3.4: Statement of financial position (final accounts) Flashcards
What is a balance sheet?
Records a business finance position/financial status at a given moment in time
- e.g. as of today, as of next month
-“haha this month you good”
Differentiate balance sheets and income statements
Income statements (DB)
- overall, longer period of time
-“moving”
Balance sheets
- at a particular point in time
What are the papers you need to record the finance of business
2 balance sheets (old vs new) and an income statement
Outline the accounting period framework
Balance sheet of year 1 -> income statement of year 2 -> balance sheet of year 2
What are the basic elements of a balance sheet?
- Assets
- Liabilities
- Equity
Define liabilities
money or amounts borrowed from other people
Define owner’s equity
Money from owner’s pocket, stocks, etc.
Define assets simply
things that one owns
What happens if there’s an imbalance between assets and equity
the audit starts again
What happens if assets and equity is unequal
The audit begins again
Why are balance sheets important?
To determine where their assets come from
- for banks, they prefer to give loans to someone who has, e.g. 70% equity to 30% liability
Define current assets
resources that can be converted to cash within one year/1 fiscal cycle
Define liquidity
If you have a lot of cash/items that can be used as cash (cash equivalents)
- e.g. bonds, stocks
Define marketable securities
- can be used to pay for credit — no need to convert to cash;
- liquid investments such as stocks or bonds;
Describe accounts receivables [3]
credit sales/debts that have not yet been collected;
- fast turnover period = better;
- longer debts remained unpaid = the less chance to be repaid;
Define inventory (stocks)
represents items that have been purchased or manufactured for resale to customers
Define prepaid expenses
payments made by company for goods and services to be received in the future
- e.g. the ordering of a factory, ordering a book from shopee, advance salaries
Define investments
assets acquired with the goal of generating income
What to do to calculate the future value of money / too much money (?)
Convert to securities/convert into investment to get money
If you have surplus money, what should you do?
Put it into a short term investment with interest to generate money to fight the loss in value
Describe non-current assets
- low liquidity — can’t sell easily;
- usually capital (+ land);
- land never depreciates;
Why is it better to invest in land rather than condos?
Condos only have a certain number years of ownership — for land, that’s yours
Why does land not depreciate?
No obsolescence in land — land is permanent.still there — value of land goes ip
- can only depreciate if it e.g. goes to the sea
Differentiate assessed value vs actual value
Actual value
- price at acquisition
Assessed value
- price estimated to be at a time not at acquisition
Define depreciation
reduction of the reported value during a period
Define book value
Value recorded (in the books)
Outline the parts in the assets section of the balance sheet
*DEBTORS = ACCOUNTS RECEIVABLE
*STOCKS = INVENTORY
Define intangible assets
Assets not physically perceivable
-e.g.: patent, copyrights and goodwill
Define goodwill
denotes the economic value of an acquired firm in excess of the value of its identifiable net assets
Outline the different parts of the income statement (describe also)
Trading account, profit and loss account and the appropriation account
[INCOME STATEMENT] describe the section “trading account”
- First part
- shows gross profit
-> gross profit = sales rev - cost of sales
-> cost of sales = opening stock + purchases - closing stock
-
Describe opening stock
- cost of stock aka raw materials + goods;
- start of the trading period
Define closing stock
- cost of stock at the end of trading period;
define purchases
- cost of supply/delivery of goods;
define “stocks”
- things to sell to customers;
[INCOME STATEMENT] Describe profit statement
- aka lost statement if not going well;
-
second part of the income statement;
-shows NET PROFIT;
-> gross profit - expenses
Define expenses
- Indirect/fixed costs of production;
- controlled by organization — taxes and interest do not count;
[INCOME STATEMENT] Describe appropriation account
- last part of the profit and loss account;
- shows dividends (portion of net profit after interest and tax that is *distributed among shareholders);
- shows retained profits (net profit - dividends);
Differentiate the income statement of a for-profit corporation vs one of a non-profit organization
Non-profits refer to their “profits as surplus.
Define purchase cost
cost of the asset at the time when it was bought.
Define lifespan
how long an asset can be used
Define residual/scrap value
how much an asset is worth at the end of its lifespan
define book value
value of an asset in a balance sheet
Define market value
estimated price of an asset if to be sold
List the two methods to calculate depreciation
- Straight line method
- Units of production method
Describe the straight line method
- Residual value = 0: Annual depreciation = purchase cost / lifespan
- Residual value > 0: Annual depreciation = (Purchase cost – Residual value) ÷ Lifespan
Define equity
The amount of money to return to business’ account after liquidation
Describe the equity section of balance sheets (DB) [4]
- Last part;
- Two sub-parts: dividends (the money to give to shareholders) and the retained profit;
- dividends: Profit before tax - tax;
- Retained profit = profit after dividends = Profit after tax (?);
why is equity = net assets
net assets -> w/o libailities?
- bec.. it is the money that will go back to the company and not to the investors, creditors, etc. so not libailities
Outline the two reasons why assets depreciate
Wear and tear and obsolescence
Define wear and tear
The repeated use of fixed assets like cars and machines causing them to the worsening of condition, and higher maintenance costs and lower value.
Define obsolescence
Existing fixed assets fall in value due to new and improved versions
(e.g. cellphones)
Give the advantages of straight line depreciation
- simple to calculate because the expense is predictable
- mostly suitable for less expensive items, such as furniture.
Give the disadvantages for straight line method
- doesn’t account for poss of efficiency and obsolescence, etc. so not suitable for expensive assets;
- inflates the value of some assets which great,y lost value in their first or second year like motor vehicles;
Give the formula for the reducing-balance method
Net book value in Year 1 = Cost of original asset - (cost of orig ass. x rate of depreciation)
Define notes payable
the interest of accounts payable
Define deferred revenue
Advance payments to be paid
Give the margin of safety formula
Actual sales - BEP units
Give the net profit formula
Total Revenue - Total cost
Differentiate capital and revenue expenditures
Capital more long term more than a year;
Revenue expenditure only for a year;
Differentiate leasing and renting
Leasing for commercial buildings (e.g. SM malls)
Briefly outline the income statement
Why are taxes deducted after the interest (INCOME STATEMENT)
Because taxes are only imposed on what you have after paying off everyone else
- the money you pay for the loan to continue it
Define dividends
The profit after all deductions that will be distributed to shareholders
Differentiate income statements vs balance sheets
Balance sheet
- financial status in a specific point in time
Income statement
- recording of all transactions
Assets are ordered in the order of..?
fluidity (liquidity)
What could make an asset current?
If they can be converted to cash within 1 year (aka short-term)
Why are promissory notes marketable securities
Factoring —
-> promissory notes: a written agreement that one party will pay back at one time
-> marketable securities: assets that can easily be converted to cash
Why are liabilities constantly moving?
Longer term debts become eventually shorter term (current) as they are paid off
