Chapter 2 - The Accounting Equation

Question 0

Liabilities

Answer 0

Present obligations of the entity, the settlement of which is expected to result in an outflow of economic benefits

Question 1

Assets

Answer 1

a resource controlled by the entity (as a result of past events), from which future economic benefits are expected

Question 2

Owner’s Equity

Answer 2

The residual interest in the assets of the entity after the deduction of its liabilities

Question 3

Accounting Equation

Assets = ??

Answer 3

Liabilities + Owner’s Equity
or
Total Equities

Question 4

Current vs Non-Current

Answer 4

• Assets and liabilities exist as current or non-current depending on whther they will exist for more or fewer than 12 months
• This distinction enhances the usefulness of the Balance Sheet because it allows for the calculation of performance indicators

Question 5

The Balance Sheet

Definition and purpose

Answer 5

The Balance Sheet details the firm’s financial position at a particular point in time by listing its assets, liabilities and owner’s equity.
The purpose is to detail the financial position of a business AS AT a particular point in time.

Question 6

Performance Indicators

Answer 6

A measure which expresses liquidity, stability or profitability in terms of the relationship between two different elements of performance

Question 7

Liquidity

Answer 7

Refers to the ability of a business to meet its short terms debts as they fall due

Question 8

Stability

Answer 8

Refers to the ability of a business to meet its long term obligations and remain a going concern

Question 9

Profitability

Answer 9

Refers to the ability of the business to earn a profit as compared against a base (sales, assets, owner’s equity)

Question 10

Liquidity - Working Capital Ratio

Answer 10

The ability of the business to meet its short-term debts as they fall due.
A liquidity indicator that measures the ratio of current assets to current liabilities to assess the firm’s ability to meet its short-term debts.
1:1 - satisfactory

Question 11

Stability - The Debt Ratio

Answer 11

The ability of the business to meet its debts and continue its operations in the long term. The debt ratio measures the proportion of the firm’s assets that are funded by external sources.

Debt Ratio = Total Assets / Total Liabilities x 100

High Debt Ratio = High Risk
Low Debt Ratio = Low Risk