Management Accounting Principles and Concepts
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Questions and Answers

What happens to equity if a business experiences a profit for the year?

  • Equity remains unchanged
  • Equity increases (correct)
  • Equity decreases
  • Equity fluctuates randomly

Which principle requires that a business's activities be distinct from its owner's activities?

  • Economic entity (correct)
  • Financial principle
  • Revenue recognition
  • Monetary unit

What is the result of breaking even in a business's financial performance?

  • Equity increases
  • Equity does not change (correct)
  • Equity decreases
  • Equity doubles

According to the monetary unit principle, what type of data should be included in accounting records?

<p>Only transactions expressible in monetary terms (D)</p> Signup and view all the answers

If a business incurs expenses but does not generate any revenue, what is the likely effect on equity?

<p>Equity decreases (B)</p> Signup and view all the answers

What is the primary focus of management accounting?

<p>Sourcing, analyzing, and using decision-relevant information (C)</p> Signup and view all the answers

Which of the following best describes indirect costs?

<p>Costs that cannot be conveniently traced to a unit of product (B)</p> Signup and view all the answers

What role does decision making play in management accounting?

<p>It seeks to achieve optimum utilization of capital resources (B)</p> Signup and view all the answers

In the context of cost objects, which of the following represents direct costs?

<p>Surgeon's salary during surgery (C)</p> Signup and view all the answers

Which of these is NOT a component of product cost?

<p>Sales commissions (D)</p> Signup and view all the answers

What is primarily focused on the information for internal decision-making and operational control?

<p>Management accounting (A)</p> Signup and view all the answers

Which of the following statements describes financial accounting?

<p>It is primarily historical. (D)</p> Signup and view all the answers

What is included in the basic accounting model?

<p>Income statement and balance sheet (A)</p> Signup and view all the answers

Which group typically utilizes management accounting information?

<p>Internal management (C)</p> Signup and view all the answers

What is a critical step in the accounting process that involves recording and summarizing economic events?

<p>Bookkeeping (A)</p> Signup and view all the answers

Which of the following is NOT typically considered when analyzing financial data?

<p>Employee happiness ratings (C)</p> Signup and view all the answers

What role does an accountant play in modern businesses beyond bookkeeping?

<p>Making financial decisions (C)</p> Signup and view all the answers

Which statement accurately describes the nature of management accounting data?

<p>Flexible in terms of detail and availability (D)</p> Signup and view all the answers

What is a key advantage of being a public limited company (plc)?

<p>Easier access to capital (B)</p> Signup and view all the answers

What does the share premium account represent?

<p>Additional amounts received above the nominal value of shares (B)</p> Signup and view all the answers

How are retained earnings best described?

<p>Net income that is kept within the company instead of distributed (D)</p> Signup and view all the answers

Which statement regarding ordinary shares is correct?

<p>Ordinary shares are treated as equity in the Statement of Financial Position (SoFP) (B)</p> Signup and view all the answers

What does a rights issue allow existing shareholders to do?

<p>Purchase extra shares at a lower price than market value (D)</p> Signup and view all the answers

What is one function of general capital reserves?

<p>To save as a buffer-zone for future years (C)</p> Signup and view all the answers

Which equity type is specifically defined as not available for withdrawal?

<p>Ordinary share capital (B), General capital reserves (D)</p> Signup and view all the answers

When a company issues additional ordinary shares as a bonus issue, what happens?

<p>Shareholders receive free shares based on their existing holdings (A)</p> Signup and view all the answers

What is a primary benefit of a corporation in terms of liability?

<p>Owners' liability is limited to their investment in shares. (D)</p> Signup and view all the answers

Which entity requires annual accounts to be submitted to Companies House?

<p>Corporation (Limited company) (C)</p> Signup and view all the answers

What must happen to profits in a partnership?

<p>They are shared among partners in accordance with the partnership agreement. (B)</p> Signup and view all the answers

What type of company can offer its shares publicly on the stock exchange?

