2 Balance Sheet & Income Statement

Question 1

What are the assets?

Answer 1

Assets are probable future economic benefits obtained and controlled by the entity as a result of past transactions or events.

Question 2

What are the three important elements for assets?

Answer 2

• future economic benefits (generate future benefits)
• control by the entity (the party who controls the economic resource)
• the occurrence of past transactions and events (paid cash or credits e.g. accounts receivable)

Question 3

What is liquidity?

Answer 3

How quickly money turns into cash

Question 4

Current Assets

Answer 4

• short-term within a year

- cash, accounts receivable and inventory (physical stock), prepayments, short-term investments

Question 5

Non-current assets

Answer 5

• long-term economic benefits longer than a year
• operations to generate profits
• can not be easily be converted into cash
• long-term investments, tangible assets (physical) — land, equipment and buildings / intangible assets — intellectual property

Question 6

What are liabilities?

Answer 6

Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Question 7

Three main elements:

Answer 7

1. A present obligation exists and the obligation involves
   settlement in the future
2. It has adverse financial consequences for the entity in that the entity is obligated to sacrifice economic benefits to one
   or more other entities
3. Past events that have occurred.

Question 8

Current Liabilities

Answer 8

• short-term payment that are due within the next year
• accounts payable, salaries payable, taxes payable, interests payable, accruals (estimate) , unearned revenue, short-term loans

Question 9

Non-current liabilities

Answer 9

• long-term payments that are due in the future

- house mortgages, long-term loans, employee pensions

Question 10

Shareholder’s equity

Answer 10

Equity is the residual interest in the assets of the entity after deducting all its liabilities.
Equity= net assets / net funds invested in the business

Question 11

What are the two key elements of equity?

Answer 11

• Share Capital— the money the owners invest in the business out of their pockets
• Retained earnings— accumulated profits that help your future business use

Question 12

What is retained profits?

Answer 12

• Retained profits is the sum of past net profits, measured since the company began, minus dividends declared (even if not yet paid) to owners since the beginning.
• When a company earns a profit, that profit can be distributed to
  shareholders as dividends or kept in the business to grow the business.
• Retained profits= net profits (rev- exp on income statement) - dividends (withdrawals)

Question 13

What is the income statement?

Answer 13

Shows the entity’s financial performance over a period of time.

Question 14

What is revenue?

Answer 14

Revenue is gross inflows of economic benefits during the period
arising in the ordinary activities of an entity when those inflows
result in increases in equity other than those relating to
contributions from equity participants. (not limited to cash only)

Question 15

What is expense?

Answer 15

Expenses are decreases in assets, or increases in liabilities,
that result in decreases in equity, other than those relating to
distributions to holders of equity claims. (doesn’t include payments or returns to owners)

Question 16

What are the factors that increase expenses?

Answer 16

• increasing operational costs
• long-term assets wear out— ‘depreciation’ or ‘amortisation’
• assets are used up (prepayments, inventory)