Chapter 2

Question 1

What is the statement of cash flows

Answer 1

statement that shows a business’s sources and uses of cash for period

Question 2

What is the income statement (statement of financial performance)

Answer 2

measures and reports the profit (or loss) generated for a period, deducts total revenue from total expenses

Question 3

What is the statement of financial position (balance sheet)

Answer 3

shows the assets of a business and the claims on those assets

Question 4

What is an asset

Answer 4

a resource held by a business, provide economic benefits

Question 5

What is a claim

Answer 5

obligations of a business to provide cash or some other benefit to an outside party

Question 6

What are the three qualifying characteristics of an asset

Answer 6

• must be an economic resource, provides rights to economic benefits
• the economic resource must be under the control of the business (through legal ownership or contact)
• resource must be capable of measurement in monetary terms

Question 7

What are the two types of claim

Answer 7

equity and liabilities

Question 8

What is equity

Answer 8

it represents the owners claim on the business (owners capital)

Question 9

What is a liability

Answer 9

claim of an individual or other organisation apart from owner arisen from past transactions / events

Question 10

What is the reporting period

Answer 10

the time span for which a business prepares its financial statements

Question 11

What is a current asset

Answer 11

an asset held for the short term and expected to be sold within a year

Question 12

Three main current assets

Answer 12

• inventories
• trade receivables
• cash

Question 13

What is a non current asset

Answer 13

a fixed asset held for the long term, a tool of the business

Question 14

Seven types of non current asset

Answer 14

• plant
• fixture and fittings
• equipment
• machinery
• motor vehicles
• property
• intangible assets

Question 15

What is a current liability

Answer 15

amounts due to be settled in the short term and exist as a result of trading with no right to defer beyond a year

Question 16

What is an example of a current liability

Answer 16

amount owed on credit (trade payable)

Question 17

What is a non current liability

Answer 17

a longer term liability

Question 18

What is an accounting conventions

Answer 18

generally accepted rules by accountants when preparing financial statements

Question 19

Business entity convention

Answer 19

for accounting purposes the business and its owner are treated as separate

Question 20

Historic cost convention

Answer 20

assets should be recorded at their historic cost (acquisition cost)

Question 21

Prudence convention

Answer 21

caution should be exercised when making accounting judgements

Question 22

Going concern convention

Answer 22

financial statements should be prepared on the assumption that a business will continue in operation for foreseeable future

Question 23

Dual aspect convention

Answer 23

that each transaction has two aspects (debit and credit)

Question 24

What is goodwill

Answer 24

an intangible asset used to cover positive attributes eg. quality of products / skills of employees

Question 25

What is the term product brands

Answer 25

covers attributes such as brand image, trademark

Question 26

What is an arms length transaction

Answer 26

one undertaken between two unconnected parties

Question 27

What does a NCA with a finite life do

Answer 27

provide benefits to business for limited period of time (equipment)

Question 28

What does a NCA with an indefinite life do

Answer 28

provides benefits to business without a forseeable time limit (property)

Question 29

What is the carrying amount

Answer 29

the difference between the cost (fair value) of an NCA and the accumulated depreciation (AKA netbook value, written down value)

Question 30

What is fair value

Answer 30

the current marker value of an asset

Question 31

What happens when an tangible asset is revalued on basis of fair values

Answer 31

all assets within a particular group must be revalued

Question 32

What is the general rule when the carrying amount is higher than the recovered amount

Answer 32

to reduce the carrying amount to the recoverable amount

Question 33

What is impairment loss

Answer 33

the amount by which the asset is reduced due to a change in a fundamental factor (market for service provided collapses)

Question 34

When must an intangible NCA be tested for impairment

Answer 34

at the end of each reporting period

Question 35

What is the realisable value

Answer 35

selling price - selling cost