FINANCIAL ACCOUNTING THEORY
QUESTIONS LATEST EDITION 2025/2026
VERIFIED ANSWERS
When \an \individual \decided \to \start \a \business \that \business \can \be \organised \in \one \of \three \
ways. \Provide \a \definition \of \each \way. \- \ANS-A \business \can \be \organised \as \a \sole \trader, \
partnership \or \company. \A \sole \trader \business \is \the \simplest \business \type, \it \is \a \business \that \
is \owned \and \operated \by \one \
person. \However \a \sole \trader \business \may \employ \more \than \one \person. \In \the \eyes \of \the \law
\the \sole \trader \personally \and \the \sole \trader's \business \are \one \and \the \same \and \therefore \a \
sole \trader \is \fully \personally \responsible \for \any \losses \that \the \business \might \incur. \A \
partnership \business \is \one \that \is \owned \and \controlled \by \at \least \two \people. \Most \
partnerships \have \between \two \and \twenty \partners \but \there \are \examples \of \partnerships, \for \
example \partnerships \of \accountants \that \have \up \to \50 \partners. \The \operations \of \a \partnership \
business \tend \to \be \more \formalised \and \most \partnership \businesses \will \operate \under \
partnership \agreements. \These \agreements \set \down \how \important \areas \within \the \business \are \
to \be \run \and \managed. \For \example, \the \duties \of \
each \partner \and \the \ratio \in \which \they \share \profits. \In \the \absence \of \such \an \agreement \the \
provisions \of \the \Partnership \Act \1890 \apply. \A \limited \company \is \a \business \that \is \owned \by \
its \shareholders, \run \by \its \directors \and \enjoys \limited \liability. \Limited \companies \can \either \be \
private \or \public. \A \private \limited \company \does \not \sell \shares \to \the \public \whereas
a \public \limited \company \does. \Due \to \the \large \membership \of \limited \companies \they \tend \to \
be \large \and \in \many \cases \have \a \multinational \aspect.
What \is \limited \liability? \- \ANS-A \situation \in \which \the \owners \or \other \shareholders \of \a \
company \are \not \responsible \for \the \debts \if \a \company \fails. \The \limited \liability \feature \is \one \of
\the \biggest \advantages \of \investing \in \publicly \listed \companies. \While \a \shareholder \can \
contribute \wholly \in \the \growth \of \a \company, \his \or \her \liability \is \restricted \to \the \amount \of \
investment \in \the \company, \even \if \it \subsequently \goes \bankrupt \and \has \remaining \debt \
obligations.
What \is \the \accruals \concept \and \how \does \it \impact \upon \the \preparation \of \a \set \of \financial \
statements? \- \ANS-
, Write \a \note \on \your \understanding \of \the \terms \financial \and \management \accounting. \You \
must \explain \types \of \information \provided \by \both. \- \ANS-There \are \two \broad \types \of \
accounting \information:
Financial \accounting \is \based \upon \meeting \the \informational \requirements \of \external \users \of \
accounting \information \for \example \
payables, \lenders \and \the \government. \Financial \accounting \is \presented \to \external \users \in \the \
form \of \financial \statements. \In \order \to \facilitate \comparison, \financial \accounts \are \prepared \
using \accepted \accounting \conventions \and \standards. \Financial \Reporting \
Standards \(FRSs) \help \to \reduce \the \differences \in \the \way \companies \prepare \their \financial \
statements. \The \financial \statements \are \public \documents. \An \example \of \the \type \of \
information \provided \by \financial \accounting \is \whether \the \business \entity \made \a \profit \or \loss \
during \the \financial \period. \This \information \is \provided \by \the \Income \Statement
Management \accounting \is \based \upon \meeting \the \informational \needs \of \internal \users \of \
accounting \
information \for \example \management. \Management \needs \much \more \detailed \and \up \to \date \
information \in \order \to \control \the \business \and \plan \for \the \future. \They \need \to \be \able \to \
cost \products \and \assess \profitability. \In \order \to \facilitate \this, \management \accounts \present \
information \in \any \way \
that \may \be \useful \to \management \and \in \most \cases \to \the \specifications \of \management. \Such \
information \is \only \available \within \the \company \and \usually \is \strategic \in \nature. \An \example \of \
the \type \of \information \provided \by \management \accounting \is \
the \financial \budgets \for \the \upcoming \financial \year.
