2. Statement of Financial Position (Balance Sheet) 2

Question 1

What are non-current assets? What are examples of non-current assets?

Answer 1

Assets that the firm intends to keep for 12 or more months.
- Property, plant and equipment (PP&E): Tangible or fixed assets employed in the operations of the firm.
- Intangible assets: intellectual property rights (e.g., patents), licenses, software, player registrations for professional sports teams
- Long-term financial assets (e.g., investment property, associate companies or joint ventures)
- Goodwill
- Net pension assets

Question 2

What is a liability?

Answer 2

A present obligation of the entity to transfer an economic resource as a result of past events.

Question 3

What are current liabilities? Give some examples

Answer 3

Liabilities that are due for payment within the next 12 months.
- Amounts owed to suppliers and service providers for goods and services it has purchased but not yet paid for:
— Trade payables: amounts owed from transactions made on credit that have been invoiced but not yet paid.
— Accrued expenses: The value of services/goods that have been consumed but have not yet been invoiced/billed.
- Unearned income: Goods and services that customers have paid for in advance but the company has not yet delivered. Important for industries where advance payments are the norm such as airlines (flight tickets), cruise ships, tour companies and professional sports.
- Short-term borrowings (e.g., short-term loans)
- Tax payable
- Employee wages and benefits

Question 4

What are non-current liabilites? Give some examples.

Answer 4

Liabilities that are due for payment in 12 months or more into the future.
- Medium or long-term loans
- Bonds issued
- Deferred tax liabilities (taxes that the firm owes but are not due for payment in the next 12 months)
- Net pension liabilities (any shortfall between the value of the company’s defined benefit pension obligations and assets).

Question 5

What are the distinct classes of equity accounts?

Answer 5

• Share capital and the share premium: Amount of capital that the owners have invested into the firm since it was established.
• Retained earnings (accumulated profits - dividend payments)
• Other comprehensive income (other reserves)

Question 6

What is a right-of-use asset?

Answer 6

A leased asset

Question 7

What is goodwill?

Answer 7

The difference between the money spent on acquiring a business and the acquired business’ book value (net value).
Goodwill accounting assumes that the price being paid for an acquisition is a fair one and that the difference between the fair price and its accounting value (goodwill) must be due to factors that financial accounting does not capture (e.g., future growth prospects, the value its people add, reputation). This extra value is then captured in goodwill.