financial accounting - statement of financial position

Question 1

explain what is meant by depreciation?

Answer 1

accounting estimate of the fall in value of a fixed asset over time

Question 2

how to calculate straight-line depreciation?

Answer 2

(cost-residential value)/estimated useful life

Question 3

how to calculate reducing balance depreciation?

Answer 3

net book value x depreciation rate

Question 4

key point of depreciation?

Answer 4

• reflects the true value of fixed assets making the accounts more realistic

Question 5

what are current assets (short term- less than a year)

Answer 5

• debtors
• stock
• cash

Question 6

what are current liabilities?

Answer 6

• overdraft
• creditors

Question 7

what are non-current assets?

Answer 7

things necessary for the business to function
- machinery
- premises
- vehicles
- fixtures + fittings

Question 8

what are non-current liabilities?

Answer 8

• long term bank loan
• mortgages

Question 9

how to calculate net assets?

Answer 9

total assets - total liabilities

Question 10

what is a statement of financial position? aka balance sheet

Answer 10

a method of recording the value or wealth of a business at a given moment in time

Question 11

what is contained within a statement of financial position?

Answer 11

• non-current assets
• inventory
• receivables
• payables
• working capital
• non-current liabilities
• net assets
• retained earnings
• total shareholder equity

Question 12

what is inventory on a SoFP?

Answer 12

inventory forms the materials, unfinished goods, and finished goods
liquidity

Question 13

what are receivables and trade (DEBTORS)?

Answer 13

money that is owed to the business
counted as a current asset (paid in less than a year)

Question 14

what are creditors (payables)?

Answer 14

opposite of debtors
who the business owes money to e.g, suppliers

Question 15

what are net current assets?

Answer 15

current liabilities - current assets
= value of companies assets

Question 16

how to calculate net assets?

Answer 16

total assets (current+non) - total liabilities (current+non)

Question 17

what are reserves and retained earnings?

Answer 17

money that has been retained in the business in order to help it grow

Question 18

what is shareholder equity?

Answer 18

value of funds tied up in the business - shares or retained profits

Question 19

how can goodwill be used to value assets?

Answer 19

when acquiring a business, the buyer pays more than the assets may be worth

Question 20

how can bad debts be used to value assets?

Answer 20

important for a business to make allowances for such bad debts, in order to gain a realistic valuation of assets

Question 21

how can patents be used to value assets?

Answer 21

• more technological = higher value
• quantitative = measurable
  = qualitative = uses need to be ?ed

Question 22

how are SoFPs useful?

Answer 22

• when obtaining a loan from the bank, can see if business has sufficient assets for security
• business can see if it has enough cash to keep afloat (net current assets)
• can calculate ratios

Question 23

what are the advantages of straight line deprecation?

Answer 23

• amount is lower in first years compared to reducing balance
• lower level = higher valuation of asset = business value is higher
• less deducted, profit is higher

Question 24

what are the disadvantages of straight line depreciation?

Answer 24

• estimate of residual value, difficult to find
• assumes life of asset is known
• lower level is misleading: inflated

Question 25

what are the advantages of reducing balance?

Answer 25

• reflects values more realistically
• no estimate of residual value needed

Question 26

what are the disadvantages of reducing balance?

Answer 26

• higher level = lower value
• lower value = harder to borrow