Definitions Chapter 3

Question 1

Profit

Answer 1

The increase in wealth attributable to the owners of the business that arises through business operations

Question 2

Revenue

Answer 2

A measure of the inflow of assets (for example, cash or amounts owed to a business by credit customers, or a reduction in liabilities, arising as a result of trading operations

Question 3

Expense

Answer 3

A measure of the outflow of assets (or increase in liabilities) incurred as a result of generating revenue

Question 4

Reporting period

Answer 4

The time span for which a business prepares its financial statements

Question 5

Gross profit

Answer 5

The amount remaining (if positive) after the cost of sales has been deducted from trading revenue

Question 6

Operating profit

Answer 6

The profit achieved during a period after all operating expense have been deducted from revenues from operations.
Financing expenses are deducted after the calculation of operating profit

Question 7

Profit for the period

Answer 7

The final result after all appropriately matched expenses of running a business have been deducted from the revenue for the year, but before the taxation charge is deducted

Question 8

Cost of sales

Answer 8

The cost of goods sold during a period.
Cost of sales can be derived by adding the opening inventories held to the inventories purchased during the period and then deducting the closing inventories held.

Question 9

Matching convention

Answer 9

The accounting convention that holds that expenses should be matched to revenue, which they help generate, in the same reporting period

Question 10

Accrued expenses

Answer 10

Expenses that remain unpaid at the end of a reporting period

Question 11

Prepaid expenses

Answer 11

Expenses that have been paid in advance at the end of the reporting period

Question 12

Materiality convention

Answer 12

The accounting convention threat states that, where the amounts involved are immaterial, only what is expedient should be considered

Question 13

Accruals convention

Answer 13

The convention of accounting that asserts that profit is the excess of revenue over expense, not the excess of cash receipts over cash payments

Question 14

Accruals accounting

Answer 14

The system of accounting that adheres to the accruals convention.
The system is followed in preparing the statement of financial position and income statement

Question 15

Depreciation

Answer 15

A measure of that portion of the cost (or fair value) of a non-current asset that has been consumed during a reporting period

Question 16

Amortisation

Answer 16

A measure of that portion of the cost (or fair value) of a non-current asset that has been consumed during a reporting period.
The word ‘amortisation’ tends to be used where the particular non-current asset is an intangible one, whereas ‘depreciation’ is normally used with tangible assets

Question 17

Residual value

Answer 17

The amount for which a non-current asset is sold when the business has no further use for it

Question 18

Straight-line method

Answer 18

A method of accounting for depreciation that allocates the amount to be depreciated evenly over the useful life of the asset

Question 19

Carrying amount

Answer 19

The difference between the cost (or fair value) of a non-current asset and the accumulated depreciation relating to the asset.
The carrying amount is also referred to as the written-down value (WDV) and the net book value (NBV)

Question 20

Reducing-balance method

Answer 20

A method of calculating depreciation that applies a fixed percentage rate of depreciation to the carrying amount of an asset in each period

Question 21

First in, first out (FIFO)

Answer 21

A method of inventories costing which assumes that the earliest acquired inventories are used (in production of sales) first

Question 22

Last in, first out (LIFO)

Answer 22

A method of inventories costing that assumes that the most recently acquired inventories are used (in production of sales) first

Question 23

Weighted average cost (AVCO)

Answer 23

A method of inventories costing, which assumes that inventories entering the business lose their separate identity and any issues of inventories reflect the weighted average cost of the inventories held

Question 24

Consistency convention

Answer 24

The accounting convention that holds that, when a particular method of accounting is selected to deal with a transaction, this method should be applied consistently over time

Question 25

Bad debt

Answer 25

An amount owed to the business that is considered to be irrecoverable