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FAC1502 EXAM PREP PROVED CLEARLY EXPLAINED SOLUTIONS
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FAC1502 EXAM PREP PROVED CLEARLY EXPLAINED SOLUTIONS
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FAC1502 EXAM PREPDiscuss the nature of accounting.
Refer to paragraph 1.2.2.
Accounting is a specialized means of communication which is used to convey a specialized message
about an entity's finances. The recipient of this specialized message (the user of financial information)
must understand it otherwise the information that is conveyed has no value.
Accounting uses words and figures to convey financial information to the users of such information. As
you progress with your study of accounting you will become familiar with the meaning of these words
and figures, which are also known as the concepts, principles and procedures of accounting. This
knowledge will ultimately help you understand the message contained in financial statements.
Each and every person who is involved in an entity uses financial information to a greater or lesser
degree. Each of us also needs to know something about accounting to manage our personal financial
affairs. Financial resources are limited or scarce, and if we are going to spend them, we must plan
properly. Knowledge of accounting is therefore also useful in this area. Accounting is therefore a
''language'' used to convey financial information to interested parties
What is the common unit of measurement in accounting?
The common unit of measurement in accounting is money.
Name the four main forms of ownership.
Sole trader
Partnership
Close Corporation
Company
Discuss the different users of financial information.
See section 1.5.
Financial information is required by many users, who analyze the information for various decision-
making purposes. The following are the most common users of this information:
Investors
Employees
Lenders
Suppliers and other trade creditors
Customers
Government and their agencies
Public
Differentiate between financial accounting and management accounting.
,See section 1.6.
Users of financial information can be subdivided into the following two categories:
internal users - for example, management and employees
external users - for example, investors, creditors and government
Two fields of accounting have developed as a result of this distinction between the users of the
information. Financial accounting is concerned with the provision of financial information to mainly
external parties, while management accounting is concerned with the provision of financial information
to people within the entity.
Financial accounting This field of accounting is concerned with recording transactions and preparing the
financial statements for the entity as a whole. Financial accounting is governed by international financial
reporting standards (IFRS), which consists of external standards which must be adhered to. These
standards ensure the comparability of financial statements between entities.
Management accounting Management accounting provides financial information for specific purposes.
Managers use this information in their decision making, which leads to the attainment of the objectives
of the entity. Without this financial information, it would be difficult for management to manage
effectively.
Name the qualitative characteristics of financial information.
See section 1.11.2.3
(1) comparability
(2) verifiability
(3) timeliness
(4) understandability
Define the concept of accounting policy.
See section 1.8
Situations often occur in our everyday lives that are repetitive (i.e. they are always the same), but they
would each have a different outcome if we were to act differently each time. If we do not have some
kind of guideline on how we should act in such cases, our actions would probably be inconsistent. Our
friends would think we were unreliable. If we lay down a guideline so that we always act the same way in
a particular situation, we can say that we are determining a policy for our actions, which will result in our
actions being consistent.
We encounter precisely the same situation in accounting. Transactions of a repetitive nature frequently
occur, and the requirement of consistency means that an entity has to establish an accounting policy to
determine exactly how such transactions should be treated. Accounting policy is thus a set of decisions
about how the entity will handle the same type of transaction in order to achieve a consistent result
What is meant by disclosure of accounting policy?
,See section 1.9
Since an accounting policy represents an entity's decisions about situations which it could deal with in
various ways, it has to disclose its accounting policy in its financial statements. For example, an entity has
to indicate what basis it has used to deal with the depreciation of property, plant and equipment.
Describe the concept of international financial reporting standards.
See section 1.10
This is the next important concept that you will encounter in your accounting studies. For the sake of
conciseness, we will refer to this as IFRS.
If everyone were to develop his or her own language and grammatical rules, communication would
break down. We therefore have generally applicable language and grammar rules.
Accounting, as a specialized medium of communication, has precisely the same problem. If each entity
were to prepare financial reports according to its own accounting rules and its interpretation of
accounting theory and principles, chaos would result in the world of economics and business.
A foundation has therefore been developed over the years for the measurement and disclosure of the
results of financial events (transactions).
This foundation is a general framework and encompasses, in broad terms, accounting concepts,
principles, methods and procedures collectively known as IFRS.
Discuss the underlying assumption of financial statements.
See section 1.11.2.2
According to the framework, there is one underlying assumption for financial statements.
This is:
(1) the going concern.
Name the fundamental qualitative characteristics of financial statements.
Relevance
Faithful representation
Name the elements of financial statements
Assets
Liabilities
Equity
Income
Expenses
Define the concept of an accounting entity
, An accounting entity is any entity for which separate financial records are kept.
Describe the financial position of an entity in terms of the BAE.
ASSETS = EQUITY + LIABILITIES
Explain the nature of assets.
Assets are the possessions of the entity
Explain the nature of equity.
Equity is the interest which the owner has in the business and which the entity therefore owes to him.
Explain the nature of liabilities.
Liabilities are creditors' interests or interests of parties other than the owner(s). Liabilities are therefore
the debts of the entity.
Name two sources of financing.
The owner
Trade payables
What is meant by the double-entry system?
In principle it means that every transaction has a dual effect on the elements of the BAE and that after
every transaction the BAE must remain in balance.
How is the financial performance (result) calculated in accounting terms? Which financial report
reflects the financial performance?
Income minus expenditure. The statement of profit or loss and other comprehensive income reflects the
financial performance.
Give three examples of income.
Refer to paragraph 3.3.
Income is the income earned by the entity through its normal everyday business activities for the
financial accounting period (normally a year), for example sales, rent income, interest income and credit
losses recovered.
Give three examples of expenditure.
Refer to paragraph 3.3.
Expenses are the running expenses of the entity for the financial accounting period (normally a year)
necessary to earn the income, for example purchases, rent expenses, telephone expenses, water and
electricity, salaries and wages.
How is profit/loss determined for a financial period?
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