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Finance for Managers > 3 chp 2 Measuring and reporting financial position > Flashcards

3 chp 2 Measuring and reporting financial position Flashcards

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1
Q

What are the four main characteristics of an asset?

A
  1. A probably future economic benefit.
  2. Exclusive right to control a benefit.
  3. The benefit must arise from some past transaction or event.
  4. The asset must be capable of reliable measurement in monetary terms.
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2
Q

Assets that have a real, physical substance is known as?

A

A tangible asset

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3
Q

What is a ‘tangible asset’?

A

An asset that has a real physical substance

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4
Q

Inventory, plant and equipment are examples of what type of asset?

A

A tangible asset

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5
Q

Provide examples of a tangible asset?

A

Inventory, plant, equipment

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6
Q

What type of asset has no physical substance but still represent potential benefits?

A

Intangible asset

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7
Q

What is an INTANGIBLE ASSET?

A

An INTANGIBLE ASSET has no physical substance but still represents potential benefits.

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8
Q

Copyrights, trademarks, patents, franchise, goodwill are examples of?

A

An INTANGIBLE ASSET

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9
Q

Provide examples of an INTANGIBLE ASSET

A

Trademarks
Patents
Franchise
Goodwill

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10
Q

What is the opposite of ASSET?

A

CLAIMS

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11
Q

What is the opposite of a CLAIM?

A

ASSETS

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12
Q

Those with different interest in ASSETS are said to have a what?

A

CLAIM

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13
Q

What is a CLAIM?

A

Represents interests (amounts) that entities have in an asset.

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14
Q

Interests (amounts) that that entities have in an asset are known as what?

A

a CLAIM

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15
Q

LIABILITIES and OWNER’S EQUITY (CAPITAL) are two types of what?

A

CLAIM (against an asset)

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16
Q

What are the two types of CLAIMS (against an asset)?

A
  1. LIABILITIES

2. OWNER’S EQUITY (or CAPITAL)

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17
Q

The claims of external entities that have arisen from past transactions or events are known as?

A

LIABILITIES

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18
Q

What is a LIABILITY?

A

Claims of external entities as a result of past transactions or events?

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19
Q

What sort of transactions could result in a liability?

A

External entity supplying a good or service,

External entity lending money

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20
Q

a bank overdraft is an example of…..

A

LIABILITY

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21
Q

accounts payable is an example of….

A

a LIABILITY

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22
Q

a personal loan is an example of…

A

a LIABILITY

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23
Q

a provision for warranty is an example of…

A

a LIABILITY

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24
Q

Staff long service leave and holiday pay is an example of….

A

a LIABILITY

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25
Q

what characteristics must a LIABILITY have?

A

The same as an asset;

  1. probable economic impact
  2. obligation must have risen from a past transaction or event
  3. Reliable measurement
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26
Q

An estimated liability with an amount of uncertainty on the amount or timing is known as a what?

A

a PROVISION

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27
Q

What is a PROVISION

A

an estimated liability that has an amount of uncertainty on the amount and/or timing.

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28
Q

what type of liability is an income tax and why?

A

Income tax is a PROVISION (liability) as there is some question over the exact amount that will need to be paid until the taxes completed and submitted.

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29
Q

a potential liability that might arise under certain circumstances are known as what?

A

CONTINGENT LIABILITY

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30
Q

what is a CONTINGENT LIABILITY

A

a liability that ‘might’ occur under certain circumstances.

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31
Q

for limited companies, where are CONTINGENT LIABILITIES included within their annual report?

A

As a NOTE

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32
Q

$1,000 is owed by a customer who will never be able to pay. Should this appear as an asset or liability on the statement of financial position of a business? Explain.

A

Neither as an asset or liability as the company unlikely to have a future benefit since the customer is unlikely to repay.

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33
Q

Could the following items appear as an asset or liability on the statement of financial position of a business? Explain.

The purchase of a licence from business B giving business A the right to produce a product designed by business B. Production of this new product is expected to increase profits over the period in which business A holds the licence.

A

The item should be included as an asset for business A.

  1. There is an expectation of future value return.
  2. There is ownership (in the form of a licence)
  3. It is the result of a transaction or past event (being a purchase)
  4. The item can be readily measured by the increase in revenue each year it generates.
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34
Q

Could the following items appear as an asset or liability on the statement of financial position of a business? Explain.

The hiring of a new marketing director by business A who is confidently expected to increase profits by at least 30% over the nest three years?

A

People are typically not considered assets as a company does not have ‘ownership’ of a person.

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35
Q

Could the following items appear as an asset or liability on the statement of financial position of a business? Explain.

The purchase by business A of a machine that will save $10k per annum. It is currently being used by the business but was acquired on credit and is not yet paid for.

A

Yes, the machine would be listed as an asset:

  1. future economic benefit,
  2. Business A effectively owns it legally
  3. A transaction occurred in the form of a credit approval
  4. The item can be readily measured in monetary terms.

(the amount owing would also be entered as a liability claim)

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36
Q

Could the following items appear as an asset or liability on the statement of financial position of a business? Explain.

