comm 1140 Week 2 Flashcards
What is the accounting equation
(non current and current) Assets = (non current and current) liabilities + shareholders equity
What is the purpose of the balance sheet?
To summarise the financial position of an enterprise at a particular point in time.
What are the two main questions addressed by a balance sheet?
- What are the resources (assets) of the enterprise?
- What were the sources (debt or equity), i.e. how were they financed?
What does the financial structure of a company indicate?
The debt to equity ratio.
Define liquidity in the context of a balance sheet.
Ease of converting assets to cash in normal course of business.
What is solvency?
Ability to pay debts when they fall due.
What are the four key components that must be included in a balance sheet?
- Name of the reporting identity
- Type of financial statement - Balance sheet
- Date - what point in time it refers to
- Currency used
What are the three main elements of a balance sheet?
- Assets
- Liabilities
- Equity
What is an asset?
A resource controlled by an entity from which future economic benefits are expected.
What are the essential characteristics of assets?
- Future economic benefit
- Control by an entity
- Occurrence of past transactions or events
What are the recognition criteria for assets?
- Probable future economic benefit
- Measurable cost or value
What distinguishes current assets from non-current assets?
Current assets are expected to be realised within the next 12 months, while non-current assets are realised over a longer period.
Define a liability.
A present obligation of the entity arising from past events that is expected to result in an outflow of resources.
What are the two essential characteristics of liabilities?
- Present obligation exists
- Involves future settlement
Differentiate between current and non-current liabilities.
Current liabilities will be paid off within one year, while non-current liabilities will remain for at least the next year.
What is equity in financial terms?
The residual interest in assets after deducting all liabilities.
What are retained profits?
Cumulative profits earned by the business that have yet to be distributed to shareholders.
How are dividends treated in relation to retained profits?
Dividends are directly deducted when calculating retained profit on the balance sheet.
What does the income statement show?
The results of business operations over a specific time period.
What is revenue according to the Australian Accounting Standards Board?
Gross inflows of economic benefits during the period arising from ordinary activities.
What are expenses?
Represent decreases in the entity’s wealth incurred to earn revenue.
True or False: Payments to owners are considered expenses.
False.
Fill in the blank: A balance sheet is a statement that summarises the financial position of an enterprise at a _______.
[particular point in time]
