2. Financial Statements

Question 1

3 key questions regarding financial statements

Answer 1

Position
Performance
Prospects

Question 2

Contents of a balance sheet

Answer 2

Assets (owned by the business)
Liabilities (owed by the business)
Owners equity (money invested by the owner + retained profits)

Question 3

Contents of an income statement

Answer 3

Revenues/income

Expenses

Question 4

Contents of a cash flow statement

Answer 4

Receipts (cash inflow)

Payments (cash outflow)

Question 5

Explain the funding process of a business

Answer 5

Money from:
Owners (Capital, Equity)
Lenders (Liabilities)

This money is invested in assets to grow the business

Question 6

Give an equation used to determine the financial position

Answer 6

Equity + Liabilities = Assets

Assets - Liabilities = Equity

Question 7

State the formats of Financial Position

Answer 7

Horizontal
2 sides - assets on the left and liabilities and equities on the right

Vertical
Used mostly by plc's
Assets first
Current liabilities follow then long term liabilities
Bottom half shows equity

Question 8

“Going Concern” means…

Answer 8

Business as usual for foreseeable future

Question 9

“Accruals” mean…

Answer 9

Revenue is recognised when realised; costs matched against revenue

Question 10

“Consistency” means…

Answer 10

Consistent use of a particular accounting method

Question 11

“Prudence” means…

Answer 11

Profits are not recognised until they are realised.