2.3 Elements of Financial Statements

Question 1

Define asset.

Answer 1

Resources that a business owns or controls that are expected to provide future benefits.

Question 2

Give examples of non-current assets (i.e. capital expenditures).
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Answer 2

• *To Memorise:**
• *Non-Current Assets** (i.e. Capital Expenditures) refer to:
  1. Land
  2. Property (comprises land and building)
  3. Office Equipment (comprises computers, printers, machines and other equipment)
  4. Fixtures and fittings (comprises furniture, shelves and lighting)
  5. Motor vehicles (comprises trucks, vans, cars and motor cycles)
  6. Plant and equipment (only plant machinery and plant equipment)

Question 3

Explain ‘office equipment’.

Answer 3

Electronic equipment used in office (e.g. computers, printers). Classified as a non-current asset.

Question 4

Explain ‘motor vehicles’.

Answer 4

Vehicles for business use (e.g. vans, trucks). Classified as a non-current asset.

Question 5

Give examples of current assets.
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Answer 5

• *To Memorise:**
  1. Inventory (goods held for resale)
  2. Trade receivables (amounts owed by debtors to whom the business sells goods and services on credit)
  3. Other receivables (amounts owed by debtors for reasons other than the sale of goods and services on credit)
  4. Income receivables (income earned that is not collected by the business yet)
  5. Prepaid expenses (expenses paid by the business before they are incurred)
  6. Cash at bank (money deposited with the bank)
  7. Cash in hand (physical cash held on hand)

Question 6

Explain ‘inventory’.

Answer 6

Goods bought by the business to sell to its customers. Classified as a current asset.

Question 7

Explain ‘trade receivables’.

Answer 7

Amounts collectible from credit customers. Classified as a current asset.

Question 8

Explain ‘cash at bank’.

Answer 8

Cash deposited with the bank. Classified as a current asset.

Question 9

Explain ‘cash in hand’.

Answer 9

Physical cash kept by the business. Classified as a current asset.

Question 10

Explain ‘income receivables’.

Answer 10

Income earned but not yet collected. Classified as a current asset.

Question 11

Explain ‘prepaid expenses’.

Answer 11

Expenses not incurred but paid in advance. Prepaid expenses should be deducted from the current period’s other expenses and the services that can be used by the business later should be recorded as a current asset.

Question 12

Define liability.

Answer 12

Obligations owed by a business to others that are expected to be settled in the future.

Question 13

What are obligations?

Answer 13

Duties to make payments or provide goods or services in the future.

Question 14

Give examples of non-current liabilities (i.e. Capital Receipts).
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Answer 14

• *To memorise accurately:**
  1. Mortgage loan
  2. Long Term Borrowings

Question 15

Explain ‘Loan from X’.

Answer 15

Money borrowed from X, which may be banks and other lenders. Classified as a non-current liability.

Question 16

Explain ‘Mortgage Loan’.

Answer 16

Money borrowed using collaterals, i.e. valuable property owned by someone who wants to borrow money which they agree will become the property of the company or person who lends the money if the debt is not paid back.

Classified as a non-current asset.

Question 17

Give examples of current liabilities.
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Answer 17

• *To memorise accurately:**
  1. Current portion of Long Term Borrowing
  2. Short term borrowings (e.g. bank overdraft)
  3. Trade payables
  4. Other Payables / Accrued Expense / Expenses Payable
  5. Income received in advance

Question 18

Explain ‘trade payables’.

Answer 18

Amounts owed to credit suppliers / sellers / goods or service providers. Classified as a current liability.

Question 19

Explain ‘bank overdraft’.

Answer 19

Money borrowed, when the bank account is overdrawn and the available balance goes below zero. Classified as a current liability.

Question 20

Explain ‘ income received in advance’.

Answer 20

Income not earned but collected in advance. Classified as a current liability.

Question 21

Explain ‘expense payable’.

Answer 21

Services such as repairs or utilities used by businesses but have not been paid for yet. Expenses payable should be added to the current financial period’s other expenses and the amount owing recorded as a liability.

Question 22

Define equity.

Answer 22

Claim by the owner(s) on the net assets of a business.

Equity = Total Assets - Total Liabilities = Net Assets

Question 23

What are the components of a sole proprietorship’s owner’s equity?

Answer 23

Capital, Profit or loss for the period and drawings.

Ending Capital = Beginning Capital + Additional Capital + Profit - Drawings

Question 24

Explain ‘capital’.

Answer 24

Resources contributed by the owner for business use. Classified as part of Owner’s Equity.

Capital = Total Assets - Total Liabilities or

Ending Capital = Beginning Capital + Additional Capital + Profit - Drawings

Question 25

Explain ‘Profit or loss for the period’.

Answer 25

The difference between the income earned and the expenses incurred within one accounting period.

Profit = Income - Expenses

Profit = Income > Expenses

Loss = Income < Expenses

Question 26

Explain ‘drawings’.

Answer 26

Assets taken from a business for the owner’s personal, own or private use. Reduces Owner’s Equity.

Question 27

Define income.

Answer 27

Amounts earned from the activities of a business. It comprises revenue earned from selling goods and providing services and other income earned from other business activities.

Question 28

Explain ‘revenue’.

Answer 28

Amounts earned through the main activities of the business.

Question 29

How many types of revenue are there?

Answer 29

1 Sales revenue

2. Service fee revenue
3. Other income

Question 30

What is the main activity of a trading business?

Answer 30

Sale of goods.

Question 31

What is the main activity of a service business?

Answer 31

Provide services.

Question 32

Explain ‘sales revenue’.

Answer 32

Money earned from selling goods.

Question 33

Explain ‘other income’.

Answer 33

Amounts earned from business activities other than the main business activity.

Question 34

Explain ‘ service fee revenue’.

Answer 34

Money earned from providing services (e.g. legal fee revenue).

Question 35

Give examples of other income.

Answer 35

Rent income, interest income, commission income, discount received, gain on sale of non-current assets (Chapter 11).

Question 36

Explain ‘rent income’.

Answer 36

Money earned from letting out part of the shop or office space.

Question 37

Explain ‘discount received’.

Answer 37

Cash discount received from credit suppliers for making early payment.

Question 38

Define expenses.

Answer 38

Costs incurred to earn income in the same accounting period.

Question 39

Give some examples of common expenses.
(To memorise at least 32 types of expenses.)
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Answer 39

1. Cost of sales (value of goods sold in a trading business)
2. Salaries or wages (amount incurred to employ staff)
3. Rental expense (amount incurred to rent a shop or office space)
4. Utilities (amount incurred for water and electricity used by the business)
5. Interest expense
6. Depreciation expense
7. Discount allowed
8. etc (at least another 27 types of expenses that you must know and commit to your memory.)

Question 40

Explain ‘cost of sales’.

Answer 40

Total cost price of goods that have been sold.

Question 41

Explain ‘interest expense’.

Answer 41

Charges for borrowing money from banks or other lenders.

Question 42

Explain ‘depreciation of non-current assets’.

Answer 42

A portion of the original cost of the non-current asset allocated over its useful life.

Question 43

Explain ‘discount allowed’.

Answer 43

Cash discount given to credit customers / trade receivables for making early payment.

Question 44

How do I classify items as assets, liabilities, equity, income and expenses for a specific business?

Answer 44

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