$2,000 owing to Business B for the satisfactory supply of goods during the past month.

A

Yes, this would show as a liability claim (accounts payable):

  1. Past transaction or event - (supply of goods)
  2. Assumed the goods are owned
  3. Their is reliable form of value measurement
  4. Assumed potential for future economic benefit
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37
Q

Could the following items appear as an asset or liability on the statement of financial position of a business? Explain.

Magazine subscriptions worth $27,400 have been received in advance by a publisher from business A.

A

Business A will record the advance payments relating to the subscription as a liability until such time as the magazines have been delivered and the contract completed.

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38
Q

Could the following items appear as an asset or liability on the statement of financial position of a business? Explain.

Business A has guaranteed a manager’s personal loan of $100,000. The manager has maintained the account in good order and $79,000 is currently owing.

A

Given the manager is unlikely to default, the loan guarantee would not be recorded as a liability claim.

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39
Q

Could the following items appear as an asset or liability on the statement of financial position of a business? Explain.

There is a legal claim against business A for negligence over faulty workmanship. It is likely that they will settle out of court for $50,000.

A

Given the payout is likely, the settlement amount should be recorded as a contingent liability claim.

40
Q

What is the term for the claim of the owner(s) against a business?

A

The OWNER’S CAPITAL

41
Q

What is meant by the OWNER’S CAPITAL?

A

the OWNER’S CAPITAL represents the claim of the owner against the business.

42
Q

Residual interest in the assets of the entity after deducting all of its liabilities is known as…..

A

EQUITY

43
Q

What is EQUITY?

A

Residual interest in the assets of an entity after deducting all liabilities.

44
Q

What is the ACCOUNTING EQUATION (short version)?

A

ASSETS = OWNER EQUITY + LIABILITIES

45
Q

what is the following equation often referred as:

ASSETS = OWNER EQUITY + LIABILITIES

A

ACCOUNTING EQUATION (short version)

46
Q

if a company buys something on say 30 days credit, how will it be recorded on a financial statement and what is the common name of the line item?

A

it will be recorded on the claims liability side as ACCOUNTS PAYABLE

47
Q

What is ACCOUNTS PAYABLE?

A

money owed to someone else like 30-day credit and such.

48
Q

what is the EXTENDED ACCOUNTING EQUATION?

A

ASSETS AT END OF PERIOD = OWNERS EQUITY AT BEGINNING OF PERIOD + PROFIT (OR - LOSS) +/- OTHER OWNERS EQUITY CHANGES + LIABILITIES AT END OF PERIOD

49
Q

assets that are held for the short term are called….

A

CURRENT ASSETS

50
Q

what is a current asset?

A

a CURRENT ASSET are assets that are held for the short term.

51
Q

cash and other assets that are expected to be consumed or converted to cash, usually within the next 12 months or within the operating cycle are called…

A

CURRENT ASSETS

52
Q

tangible non-current assets are usually put into what general category?

A

PROPERTY, PLANT and EQUIPMENT

53
Q

what general type of items are kept under the general heading PROPERTY, PLANT AND EQUIPMENT

A

tangible non-current assets

54
Q

Three classifications of OWNER’S EQUITY?

A

OWNER’S EQUITY CONTRIBUTED
RETAINED PROFIT
OTHER RESERVES

55
Q

A sole trader injects $100 into his company, where and under what category is this shown on the balance sheet?

A

Claim liabilities, OWNERS EQUITY CONTRIBUTED

56
Q

a sole trader company makes $100 profit and decides to keep this within the company for future use. Where and under what category is this shown on the balance sheet within the claim liabilities?

A

RETAINED PROFITS (retained earnings)

57
Q

What are the three types of OWNERS EQUITY

A 
OWNER'S EQUITY CONTRIBUTED
RETAINED PROFITS (RETAINED EARNINGS)
58
Q

describe the display of information within a horizontal statement of financial position?

A

On the left - current assets and non current assets

On the right - liabilities (further broken down into current and non-current) and owner’s equity

59
Q

What is the formula for the horizontal statement of finacial position?

A

CURRENT ASSETS + NON-CURRENT ASSETS = CURRENT LIABILITIES + NON-CURRENT LIABILITITES + OWNERS EQUITY

60
Q

when entering individual items under a categories (e.g. non-current assets) what order are they usually put in?

A

Order of liquidity (ascending or descending depends on country)

61
Q

what are the two types of statement of financial position FORMATS?

A

HORIZONTAL format and VERTICAL (NARRATIVE) FORMAT.

62
Q

HORIZONTAL format relates to…..

A

STATEMENT OF FINANCIAL POSITION

63
Q

VERTICAL format relates to….

A

STATEMENT OF FINANCIAL POSITION

64
Q

what are the two types of VERTICAL format statement of financial position?

A
  1. ENTITY APPROACH

2. PROPRIETARY APPROACH

65
Q

(statement of financial position, vertical format); what is the underlying formula for the ENTITY APPROACH?

