chapter 8 Flashcards
statement of financial position
a list of the assets, liabilities, capital and reserves of a business at a particular point in time
financial statements
the statements that is required to produce, normally at the end of an accounting year
what can be deducted after analysing statement of financial position
It can be analysed using ratio analysis to determine whether the business is financially stable or not.
things included in the statement of financial position
non current assets
current assets
current liabilities
non current liabilities
capital
secured non current asset
Secured means that the loan is secured to an asset that the borrower owns, often the asset that the loan is being used to buy, such as a property. Secured borrowing gives the lender the right to repossess assets should the borrower fail to make the repayments on time.
unsecured non current assets
Unsecured means that the borrowing is not linked to specific assets-smaller bank loans are often unsecured. If the borrower fails to keep up with repayments, the lender will take action to recover money owed, rather than assets.
methods of calculating the owner’s capital
method 1: preparing a capital account and making the necessary entries
methods 2: using an arithmetical listing approach
conventions that must be observed
non current assets are always listed first, and within that category it is customary to list either the largest items first or those with the longest remaining useful life first.
Current assets are listed in the order that reflects how long it might take to turn them into cash:
-inventory is listed first as it must be sold and then the money needs to be collected
-trade receivables just need to be collected
-cash and cash equivalents just need to be withdrawn from the bank or taken out of the safe.
The calculation of the owner’s capital is shown in full, not just the closing balance.
Current liabilities list payables followed by the bank overdraft if there is one (a credit
balance in the trial balance).
Non-current liabilities contain the bank loan because it is repayable after more than 12 months.
accounting equation
assets=liabilities + capital
what does it mean when the current assets are lower than the current liabilities
the business is more likely to struggle to pay its day-to-day expenses and suppliers on time. This might mean that the sole trader could be forced to sell non- current assets to pay his or her trade payables. This is not a good position to be in as the non-current assets will soon run out and are likely to be needed for the business to be able to operate.
