Chapter 2

Question 1

What are the two types of assets?

Answer 1

non-current and current assets

Question 2

What is a current asset?

Answer 2

assets acquired for resale or expected to be realised within the normal course of trading

eg.
inventory - stock
receivables (money owed by credit customers) and cash

Question 3

What is a receivable?

Answer 3

money owed by credit customers

Question 4

What is a non-current asset?

Answer 4

assets acquired for on-going, long-term use in the business

these may include assets purchased outright or those leased my the business (known as right of use assets)

eg.
land and buildings
plant and machinery

Question 5

What is the accounting equation known as?

Answer 5

statement of financial position (SFP) equation

Question 6

What is the statement of financial position (SFP) equation?

Answer 6

detailed expansion of the equation showing assets, liabilities and capital

Question 7

What are the two types of liabilities?

Answer 7

non-current and current

Question 8

Non-current Liabilities

Answer 8

long-term liabilities payable more than 12 months after the statement of financial position date

eg.
loan

Question 9

Current Liabilities

Answer 9

liabilities which are payable within 12 months of statement of financial position date

eg.
trade receivables (money owed to credit suppliers)
overdraft

Question 10

trade receivables

Answer 10

Money owed to credit suppliers

Question 11

What is the business entity concept?

Answer 11

the concept states that financial statements should only show the activities of the business and not the personal activities of its owners

therefore the business entity is treated as separate from its owners

Question 12

What are examples of flow of money between owner and business?

Answer 12

extra capital invested into the business by the owner

‘drawings’ being funds withdrawn from the business by the owner

Question 13

Where are flows of money between the owner and the business reported?

Answer 13

within the statement of financial position as capital

Question 14

Assets = ?

Answer 14

liabilities + capital

Question 15

Capital = ?

Answer 15

assets - liabilities

Question 16

What is a consequence of business entity concept about assets, liabilities or capital?

Answer 16

a business will buy assets using borrowed funds (liabilities) or capital from its owner

Question 17

What does the top half of the financial position show?

Answer 17

assets

Question 18

What does the bottom half of the financial position show?

Answer 18

liabilities and capital

Question 19

What is capital?

Answer 19

how much a business owes the owner

Question 20

How is capital calculated?

Answer 20

opening capital + profit + capital injections - drawings

Question 21

What does the duality concept state?

Answer 21

every transaction has a duel effects/two impacts

Question 22

What does the duality concept mean?

Answer 22

if a company were to purchase goods on credit, it would:

increase trade payables because the company now owns a supplier

and

increase inventory because the company now holds stock

Question 23

Duality concept - if the business sells inventory for more than it cost?

Answer 23

business has made a profit which increases capital

Question 24

Duality concept - if the business sells inventory for less than it cost?

Answer 24

business has made a loss which reduces capital

Question 25

What does a statement of profit or loss (SPL) show?

Answer 25

how the profit figure included in the calculation of capital has arisen it shows income less expensive over period of time

Question 26

What happens if expenses > income in a SPL?

Answer 26

a loss will be reported

Question 27

What are the two types of sales?

Answer 27

cash sales credit sales

Question 28

Cash Sales

Answer 28

will increase cash

Question 29

Credit Sales

Answer 29

sales that allow customers to pay later will increase trade receivables

Question 30

What does the statement of profit or loss need to reflect in relation to sales?

Answer 30

it needs to reflect how much it has cost the business to make it sales

Question 31

How is the cost of sales calculated?

Answer 31

opening inventory + purchase - closing inventory

Question 32

Opening inventory

Answer 32

inventory held in the business on the first day of the period

Question 33

Purchases

Answer 33

what the business bought during the period to sell

Question 34

What are the two types of purchases?

Answer 34

cash credit

Question 35

Cash Purchases

Answer 35

will decrease cash

Question 36

Credit Purchases

Answer 36

purchase that allow us to pay later will increase trade payables

Question 37

Closing Inventory

Answer 37

inventory help in the business on the last day of the period

Question 38

What are expenses?

Answer 38

running costs of the business and reduced profit and therefore the capital

Question 39

Relationship between the statement of financial position and statement of profit or loss

Answer 39

capital at the start of the period + profit (or - loss) from statement of profit or loss + cash injects/introduced from owner - cash drawings taken by owner = capitals at the end of period