A

(same as horizontal) CURRENT ASSETS + NON-CURRENT ASSETS = CURRENT LIABILITIES + NON-CURRENT LIABILITIES + OWNER’S EQUITY

66
Q

(statement of financial position format) which vertical format is the same as the horizontal format?

A

ENTITY APPROACH

67
Q

which format focusses on the owner’s equity rather than the entity itself?

A

Proprietary Approach

68
Q

What is the formula for the PROPRIETARY APPROACH (vertical format, statement of financial position)

A

Current Assets + Non-Current Assets - Current Liabilities - Non-Current Liabilities = Owner’s Equity

69
Q

An entity with users who rely on general-purpose financial statements for their information relating to that entity is known as…..

A

REPORTING ENTITY

70
Q

what is a REPORTING ENTITY?

A

an entity with users who rely on general-purpose financial statements for their information relating to that entity.

71
Q

rules that have been devised over time in order to deal with practical problems experienced by preparers and users of financial reports are known as?

A

CONVENTIONS

72
Q

what are CONVENTIONS?

A

CONVENTIONS are rules that have been devised over time in order to dearl with practical problems experienced by preparers and users of financial reports.

73
Q

What does GAAP stand for?

A

GAAP stands for ‘GENERALLY ACCEPTED ACCOUNTING PRACTICE’

74
Q

accounting conventions (or principles, assumptions or accepted ideas) on which accounting rules, records and reports were or are based are known as ….

A

GAAP

75
Q

What is meant by GAAP?

A

GAAP are accounting conventions (or principles, assumptions or accepted ideas) on which accounting rules, records and reports were or are based

76
Q

the convention that states the business and its owner(s) are treated separate and distinct for the purposes of accounting is known as …….

A

THE BUSINESS ENTITY CONVENTION

77
Q

what is THE BUSINESS ENTITY CONVENTION?

A

THE BUSINESS ENTITY CONVENTION is the convention that the business and its owner(s) are treated separately as distinct entities for the purpose of accounting.

78
Q

the convention that caution should be exercised when making accounting judgements is known as ……

A

THE PRUDENCE CONVENTION holds that caution should be exercised when making accounting judgements.

79
Q

what is the PRUDENCE CONVENTION?

A

THE PRUDENCE CONVENTION holds that caution should be exercicsed when making accounting judgements.

80
Q

Using the PRUDENCE CONVENTION, how should losses be recorded?

A

Under the PRUDENCE CONVENTION, all losses should be recorded at once and in full; both actual losses and expected losses.

81
Q

Using the PRUDENCE CONVENTION, how should profits be recorded?

A

Profits are only recognised when they arise.

82
Q

the accounting convention that assets should be recorded at their historic (acquisition) cost is known as…

A

The HISTORIC COST CONVENTION

83
Q

What is the HISTORIC COST CONVENTION

A

The HISTORIC COST CONVENTION holds that the value of assets should be recorded at their historic (acquisition) cost.

84
Q

The convention that financial statements should be prepared on the assumption that a business will continue operations for the foreseeable future; unless there is evidence to the contrary is known as …

A

The GOING CONCERN CONVENTION

85
Q

what is the GOING CONCERN CONVENTION?

A

The GOING CONCERN CONVENTION holds that financial statements should be prepared on the basis that the organisation will continue operating into the foreseeable future; unless their is evidence to the contrary.

86
Q

The convention that each trasanction has two aspects and the each aspect must be recorded in financial statements is known as …

A

the DUAL ASPECT CONVENTION

87
Q

what is the DUAL ASPECT CONVENTION

A

the DUAL ASPECT CONVENTION holds that every transaction has two aspects and both aspects must be recorded in financial statements.

88
Q

the formal system of recording using ledger accounts with reflect the dual aspect of financial transactions is known as …

A

DOUBLE-ENTRY BOOK-KEEPING/ACCOUNTING

89
Q

what is DOUBLE-ENTRY BOOK-KEEPING/ACCOUNTING?

A

DOUBLE-ENTRY BOOK-KEEPING/ACCOUNTING is the formal system of recording using ledger accounts which reflect the dual aspect of financial transactions.

90
Q

the accounting convention that accounting should only deal with those items which are capable of being expressed in monetary terms is known as ….

A

THE MONEY MEASUREMENT CONVENTION

91
Q

what is the MONEY MEASUREMENT CONVENTION ?

A

the MONEY MEASUREMENT CONVENTION states accounting should only deal with items capable of being expresssed in monetary terms.

92
Q

the accounting convention that money will not change in value over times is known as …

A

the STABLE MONETARY UNIT CONVENTION

93
Q

What is the STABLE MONETARY UNIT CONVENTION?

A

the STABLE MONETARY UNIT CONVENTION holds that money will not change in value over time.

94
Q

The amount of loss that must be wriiten-off for an asset where the carrying amount is more than the recoverable amount is known as ….

A

an IMPAIRMENT

95
Q

what is an IMPAIRMENT?

A

an IMPAIRMENT is the amount of loss that must be writtent-off for an asset where the carrying cost is higher than the recoverable amount.

Finance for Managers (4 decks)

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