Definitions Chapter 2

Question 1

Statement of cash flows

Answer 1

A statement that shows a business’s sources and uses of cash for a period

Question 2

Income statement

Answer 2

A financial statement (also known as profit and loss account) that measures and reports the profit (or loss) the business has generated during a period.
It is derived by deducting from total revenue for a period, the total expenses associated with that revenue

Question 3

Statement of financial position

Answer 3

A statement that shows the assets of a business and the claims on those assets.
It is known as a balance sheet.

Question 4

Final accounts

Answer 4

The income statement, statement of cash flows and statement of financial position taken together

Question 5

Assets

Answer 5

Resources held by a business, which have certain characteristics, such as the ability to provide future benefits

Question 6

Claims

Answer 6

Obligations on the part of a business to provide cash or some other benefit to an outside party

Question 7

Tangible assets

Answer 7

Assets that have a physical substance (for example, plant and machinery, motor vehicles)

Question 8

Intangible assets

Answer 8

Assets that do not have a physical substance (for example, patents, goodwill and trade receivables)

Question 9

Equity

Answer 9

The owners’ claim on the business.

In the case of a limited company, it comprises the sum of shares and reserves

Question 10

Liabilities

Answer 10

Claims of individuals and organisations, apart from the owner(s), that have arisen from past transactions or events, such as supplying goods or lending money to a business

Question 11

Current assets

Answer 11

Assets that are held for the short term.
They include cash itself and other assets that are held for sale or consumption in the normal course of a business’s operating cycle

Question 12

Non-current assets

Answer 12

Assets held that do not meet the criteria of current assets.
They are held for the long-term operations of the business rather than continuously circulating within the business.
They are also known as fixed assets

Question 13

Property, plant and equipment

Answer 13

Those non-current assets that have a physical substance (for example, plant and machinery, motor vehicles)

Question 14

Current liabilities

Answer 14

Liabilities that are expected to be settled within the normal course of the business’s operating cycle or within 12 months of the statement of financial position date, or which are held primarily for trading purposes, or for which the business does not have the right to defer settlement beyond 12 months of the statement of financial position date

Question 15

Non-current liabilities

Answer 15

Liabilities of the business hat are not current liabilities

Question 16

Accounting conventions

Answer 16

Generally accepted rules that are followed when preparing financial statements.
They have evolved over time to deal with practical problems rather than to reflect some theoretical idea

Question 17

Business entity convention

Answer 17

The convention that holds that, for accounting purposes, the business and its owner(s) are treated as quite separate and distinct

Question 18

Historic cost convention

Answer 18

The accounting convention that holds that assets should be recorded at their historic (acquisition) cost

Question 19

Prudence convention

Answer 19

The accounting convention that holds that caution should be exercised when making accounting judgments.
It involves reporting actual and expected losses immediately but reporting profits only when they arise

Question 20

Going concern convention

Answer 20

The accounting that holds a business is assumed to continue operations for the foreseeable future, unless there is reason to believe otherwise.
In other words, it is assumed that there is no intention, or need, to liquidate the business

Question 21

Dual aspect convention

Answer 21

The accounting convention that holds that each transaction has two aspects and that each aspect must be reflected in the financial statements

Question 22

Fair values

Answer 22

The values ascribed to assets as an alternative to historic cost.
They are usually the current market values (that is, the exchange values in an arm’s-length transaction)

Question 23

Impairment loss

Answer 23

The amount by which the asset value reduced as a result of having its value assessed as impaired