2. The Framework of Financial Statements

Question 1

Separate entity convention

Answer 1

A company as a person in its own right, distinct from the personalities of its owns/ shareholders

Question 2

Accounting equation

Answer 2

Assets = liabilities + capital

Question 3

Asset

Answer 3

Owned or owed to the business

I.e. Buildings, vehicles, machinery, bank accounts, money owed

Question 4

Liability

Answer 4

Money we owe

I.e. Suppliers, bank loans, mortgages, vat due to HMRC

Question 5

Capital

Answer 5

Initial investment in the business by the owner and any profits earned by the business

Question 6

Statement of financial position

Answer 6

Expanded version of the accounting equation

Question 7

Assets are split into

Answer 7

Non current assets

Current assets

Question 8

Non current assets

Answer 8

Owned for greater than one year I.e. Land and buildings, motor vehicles

Question 9

Current assets

Answer 9

Short term I.e. Inventory, receivables

Least liquid items shown first on the SFP

Question 10

Current liabilities

Answer 10

Due for payment within one year

Question 11

Non current liabilities

Answer 11

Due for repayment more than one year after the SFP
I.e. Always based on the SFP date, loan for 5000 to be paid in 5 annual instalments, 1000 shown as current liability and 4000 as non current as due after one year

Question 12

Vertical presentation of the SFP

Answer 12

Assets
Non current assets
Current assets
TOTAL

Capital and liabilities
Capital
Non current liabilities
Current liabilities
TOTAL

Question 13

Working capital/ net current assets

Answer 13

Current assets - current liabilities
If positive = net current assets
If negative = working capital

Question 14

Statement of profit or loss

Answer 14

Income generated and expenditure incurred over a period of time

Question 15

Income - expenditure

Answer 15

= profit or loss for the period

Question 16

Gross profit

Answer 16

Sales - cost of goods sold

Question 17

Net profit

Answer 17

Gross profit - any other running costs of the business

Question 18

Trading account

Answer 18

Part of the SPL
sales
- cost of goods
= gross profit

Question 19

Cost of goods

Answer 19

+ cost of opening inventory at start of period
+ cost of purchases during the period

• cost of closing inventory

= cost of goods sold

Question 20

Capital and revenue

Answer 20

Capital transactions (non current asset expenditure)

Revenue Transaction (amounts spent to increase the revenue generating capacity)

Question 21

Capital transactions

Answer 21

Expenses that will affect the long term

SFP

Question 22

Revenue Transactions

Answer 22

Any expenditure that isn’t capital expenditure

SPL