Accounting Flashcards
What are the four main financial statements?
Income Statement, Statement of Financial Position, Statement of Changes in Equity, Statement of Cash Flows.
What is the purpose of the Income Statement?
To show the company’s revenues, expenses, and profit or loss for the year.
What does the Statement of Financial Position show?
The financial health of a business at a specific date, listing assets, liabilities, and equity.
What is the accounting equation?
Assets = Liabilities + Equity.
What is the purpose of the Statement of Cash Flows?
It shows cash inflows and outflows from operating, investing, and financing activities.
What is the Trial Balance?
A list of all double-entry transactions ensuring total debits equal total credits.
What is the purpose of financial statements?
To evaluate financial performance, assist in decision-making, and provide transparency to stakeholders.
Who are internal users of financial information?
Owners, managers, employees.
Who are external users of financial information?
Investors, lenders, suppliers, customers, tax authorities, the public.
Why do investors use financial information?
To assess profitability and potential return on investment.
How do lenders use financial statements?
To determine the company’s ability to repay loans.
Why do suppliers use financial information?
To evaluate the company’s creditworthiness before extending credit.
What are the key elements of an Income Statement?
Revenue, Cost of Sales, Expenses, Profit/Loss.
What is Revenue?
The total income earned from sales and services before expenses.
What is Cost of Sales (COS)?
The direct costs associated with producing goods or services.
How is Gross Profit calculated?
Revenue - Cost of Sales.
How is Net Profit calculated?
Gross Profit - Expenses.
Why is the Income Statement important to business owners?
It helps evaluate performance, profitability, and future projections.
What are the three main components of a Statement of Financial Position?
Assets, Liabilities, Equity.
What are Non-Current Assets?
Long-term assets used in business operations (e.g., buildings, vehicles).
What are Current Assets?
Short-term assets expected to be converted into cash within a year (e.g., inventory, receivables).
What are Non-Current Liabilities?
Long-term obligations due beyond one year (e.g., loans, bonds payable).
What are Current Liabilities?
Short-term obligations due within one year (e.g., trade payables, bank overdrafts).
What is Equity?
The owner’s residual interest in the business after liabilities are deducted from assets.
How is Equity calculated?
Equity = Total Assets - Total Liabilities.
What is the purpose of a Statement of Financial Position?
To provide a snapshot of the company’s financial condition at a specific date.
Why do potential investors analyze the Statement of Financial Position?
To assess financial stability and potential investment risks.
What are debit balances typically associated with?
Expenses and Assets.
What are credit balances typically associated with?
Income, Liabilities, and Equity.
How does an increase in assets affect the accounting equation?
It increases total assets, which must be balanced by an increase in liabilities or equity.
Why must the Trial Balance be balanced?
To ensure that total debits equal total credits, verifying the accuracy of transactions.
What are trade receivables?
Customers who owe the business money for goods or services received on credit.
What is an irrecoverable debt?
A debt that cannot be collected from a customer, often due to bankruptcy.
How does an irrecoverable debt affect the accounts?
It reduces trade receivables and increases expenses.
Why are financial ratios important?
They help analyze a company’s performance and compare it with industry benchmarks.
What is the Current Ratio formula?
Current Assets / Current Liabilities.
What does the Current Ratio indicate?
The company’s ability to pay short-term obligations.
What is the Debt-to-Equity Ratio formula?
Total Liabilities / Equity.
What does the Debt-to-Equity Ratio show?
The proportion of debt financing relative to equity.
Why is the Statement of Financial Position legally required for limited companies?
To ensure financial transparency and accountability.
What regulatory bodies oversee financial reporting?
International Financial Reporting Standards (IFRS), Generally Accepted Accounting Principles (GAAP).
What is depreciation?
The gradual reduction in the value of an asset over time.
How does depreciation affect financial statements?
It reduces asset value and increases expenses.
What is goodwill?
An intangible asset representing a company’s reputation and brand value.
What are prepayments?
Expenses paid in advance for future periods (e.g., rent, insurance).
What are accrued expenses?
Expenses incurred but not yet paid.
What is the difference between cash and accrual accounting?
Cash accounting records transactions when cash is exchanged; accrual accounting records when transactions occur.
What is a contingent liability?
A potential liability that depends on the outcome of a future event.
Why is financial reporting important?
It provides stakeholders with essential information for decision-making.
What is working capital?
Current Assets - Current Liabilities.
Why is working capital important?
It measures short-term financial health and operational efficiency.
