Chapter 1 Introduction to finance and accounting

Discussion Questions Easy

1.1

What is the purpose of producing accounting information?

The objective of providing accounting information is to enable users to make more informed
decisions and judgements about the organisation concerned.

1.5

Which of the three major external financial reports might be best understood by a nonaccountant? Why did you select that report?
The statement of cash flows might be best understood by non-accountants as your average
person knows what is meant by cash inflow and outflow while they probably have lower
knowledge of the elements of the statement of financial position and the statement of
financial performance.

1.8

Understandability is identified in the text as a key characteristic of accounting

information. By whom should the financial reports be readily understood?
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).

Discussion Questions Intermediate

1.14

Reconcile financial accounting with management accounting. Your textbook clearly

distinguishes between them. What are the similarities?
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.

Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486008797
/Atrill/Accounting: An Introduction/6th edition

Page 1

Application Exercises Easy

AE1.1

Identify the similarities and differences between the three major external financial
reports (statement of financial performance, statement of financial position, statement
of cash flows) by completing the table below.
Financial Report /
Aspect
Nature
Basis of transaction
recognition
Related elements
(Account types)
Focus

Statement of
financial position
Static report ( at the
end of the period)
Accrual

Statement of
cash flows
Flow report (for the
period)
Cash

Income and expenses

Assets, liabilities and

owners equity

All elements

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

Income Statement
Flow report (for the
period)
Accrual

Application Exercises Intermediate

AE1.2

Complete the table below by providing two advantages for each of the three main types
of business organisation.
Type of business
organisation
Sole trader

Advantage #1

Advantage #2

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

Chapter 5 Regulatory framework for Companies

5.2

You have heard that management accounting is not regulated by accounting

rules, under the premise that companies should be allowed to adopt methods and
procedures that are best suited for them. Why does financial accounting not have
the same degree of freedom?
The difference arises from the different users of the information. Management
accounting is prepared for internal use by managers within the organisation while
financial accounting is targeted at external users. Without accounting rules, there is a
much greater risk that unscrupulous directors will adopt accounting policies and
practices that portray an unrealistic view of financial health. There is also a much
greater risk that the financial statements will not be comparable over time or with
those of other businesses. Accounting rules can narrow areas of differences and reduce
the variety of accounting methods.

Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486008797
/Atrill/Accounting: An Introduction/6th edition

Page 2