LO 2: Explain the differences between financial accounting and management accounting
7 important questions on LO 2: Explain the differences between financial accounting and management accounting
Would the total depreciation expense over the car’s useful life be different under
the different depreciation methods? Explain.
The total expense claimed by the business over the entire period that it owns
the asset (including any gain or loss on disposal of the asset) is the same
under either method.
The only difference between the two methods is the period in which the expense is recognised. The straight
-line method recognises
the same depreciation expense year-
by -year.
The diminishing value method
recognises more depreciation expense in the periods when the asset is new and
less expense the older the asset becomes.
Provide two reasons why profit is different from operating cash flows.
The profit is calculated after deducting depreciation which is a non-cash item
and therefore not included in a statement of cash flows. Other non-cash items
are amortisation and impairment (if
included in the Income Statement).
Also, there are differences between income and expenses that are recognised in
the Income Statement based on when the transaction occurs called accrual
accounting and when the cash transaction happens. The reconciliation
between profit and operating cash flows highlights the changes in accrual
accounting from one year to the next.
Accounting is concerned with providing financial information for decision making.
This information is provided in financial statements, give three examples
The income statement
The balance sheet
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The share price of a listed company?
On the Statement of Cash Flows, the
cash payment for the purchase of a new
truck (non-current asset) will be shown as
Why a cash flow statement is prepared and what information is included?
a cash flow statement is prepared in order to show how cash has been received and spent
during the year. It helps to assess the entity’s ability to generate cash, meet its obligations (pay bills) and understand why assets and liabilities have changed.
Explain in your own words what depreciation is and why it is not included in a statement of cash flows.
Depreciation is the allocation of the cost of a tangible non-current asset over its useful life to
the entity. It is not included in a statement of cash flows because it is a non-cash item. The cost of a non-current asset is recorded as an investing cash flow when purchased and the sale proceeds are recorded as investing cash inflows.
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