poa theory notes

POA THEORY QUESTIONS (EXPRESS) CHAPTER 1: INTRODUCTION TO ACCOUNTING State the role of accounting. Accounting provides accounting information for decision-making by business owners and other stakeholders to make informed decisions regarding the management of resources and performance of businesses. State the role of accountants. Accountants act as stewards of businesses through preparing and providing accounting information for stakeholders’ decision-making. Stewards are responsible for managing the resources of the business on behalf of the owner(s). Define integrity and objectivity. Integrity - being straightforward and honest in all professional and business relationships Objective - not letting bias, conflict of interest or undue influence of others override professional judgement Explain the importance of having integrity and objectivity in preparing and presenting accounting information. Accountants must adhere to professional ethics, uphold integrity and be objective so that stakeholders can place trust in the information provided. State the stakeholders who are interested in the affairs of the business and make use of the accounting information for decision-making. Explain why stakeholders of a business are interested in accounting information. Stakeholder Why the stakeholder is interested Owners Whether to continue to invest in the business or sell the business, depending on the risks and returns related to the business. Managers Whether to consider ways to improve the performance of the business. Employees Whether to continue working for the business. Lenders Whether to grant loans to the business, depending on the business’ ability to repay the loan principal and pay interest. Suppliers Whether to sell to the business on credit, depending on its ability to pay. Customers Whether to buy from the business, depending on the business’ ability to provide the goods and services that they need and good after-sales service. Government Whether the business complies with the tax regulations and decides the amount of tax to collect from the business. Competitors Whether they are comparable to the business and how to improve their own performance.

Define each accounting theory. 1) Accounting Entity Accounting Entity theory requires that the activities of a business are separate from the actions of the owner. All transactions are recorded from the point of view of the business. 2) Accounting Period Accounting period theory divides the life of a business into regular time intervals. 3) Accrual basis of accounting Accrual basis of accounting theory requires the recording of all business activities which have occurred, regardless of whether cash is paid or received in that accounting period. 4) Matching Matching theory states that expenses incurred in a given period must be matched against income earned to determine the profit and loss for that period. 5) Consistency Consistency theory requires an entity to use the same accounting methods and procedures across periods to enable meaningful comparison over time. 6) Going Concern Going concern theory states that a business entity is assumed to operate indefinitely unless there are signs that it has to stop operating. 7) Historical Cost Historical cost theory requires that transactions be recorded at their original cost. 8) Monetary Monetary theory states that only transactions which can be measured in monetary terms are to be recorded. 9) Materiality Materiality theory requires that relevant information should be reported in the financial statements if it is likely to make a difference to the decision-making process. 10) Objectivity Objectivity theory requires that accounting information recorded must be supported by reliable and verifiable evidence so that financial statements will be free from opinions and biases. 11) Prudence Prudence theory requires that the accounting treatment chosen should be one that least overstates profits and least understates liabilities and losses. 12) Revenue recognition Revenue recognition theory states that revenue is earned when goods have been delivered or services have been provided.

Explain the differences between trading and service businesses. A trading business buys goods from suppliers and sells the goods to customers, while a service business provides services to its customers. Distinguish between financial statements of businesses in trading and services. In a trading business, the statement of financial performance has a trading portion and the presence of inventory which a service business does not have. The inventory is also present in its statement of financial position. Distinguish between the financial statements of a sole proprietorship and private limited company In the statement of financial position, the private limited company shows shareholders’ equity in the equity section while the sole proprietorship shows owner’s equity. Explain the features of a sole proprietorship, limited liability partnership and private limited company Feature Sole Proprietorship (SP) Limited Liability Partnership (LLP) Private Limited Company (PLC) Capital structure Owned by 1 person who contributes the capital to set up the SP. Owned by 2 or more partners where each partner contributes capital to set up the LLP. Owned by 50 or less shareholders where each shareholder buys shares and contributes capital. Access to funds Banks and other lenders are less likely to lend money to the SP due to the lack of personal assets that can serve as collaterals. Access to funds usually limited to owner’s contributions. Banks and other lenders are more likely to lend money to the LLP as there are more sources of personal assets from partners and business assets to serve as collaterals. May get more persons to join as partners and contribute capital. Banks and other lenders are more likely to lend money to the PLC as there are more business assets of high value to serve as collaterals. May issue more shares to raise funds. Extent of liability (risk) Owner is obliged to pay all debts and losses using personal assets. Partners are not obliged to pay all debts and losses using their personal assets. Only the partner who is responsible for the debts or losses due to wrongful actions need to be personally liable. Shareholders are not obliged to pay all debts and losses using the personal assets. They will only need to forfeit the investments in the business.

Feature Sole Proprietorship (SP) Limited Liability Partnership (LLP) Private Limited Company (PLC) Level of control Owner has absolute control over the business. Partners share the control of the business, with at least one partner heavily involved in the running of the business. Shareholders have no control over the running of the business unless they are part of the management team. The company hires professionals to run the business on behalf of the shareholders. Lifespan Exists as long as the owner is alive and desires to continue operation. Exists forever until it is wound up. Exists forever until it is wound up. Transferability of ownership Update the particulars of the new owner in the Accounting and Corporate Regulatory Authority (ACRA) of the transfer of ownership. All partners to agree to the addition or withdrawal of partner(s) before ACRA acknowledges the transfer of ownership. Shareholders pay a stamp duty (tax related to the transfer of shares) to the tax authority to transfer their shares to another person or organisation.

CHAPTER 2: ACCOUNTING INFORMATION SYSTEM State the order in which each type of transaction is processed through the accounting information system. State the stag