<p>Public limited company (PLC) (D)</p> Signup and view all the answers

What is the purpose of a statement of changes in equity?

<p>To detail changes in capital over time. (A)</p> Signup and view all the answers

Which of the following is a characteristic of a sole trader?

<p>Unlimited personal liability for business debts. (C)</p> Signup and view all the answers

Why would a bank require accounting information from a business?

<p>To assess the creditworthiness for making loans. (C)</p> Signup and view all the answers

What does a statement of cash flow primarily reflect?

<p>The cash movements and net cash effects during a period. (B)</p> Signup and view all the answers

What are costs that cannot be traced directly to specific units produced known as?

<p>Manufacturing overheads (A)</p> Signup and view all the answers

Which of the following is an example of a relevant cost?

<p>Petrol costs (D)</p> Signup and view all the answers

What does the break-even point represent?

<p>Total costs equal total revenues (A)</p> Signup and view all the answers

Which type of financing does not represent current liabilities?

<p>Preference shares (B)</p> Signup and view all the answers

In WACC, which of the following is not a required component for its calculation?

<p>Company's total assets (B)</p> Signup and view all the answers

Which cost is considered a sunk cost?

<p>Money spent on past advertisements (D)</p> Signup and view all the answers

What does the contribution per unit measure?

<p>Selling price minus variable costs (D)</p> Signup and view all the answers

Which financing method involves issuing shares?

<p>Equity financing (A)</p> Signup and view all the answers

What is the key feature of debentures?

<p>They are a form of security for loans (C)</p> Signup and view all the answers

Which of the following is a method of investment appraisal?

<p>Payback period (PP) (A)</p> Signup and view all the answers

Why is it important to understand the cost of capital?

<p>To justify the cost of capital project returns (A)</p> Signup and view all the answers

Which costs are defined as fixed costs?

<p>Costs incurred regardless of production volume (D)</p> Signup and view all the answers

What role do opportunity costs play in decision-making?

<p>They represent lost profit from the next best alternative (D)</p> Signup and view all the answers

Flashcards

Accounting

The process of identifying, recording, and communicating economic events of an organization.

Managerial accounting

Information used by internal stakeholders for decision making and control within an organization.

Financial accounting

Information reported to external users to help them make informed decisions about the company.

Bookkeeping

The systematic process of recording, classifying, and summarizing transactions that affect the financial position of an organization.

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Financial statements

Reports that summarize a company's financial performance and position.

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Cost accounting

The process used to determine the cost of producing a product or service.

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Budgeting

The process of creating budgets and monitoring performance against the budget.

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Financial statement analysis

Analyzing financial statements to understand the financial performance and position of a company.

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Total Revenue

The total amount of money earned by a business during a specific period.

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Total Expenses

The total amount of money spent by a business during a specific period.

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Profit (or Loss)

The difference between total revenue and total expenses. It can be positive (profit) or negative (loss).

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Equity

The value of the owner's investment in the business. It increases with profits and decreases with losses.

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Monetary Unit Principle

An accounting principle that requires businesses to record transactions only if they can be expressed in terms of money.

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Corporation (Limited Company)

A business structure where ownership is divided into shares, and the company is a separate legal entity from its owners.

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Companies House Submission

The legal requirement for a corporation to submit financial accounts to a government agency, providing transparency about the company's financial performance.

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Statement of Financial Position

A financial statement that details the assets, liabilities, and equity of a business at a specific point in time.

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Limited Liability

The legal liability of business owners is limited to their investment in the company, protecting them from personal financial ruin.

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Partnership

A business structure owned by two or more individuals, often in retail or service industries, sharing profits and liabilities.

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Income Statement (Profit and Loss Account)

A financial statement showing a company's revenue, expenses, and net profit or loss over a specific period.

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Statement of Cash Flow

A financial statement that details the cash inflows and outflows of a business over a specific period.

