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
Outline the different parts of the income statement (describe also)
Trading account, profit and loss account and the appropriation account
[INCOME STATEMENT] Describe profit statement
- aka lost statement if not going well;
-
second part of the income statement;
-shows NET PROFIT;
-> gross profit - expenses
Differentiate the income statement of a for-profit corporation vs one of a non-profit organization
Non-profits refer to their “profits as surplus.
Describe the straight line method
- Residual value = 0: Annual depreciation = purchase cost / lifespan
- Residual value > 0: Annual depreciation = (Purchase cost – Residual value) ÷ Lifespan
Briefly outline the income statement
