Financial Accounting 188

Question 1

liability

Answer 1

A liability is a present obligation of the entity to transfer an economic resource as a result of past events.

Question 2

asset

Answer 2

An asset is a present economic resource controlled by the entity as a result of past events

Question 3

economic resource

Answer 3

An economic resource is a right that has the potential to produce economic benefits.

Question 4

4 types of entities

Answer 4

Sole proprietor, Partnership, Close
Corporation, Company

Question 5

equity

Answer 5

Equity is the residual interest in the assets of the entity after deducting all its liabilities. It is comprised of capital and profit/loss (Capital contributions + Income – Capital withdrawals – Expenses)

Question 6

income

Answer 6

increase in assets, or decreases in liabilities, that result in increases in
equity, other than those relating to contributions from holders of equity claims.

Question 7

expense

Answer 7

decreases in assets, or increases in liabilities, that result in decreases
in equity, other than those relating to distributions to holders of equity claims.

Question 8

recognition standards of income

Answer 8

the recognition of INCOME occurs at the same time as:

(i) the initial recognition of an asset, or an increase in the carrying amount of an asset; or
(ii) the derecognition of a liability, or a decrease in the carrying amount of a liability.

Question 9

recognition standards of expenses

Answer 9

the recognition of EXPENSES occurs at the same time as:

(i) the initial recognition of a liability, or an increase in the carrying amount of a liability; or
(ii) the derecognition of an asset, or a decrease in the carrying amount of an asset.

Question 10

Cost price definition

Answer 10

Total costs incurred to bring the inventory to their present
location and condition (ready for sale)

–> (Once ready for sale no more adding to cost price)

Question 11

Net realisable value

Answer 11

estimated selling prices in the ordinary course of business LESS estimated cost of completion and estimated cost to make the sale

Question 12

convenience account

Answer 12

During the closing-off process certain convenience accounts are created in the ledger to make reporting easier. This is done by grouping accounts together (trade account or profit and loss account)

Question 13

financial position

Answer 13

It is the financial value (aka owner’s equity) of an entity at a particular moment in time —> represented by the balance sheet

(A-L = financial position)

Question 14

Qualitative characteristics according to the conceptual framework

Answer 14

1. RELEVANCE
   —>Predictive value: Information can be used by users to make their own predictions.

—>Confirming value: Information provides feedback about previous evaluations

2. FAITHFUL REPRESENTATION
   —>Completeness
   —>Neutrality
   —>Freedom from error

Question 15

4 Enhancing qualitative characteristics (VCUT)

Answer 15

1. Comparability (at least against last year)
2. Verifiability (different knowledgeable and independent observers could reach consensus)
3. Timeliness
4. Understandability

Question 16

Accrual basis

Answer 16

expenses must be recorded in the period in which they are incurred, not when they are paid

Question 17

historical cost basis

Answer 17

assets and liabilities are recorded at their original cost at which they were purchased

Question 18

What does the income statement represent?

Answer 18

The financial performance of the entity

Question 19

What does the balance sheet represent?

Answer 19

The financial position of the entity at a particular moment in time

Question 20

Going concern principle

Answer 20

Financial statements are prepared with the assumption that the entity will continue to be in business in the foreseeable future.

Question 21

What do future economic benefits of an asset mean?

Answer 21

the potential to contribute directly or
indirectly to the inflow of cash or cash equivalents to the entity

Question 22

fair value

Answer 22

Fair value is the estimated price at which an asset or liability can be bought or sold in an open market under current conditions between willing parties

Question 23

current cost basis

Answer 23

The amount of cash or cash equivalents that would be required to replace an asset or settle a liability at present

Question 24

Present value of an asset

Answer 24

the current worth of its expected future cash flows, discounted at an appropriate rate to reflect the time value of money

Question 25

statement of changes in equity

Answer 25

reconciliation of equity at the beginning of the financial year with equity at the end of the financial year

Question 26

Statement of cash flows

Answer 26

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

Question 27

Reasons for claiming a discount from the supplier (Returns)

Answer 27

* return of damaged goods * reduction in price after invoice was issued * trade discount omitted on invoice * correction of error on invoice

Question 28

Examples of convenience accounts

Answer 28

* a debtors’ control account, which is a summary of all the debtors of the entity in the debtors’ ledger, * a creditors’ control account, which is a summary of all the creditors of the entity, in the creditors’ ledger, * a trade account which contains all the information regarding sales and cost of sales, * a profit and loss account which contains all the information regarding income and expenses.

Question 29

Financial statements

Answer 29

Balance sheet, income statement, statement of cash flows

Question 30

Trial balance

Answer 30

A list that is prepared from all the balances in the general ledger to verify whether the double entry for each transaction has been completed

Question 31

5 Limitations of the trial balance (where it fails to pick up errors)

Answer 31

Omission Errors: When a transaction or event is completely left out of the records. Posting Errors: When a transaction is recorded, but the debit or credit is placed in the wrong account (posted to CPJ instead of CRJ). Compensating Errors: When an error on the debit side exactly matches an error on the credit side, balancing each other out. Recording Errors: When a transaction is recorded in the wrong journal or with the wrong amount in the correct journal (purchase recorded in the SJ instead of PJ). Principle Errors: When a transaction is classified incorrectly, but the amounts are posted to the correct side of the ledger, just in the wrong account (Stationery recorded as an asset)

Question 32

Gross profit

Answer 32

the profit that results from the entity’s primary operations

Question 33

Inventory

Answer 33

Inventories are assets that: (a) are held for sale in the ordinary course of business (trading inventory), (b) are in the process of production for such sale (work in progress), or (c) are in the form of materials or supplies to be consumed in the production process or in the rendering of services (raw materials and consumables)

Question 34

how to recognise relevance and faithful representation as qualitative characteristics

Answer 34

Relevance: Is there a high probability of an inflow or outflow of economic benefits? Faithful representation: Is there measurement uncertainty?

Question 35

how to calculate cost of sales

Answer 35

O/B inventory + Purchases - Purchase returns - C/B inventory

Question 36

difference between wages reducing liabilities and reducing equity

Answer 36

If wages were recorded as a liability (creditors/salaries payable) in the previous period, the payment reduces liabilities If the business pays wages immediately without recording them as a liability, it is an expense, and the payment reduces equity