04 - Analyzing the Accounting Equation

Question 1

Ques that it is not a Liability

1.
2.
3.

Answer 1

1. an item that fails the recognition test (NOT reported in the balance sheet | might be reported in the notes (to the accounts as a contingent liability))
   - example of the prudent nature of financial reporting practise
   - example: potential liability for defective products

Question 2

Definition | net assets

Answer 2

• shorter way of saying “total assets less total liabilities”

Question 3

Definition | (Shareholder´s) Equity

Answer 3

• the ownership interest: residual amount found by | deducting all of the entity´s liabilities | from all of the entity´s assets
• recognition totally dependent on the recognition of assets and liabilities
• net assets

Question 4

What does the Change in the (shareholder´s) equity let us do?

Answer 4

• compare the financial position of the business at two points in time

Question 5

Different changes in (shareholder´s) equity and their causes

1.
2.
3.

Answer 5

• increase / decrease in equity ( + / - ) | normal business transactions (e.g. supplying goods / services to customers)
• increase in equity ( + ) | owner contributing resources to the business (invest cash in the business)
• decrease in equity (-) | owner withdrawing resources from the business (withdraw cash from the business)

Question 6

What is the equation for Change in (shareholder´s) equity?

Answer 6

Change in equity

equals

Capital contributed (+) / withdrawn (-) by the ownership | plus revenue | minus expenses