Chapter 2: Measuring And Reporting Financial Position

Question 1

What is the calculation for straight line depreciation?

Answer 1

Depreciation = (Cost - Residual Value)/ Estimated Lifecycle of Product

Question 2

In the context of a balance sheet or statement of financial position, what is the relationship between assets, liabilities and shareholder equity?

Answer 2

Assets = Liabilities + Equity

Assets - Liabilities = Equity

Question 3

Define Balance Sheet

Answer 3

Also know as the statement of financial position (SOFP).

The balance sheet is a measure of the overall combined wealth of a business.

The balance sheet comprises of the assets, liabilities and equity of a business.

The balance sheet is the primary component of the final accounts of a business

Question 4

What are trade receivables?

Answer 4

Debts to be collected by the business for products or services rendered.

Amount owed by customers for goods or services supplied on credit.

Question 5

In the context of the statement of financial position, define the relationship between assets, liabilities and shareholder equity.

Answer 5

Assets = Liabilities + Equity
Assets - Liabilities = Equity
Liabilities + Equity = Assets

Question 6

What is the Accounting Equation?

Answer 6

Assets = Liabilities + Equity

Question 7

Describe the circulating nature of current assets

Answer 7

Cash-Inventory-Trade Receivables…

Question 8

What is the liquidity ratio?

Answer 8

The liquidity ratio is current assets divided by the current liabilities

Question 9

How would you determine the current value of an asset?

Answer 9

By either it’s cost to replace or its resale value

Question 10

In accounting what is the historic cost convention?

Answer 10

The historic cost convention is the notion that assets on the statement of finacial position shoud be valued by the acqusition cost (purchase cost)

Question 11

What is the difference in the equation for two different balance sheet layout?

Answer 11

The typical balance sheet layout uses the accounting equation, Assets = Liabilities + Equity
An alternative balance sheet layout uses the equation, Assets - Liabilities = Equity

Question 12

What is the enhaced variation of the accounting equation?

Answer 12

Assets = Equity +/- Profit/Loss + Liabilities

Question 13

Describe the Dual Aspect convention

Answer 13

The dual aspect convention states that each transation has a dual effect on the balance sheet.
Liability Down = Cash Down
Inventory Assets Up = Cash Down
Trade payable Down = Cash Down

Question 14

What does the accronm EBITDA stand for?

Answer 14

Earnings before interest, tax, depreciation and amortization

Question 15

In accounting, what is the carrying amount?

Answer 15

Cost of assest - depreciation = Carrying Amount

Question 16

Define impairment loss

Answer 16

The reduction of the carrying amount of an asset on the balance sheet to its resale value to prevent overstating it’s value