objectively and neutrality.The possible conflict relates to obtaining the appropriate balance between the two as relevance is often inversely related to the passage of time, while reliability is positively related to the passage of time.

LO1 Explain the nature and role of accounting

1.13 As an owner of a small business, what are three key financial attributes of the business you would wish to assess when you review financial reports?

Solution: Liquidity, solvency and profitability.

LO2 List the main groups that use the accounting reports of a business entity, and summarise the different uses that can be made of accounting information

1.14 Reconcile financial accounting with management accounting. Your textbook clearly distinguishes between them. What are the similarities?

Solution: The link between management and financial accounting is in the actual statement of financial performance and statement of financial position.For management accounting, the actuals are required to compare with budgets and standards as part of the control function. For financial accounting, the actuals are the substance of the financial reports.

LO3 Compare and contrast financial and management accounting

1.15 What is meant by the ‘risk–return relationship’? Provide a non-accounting example of the trade-off between risk and return.

Solution: Projects or ventures that are less likely to succeed should provide higher returns.It is acceptable for safe (likely to succeed) ventures to earn lower returns. A long shot bet at the racetrack is unlikely to win but will pay off handsomely if you get lucky as compared to betting on the favourite that has a good chance of winning but won’t pay back a great deal.

LO4 Identify the main purpose of a business (while recognising a range of other influences), and explain the traditional risk–return relationship

1.16 Describe two advantages for each type of business organisation.

Solution:

Sole trader – easy and inexpensive to create – owner maintains control of the business Partnership – easy and inexpensive to create – greater access to financing and skills Limited company – limited liability – unlimited life.

LO6 Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context .Page

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