Questions for Practice
Short Answers
1. Define accounting.
Answer: Accounting is the systematic process of identifying, recording, classifying, summarizing, and interpreting financial transactions and communicating the results to users.
2. State the end product of financial accounting.
Answer: The end products of financial accounting are the financial statements, which include the Income Statement, Balance Sheet, and Cash Flow Statement.
3. Enumerate main objectives of accounting.
Answer:
- To maintain systematic records
- To ascertain profit or loss
- To depict financial position
- To provide information for decision-making
4. Who are the users of accounting information?
Answer: Users include internal users (owners, management, employees) and external users (investors, creditors, tax authorities, government, customers).
5. State the nature of accounting information required by long-term lenders.
Answer: Long-term lenders require information related to the financial stability, profitability, and long-term solvency of the business to assess credit risk.
6. Who are the external users of information?
Answer: External users include investors, creditors, government agencies, regulatory bodies, and the general public.
7. Enumerate information needs of management.
Answer:
- Planning and budgeting
- Performance evaluation
- Strategic decision-making
- Cost control and efficiency analysis
8. Give any three examples of revenues.
Answer:
- Sales revenue
- Interest income
- Commission received
9. Distinguish between debtors and creditors; profit and gain
Answer:
Debtors vs Creditors: Debtors owe money to the business; creditors are owed money by the business.
Profit vs Gain: Profit is the excess of revenue over expenses from core operations; gain arises from incidental transactions like sale of fixed assets.
10. ‘Accounting information should be comparable’. Do you agree with this statement? Give two reasons.
Answer: Yes, comparability is crucial.
- It enables performance comparison over time.
- It allows benchmarking with other businesses in the same industry.
11. If the accounting information is not clearly presented, which of the qualitative characteristic of the accounting information is violated?
Answer: The characteristic violated is “Understandability”.
12. “The role of accounting has changed over the period of time” – Do you agree? Explain.
Answer: Yes, the role has evolved from mere bookkeeping to strategic decision-making. Modern accounting supports planning, control, compliance, and financial analysis.
13. Giving examples, explain each of the following accounting terms:
Answer:
- Fixed Assets: Long-term tangible assets like buildings, machinery
- Revenue: Income from normal operations like sales
- Expenses: Costs incurred like rent, salaries
- Short-term Liability: Obligations due within a year like creditors
- Capital: Owner’s investment in the business
14. Define revenues and expenses?
Answer:
Revenues: Inflows of assets from business operations.
Expenses: Outflows or using up of assets for earning revenues.
15. What is the primary reason for the business students and others to familiarise themselves with the accounting discipline?
Answer: Understanding accounting helps in making informed business decisions, managing finances, and interpreting financial health of businesses.
Long Answers
1. What is accounting? Define its objectives.
Answer: Accounting is the art of recording, classifying, summarizing, and interpreting financial transactions. Its objectives are to maintain records, determine profit/loss, show financial position, and provide data for decision-making.
2. Explain the factors which necessitated systematic accounting.
Answer:
- Growth of business
- Legal compliance
- Need for decision-making
- Financial transparency
- Avoidance of fraud and errors
3. Describe the informational needs of external users.
Answer: External users like investors, creditors, and regulatory bodies need information on profitability, liquidity, solvency, and overall financial health to make informed decisions.
4. What do you mean by an asset and what are different types of assets?
Answer: Assets are economic resources controlled by the business. Types include:
- Fixed Assets: e.g., machinery
- Current Assets: e.g., cash, inventory
- Intangible Assets: e.g., patents
- Fictitious Assets: e.g., preliminary expenses
5. Explain the meaning of gain and profit. Distinguish between these two terms.
Answer:
Profit: Surplus from core operations.
Gain: Income from non-operating activities.
Difference: Profit is regular; gain is incidental or occasional.
6. Explain the qualitative characteristics of accounting information.
Answer:
- Relevance
- Reliability
- Comparability
- Understandability
- Timeliness
7. Describe the role of accounting in the modern world.
Answer: Accounting helps businesses maintain financial control, ensures legal compliance, aids in managerial decisions, attracts investors, and improves transparency in operations. It plays a key role in economic development and sustainability of businesses.