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Statement of Changes in Equity

A financial statement that shows the changes in a company's equity over a specific period.

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Management accounting's purpose

The information gathered, analyzed, and communicated in management accounting is used to make choices that will improve the company's value.

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What are direct costs?

Direct costs are those that can be easily and directly traced to a particular product or activity, for example, the cost of raw materials used in a manufacturing process.

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What are indirect costs?

Indirect costs, also known as overhead costs, are expenses that cannot be easily linked to a specific product or service. Examples include rent, utilities, and administrative salaries.

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What is the goal of decision-making?

The primary objective of decision-making within a company is to achieve the best possible use of its capital and resources. This involves choosing the most effective options to make the most of available resources.

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What are key requirements for effective management accounting?

Effective management accounting requires timely, accurate, and relevant information, along with strong communication, clear responsibilities, and appropriate levels of authority.

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Ordinary Share Capital

The total amount of money invested in a company by its owners. It represents the owners' stake in the company.

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Share Premium

The extra amount of money paid by a shareholder above the nominal value of a share. It represents the premium paid for the share.

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Retained Earnings

The profit that a company retains within its business instead of distributing it to shareholders as dividends.

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General Capital Reserves

A company's own generated profits that are set aside for specific purposes like future investments or unexpected expenses. It's a safety net.

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Rights Issue

A method of raising capital by issuing new shares to existing shareholders at a discounted price. Each shareholder is offered shares in proportion to their existing holding.

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Bonus Issue

A method of raising capital by issuing new shares to existing shareholders for free, in proportion to their existing holding.

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Long Term Borrowings

Money borrowed by a company for a long period of time, typically with a fixed interest rate. It's a way for companies to fund expansion or investments.

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Preference Shares

A type of security that gives its holder a fixed dividend payment and priority over ordinary shareholders for receiving assets in the event of a liquidation.

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Direct Costs

Costs that can be directly traced to specific units produced, such as raw materials, labor, and manufacturing supplies.

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Manufacturing Overhead

Costs that cannot be directly traced to specific units produced, such as indirect materials, indirect labor, and factory overhead.

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Non-Manufacturing Overhead Costs

Costs that are essential for getting the order and delivering the product, such as marketing, sales, and administration expenses.

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Variable Costs

Costs that vary in total with the level of activity, such as direct materials, direct labor, and variable manufacturing overhead.

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Fixed Costs

Costs that remain constant in total regardless of the level of activity, such as rent, property taxes, and depreciation.

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Relevant Costs

Future costs that will be different depending on the decision made, such as the cost of materials or labor.

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Irrelevant Costs

Costs that will not be affected by the decision, such as sunk costs or irrelevant costs.

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Opportunity Cost

The potential benefit that is lost when one alternative is chosen over another.

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Replacement Cost

The cost of purchasing a substitute asset for the current asset being used by a company.

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Sunk Cost

A cost that has already been incurred and cannot be recovered.

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Break-Even Point

The point where total revenue equals total costs, resulting in neither profit nor loss.

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Contribution Margin per Unit

The amount of money each sale of a unit contributes towards covering the fixed costs of a product or business.

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Cost of Capital

The cost of a business's financing, including the expected return required by shareholders and the interest paid on debt.

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WACC (Weighted Average Cost of Capital)

The weighted average cost of a company's debt and equity financing, reflecting their proportions in the company's capital structure.

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Investment Appraisal Methods

A method for analyzing whether an investment project is worthwhile, considering factors such as profitability, payback period, and accounting rate of return.

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Study Notes

Accounting Framework

  • Accounting is "the language of business"
  • Identifies, records, classifies, and summarizes economic events (transactions)
  • Prepares accounting reports for users.
  • The accounting process includes bookkeeping.
  • Accounting helps to make business decisions.

