Chapter 3: The accounting equation

Question 1

The accounting equation

Answer 1

Assets = Equity + Liabilities

Question 2

Double-entry system

Answer 2

For every debit entry there must be a corresponding credit entry for the same amount.

Question 3

Objective of financial statements

Answer 3

To provide information on the financial position, financial performance and cash flow of an entity which is useful for a wide variety of users when making economic decisions.

Question 4

Financial period

Answer 4

The period for which financial statements have to be prepared.

Question 5

Normal financial period for internal reporting

Answer 5

One month

Question 6

Financial period for external reporting

Answer 6

12 months.

Question 7

Components of financial statements

Answer 7

• Balance sheet (Statement of financial position)
• Income sheet (Statement of comprehensive income_
• Statement of changes in equity
• Cash flow statement
• Notes to financial statements

Question 8

Balance sheet

Answer 8

Presents the financial position of an entity at a specific point in time - the last day of the financial year.

Question 9

Financial position

Answer 9

The wealth or ability of an entity at a specific point in time, as well as a breakdown of the individuals that have an interest there-in.

Question 10

Income statement

Answer 10

Presents the financial results of an entity for a specific financial period.

Question 11

Financial results

Answer 11

The gains or losses that contributed towards an improvement or decline in the financial performance of an entity.

Question 12

Statement of changes in equity

Answer 12

Reconciliation of equity at the beginning of the financial year with equity at the end of the year.

Question 13

Cash flow statemnet

Answer 13

Provides information on the ability of the entity to produce cash and cash equivalents and the demand of the entity to utilize that cash flow.