Investors \and \lenders \have \been \identified \as \users \of \accounting \information. \Write \a \brief \note \
on \these \including \the \key \accounting \information \required \by \each \user \and \why \each \user \
requires \the \information. \- \ANS-Lenders
Banks \who \lend \money \to \a \business \require \information \initially \to \help \the \lender \assess \
whether \the \bank \should \extend \the \credit \to \the \business \entity \or \not. \Once \the \loan \has \been \
extended \lenders \require \information \
that \helps \them \determine \whether \loans \and \interest \will \be \paid \when \due. \The \key \
accounting \information \for \lenders \is \therefore, \
existing \levels \of \debt \and \the \cash \flow \of \the \business. \Cash \flow \is \probably \the \most \
important \piece \of \information \required \by \lenders \as \loans \and \interest \are \repaid \out \of \the \
cash \flow \of \the \business \entity. \
Investors
QUESTIONS LATEST EDITION 2025/2026
VERIFIED ANSWERS
When \an \individual \decided \to \start \a \business \that \business \can \be \organised \in \one \of \three \
ways. \Provide \a \definition \of \each \way. \- \ANS-A \business \can \be \organised \as \a \sole \trader, \
partnership \or \company. \A \sole \trader \business \is \the \simplest \business \type, \it \is \a \business \that \
is \owned \and \operated \by \one \
person. \However \a \sole \trader \business \may \employ \more \than \one \person. \In \the \eyes \of \the \law
\the \sole \trader \personally \and \the \sole \trader's \business \are \one \and \the \same \and \therefore \a \
sole \trader \is \fully \personally \responsible \for \any \losses \that \the \business \might \incur. \A \
partnership \business \is \one \that \is \owned \and \controlled \by \at \least \two \people. \Most \
partnerships \have \between \two \and \twenty \partners \but \there \are \examples \of \partnerships, \for \
example \partnerships \of \accountants \that \have \up \to \50 \partners. \The \operations \of \a \partnership \
business \tend \to \be \more \formalised \and \most \partnership \businesses \will \operate \under \
partnership \agreements. \These \agreements \set \down \how \important \areas \within \the \business \are \
to \be \run \and \managed. \For \example, \the \duties \of \
each \partner \and \the \ratio \in \which \they \share \profits. \In \the \absence \of \such \an \agreement \the \
provisions \of \the \Partnership \Act \1890 \apply. \A \limited \company \is \a \business \that \is \owned \by \
its \shareholders, \run \by \its \directors \and \enjoys \limited \liability. \Limited \companies \can \either \be \
private \or \public. \A \private \limited \company \does \not \sell \shares \to \the \public \whereas
a \public \limited \company \does. \Due \to \the \large \membership \of \limited \companies \they \tend \to \
be \large \and \in \many \cases \have \a \multinational \aspect.
What \is \limited \liability? \- \ANS-A \situation \in \which \the \owners \or \other \shareholders \of \a \
company \are \not \responsible \for \the \debts \if \a \company \fails. \The \limited \liability \feature \is \one \of
\the \biggest \advantages \of \investing \in \publicly \listed \companies. \While \a \shareholder \can \
contribute \wholly \in \the \growth \of \a \company, \his \or \her \liability \is \restricted \to \the \amount \of \
investment \in \the \company, \even \if \it \subsequently \goes \bankrupt \and \has \remaining \debt \
obligations.
What \is \the \accruals \concept \and \how \does \it \impact \upon \the \preparation \of \a \set \of \financial \
statements? \- \ANS-
, Write \a \note \on \your \understanding \of \the \terms \financial \and \management \accounting. \You \
must \explain \types \of \information \provided \by \both. \- \ANS-There \are \two \broad \types \of \
accounting \information:
Financial \accounting \is \based \upon \meeting \the \informational \requirements \of \external \users \of \
accounting \information \for \example \
payables, \lenders \and \the \government. \Financial \accounting \is \presented \to \external \users \in \the \
form \of \financial \statements. \In \order \to \facilitate \comparison, \financial \accounts \are \prepared \
using \accepted \accounting \conventions \and \standards. \Financial \Reporting \
Standards \(FRSs) \help \to \reduce \the \differences \in \the \way \companies \prepare \their \financial \
statements. \The \financial \statements \are \public \documents. \An \example \of \the \type \of \
information \provided \by \financial \accounting \is \whether \the \business \entity \made \a \profit \or \loss \
during \the \financial \period. \This \information \is \provided \by \the \Income \Statement
Management \accounting \is \based \upon \meeting \the \informational \needs \of \internal \users \of \
accounting \
information \for \example \management. \Management \needs \much \more \detailed \and \up \to \date \
information \in \order \to \control \the \business \and \plan \for \the \future. \They \need \to \be \able \to \
cost \products \and \assess \profitability. \In \order \to \facilitate \this, \management \accounts \present \
information \in \any \way \
that \may \be \useful \to \management \and \in \most \cases \to \the \specifications \of \management. \Such \
information \is \only \available \within \the \company \and \usually \is \strategic \in \nature. \An \example \of \
the \type \of \information \provided \by \management \accounting \is \
the \financial \budgets \for \the \upcoming \financial \year.
Investors \and \lenders \have \been \identified \as \users \of \accounting \information. \Write \a \brief \note \
on \these \including \the \key \accounting \information \required \by \each \user \and \why \each \user \
requires \the \information. \- \ANS-Lenders
Banks \who \lend \money \to \a \business \require \information \initially \to \help \the \lender \assess \
whether \the \bank \should \extend \the \credit \to \the \business \entity \or \not. \Once \the \loan \has \been \
extended \lenders \require \information \
that \helps \them \determine \whether \loans \and \interest \will \be \paid \when \due. \The \key \
accounting \information \for \lenders \is \therefore, \
existing \levels \of \debt \and \the \cash \flow \of \the \business. \Cash \flow \is \probably \the \most \
important \piece \of \information \required \by \lenders \as \loans \and \interest \are \repaid \out \of \the \
cash \flow \of \the \business \entity. \
Investors