Types of Accounting

  • Financial accounting: Presents financial position and performance using published statements for external users (mainly). Follows broad accounting standards and regulations. Predominantly historical and quantifiable in monetary terms.
  • Managerial accounting: Provides internal users with information for decision-making and controlling operations. Internal users have specific needs and information requirements. No strict restrictions on content; can include non-financial information; less focus on objectivity, and verifiability.

Users of Accounting Data

  • Internal users: Marketing, management, finance, and human resources departments. Example questions they ask include: what price maximizes company net income? Which product lines are most profitable? Can the company afford to pay salary increases?
  • External users: Investors, creditors, owners, managers, lenders, suppliers, customers, competitors, employees, government and tax authority, community representatives, and investment analysts. Example questions they ask include: Is the company profitable? Can they fulfill their debts?

Main Elements of Accounting

  • Assets: Resources controlled by the entity with future economic benefits.
  • Liabilities: Obligations to transfer economic benefits.
  • Equity: Residual interest in the assets of the entity after deducting its liabilities.
  • Income: Increase in equity from normal business activities.
  • Expenses: Decrease in equity, also from normal business activities.

Accounting Concepts and Conventions

  • Business entity: Business is separate from owners.
  • Cost principle: Transactions are recorded at original cost.
  • Going concern: Business continues operating normally in the foreseeable future.
  • Accrual concept: Record revenues and expenses when they occur, not necessarily when cash changes hands.
  • Consistency: Use the same accounting methods from one period to the next.
  • Materiality: Information is material if its omission or misstatement could influence the decisions of users.

Financial Statements

  • Statement of Financial Position (Balance Sheet): Snapshot of a company's financial position at a specific time. Includes assets, liabilities, and equity.
  • Income Statement: Tracks the company's performance over a period. Shows revenues and expenses to arrive at net income.
  • Statement of Cash Flows: Shows the inflows and outflows of cash during a period. Includes operating, investing, and financing activities.

Qualitative Characteristics

  • Fundamental qualitative characteristics: Relevance (influencing stakeholder decisions) and faithful representation (capture economic activity).
  • Enhancing qualitative characteristics: Include comparability, verifiability, understandability, and timeliness.

Types of Businesses

  • Proprietorship (Sole Trader): Owned by one person, unlimited liability (owner responsible for all debts).
  • Partnership: Owned by two or more individuals, typically with unlimited liability.
  • Corporation (Limited Company, Ltd/PLC): Separate legal entity from owners, limited liability.

Equity in Limited Companies

  • Limited liability companies (ltds): Limited liability protects owners from personal responsibility for company debts. Restricted on issuing shares that are offered publicly.
  • Public limited companies (plcs): Greater scrutiny of financial situation, legally obligated to provide annual reports; can issue shares publicly.

Accounting Standards

  • International Financial Reporting Standards (IFRS): Commonly used by public companies and some private entities around the world.
  • Generally Accepted Accounting Principles (GAAP): Used primarily in the US for private companies and some public organizations.

Cost of Capital

  • Cost of equity: Expected rate of return from shareholders.
  • Cost of debt: Rate of interest charged on debt financing.
  • WACC (Weighted Average Cost of Capital): Weighted average cost of all sources of financing based on their relative proportions.

Investment Appraisal Methods

  • Accounting rate of return (ARR): Shows the average accounting profit as a percentage relative to the investment.
  • Payback period (PP): Measures the time required to recover the initial investment.
  • Net present value (NPV): Calculates the difference between the present value of cash inflows and cash outflows to assess the profitability of an investment.

Budgeting

  • Master budget: Comprehensive plan that includes various budgets like sales, production and cash.
  • Sales budget: Predicts revenues from sales.
  • Production budget: Predicts production quantities
  • Cash budget: Predicts cash inflows and outflows.

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Description

Test your knowledge on the fundamental principles of management accounting with this quiz. Explore topics such as equity, decision making, and cost components. Perfect for students and professionals looking to reinforce their understanding of management accounting.

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