Chapter 1

Question 1

What are financial statements?

Answer 1

• Statement of Financial Position (SFP)
• Statement of Comprehensive Income (SCI)
• Statement of Changes in Equity (SCE)
• Statement of Cash Flows (SCF)
• Notes to the financial statements are produced but these provide further information regarding numbers in the financial statements.

Question 2

What are financial statements often referred to as? and why?

Answer 2

“published accounts” - because they are statements that are produced and published for use by a wide range of external parties (users).

Question 3

Financial statements are to be used by external parties. What is important?

Answer 3

That the financial statements are prepared in accordance with certain regulations (accounting standards).

Question 4

Who produces the “International Accounting Standards”?

Answer 4

A regulatory board known as the International Accounting Standards Board (IASB)

Question 5

What are the standards referred to as?

Answer 5

• International Accounting Standard (IAS)

- International Financial Reporting Standard (IFRS)

Question 6

There is no difference between IAS and IFRS except one is older. Which one is this?

Answer 6

IAS (International Accounting Standards) are older.

Question 7

What specific format does the financial statements follow?

Answer 7

Proformas

Question 8

Why is it important that companies produce their financial statements in the same format?

Answer 8

So that that users can easily compare the information from one company to another.

Question 9

How often are financial statements normally produced?

Answer 9

Annually

Question 10

What does the reporting period refer to?

Answer 10

The year covered by the financial statements

Question 11

What is the last day of the reporting period referred to as?

Answer 11

The reporting date

Question 12

What is the purpose of The Statement of Financial Position (SFP)

Answer 12

Shows the position the company is in at the end of the reporting period.

Question 13

What three key items does The Statement of Financial Position contain information about?

Answer 13

Assets, Liabilities, Equity

Question 14

What is the purpose of The Statement of Comprehensive Income (SCI)

Answer 14

Shows the performance of the company during the accounting period.

Question 15

What two key items does The Statement of Comprehensive Income contain information about?

Answer 15

Income, Expense

Question 16

What is the purpose of The Statement in Changes of Equity? (SOCIE)

Answer 16

It shows how the figure of equity in the SFP has changed between the start of this year and the end of this year.

Question 17

What is the “Framework” ?

Answer 17

The framework is a document that provides accountants with the basic principles to apply when producing financial statements.

Question 18

What are the 5 items in the SFP and SCI known as?

Answer 18

“Elements of Financial Statements”

Question 19

What are the 5 “Elements if Financial Statements”?

Answer 19

Assets, Liabilities, Equity, Income, Expenses.

Question 20

What is an “Asset”?

Answer 20

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Question 21

4 Examples of an Asset are?

Answer 21

• Property/Machinery
• Inventory (goods held to sell to customers)
• Receivables (amounts the business is owed)
• Cash

Question 22

How is the presentation of an asset split?

Answer 22

• Non-Current Asset

- Current Asset

Question 23

Define a “Current Asset”

Answer 23

An asset that a company intends to sell in its ordinary day to day business or that it intends to turn into cash within 12 months after the reporting date.

Question 24

What are “Current Assets” primarily made up from?

Answer 24

• Inventories
• Receivables
• Cash

Question 25

What is a “Non-Current Asset”?

Answer 25

An asset that is more long term in nature. Usually no intention to sell the asset as it will be used in the business to help generate profit.

Question 26

Define a “Liability”

Answer 26

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Question 27

2 examples of “liabilities” are?

Answer 27

• Trade Payables

- Loan owed to bank

Question 28

How is the presentation of an liability split?

Answer 28

• Non-Current Liability

- Current Liability

Question 29

What is a “Current Liability”?

Answer 29

A current liability is an amount owed within 12 months of the reporting date.

Question 30

What is a “Non-Current Liability”?

Answer 30

A non-current liability is something owed after 12 months.

Question 31

Define “Equity”

Answer 31

Equity is the residual interest in the assets of the entity after deducting all its liabilities. (Assets -Liabilities). It can be seen as the amount owned by the owners of an entity.

Question 32

Define “Income”

Answer 32

Income is an increase in economic gain during the accounting period. This is usually down to an increase in assets or a decrease in liabilities. (This results in an increase of equity to the owner of an entity).

Question 33

Examples of income would be?

Answer 33

• Sales
• Rent
• Bank Interest

Question 34

Define “Expense”

Answer 34

Expense is a decrease in economic gain during the accounting period. This is usually down to a decrease in assets or an increase in liabilities. (This results in an decrease of equity to the owner of an entity).

Question 35

Examples of expense would be?

Answer 35

• Purchase of goods
• Wages
• Depreciation