Financial Position + Performance of a Business

Question 1

Types of Asset

Answer 1

Non-current (Fixed) Assets

• assets acquired by a business for long-term use
• as a result of capital expenditure
  e. g. land and buildings, machinery, office furniture, motor vehicles
• valued at historical cost

Current Assets

• assets held for sale or consumption during the businesses’ normal operating cycle i.e. short-term
• held for trading and expected to be sold within next year
  e. g. inventories, bank and cash balances

Question 2

Types of Liability

Answer 2

Non-Current Liabilities

• amounts due for repayment >1 year
  n. b. become current when the due date is <1 year
  e. g. long-term loans

Current Liabilities

• expected to be settled within the businesses normal operating cycle
• amounts due for repayment in <1 year
  e. g. amounts owed to suppliers, bank overdrafts

Question 3

Capital

Answer 3

• amounts invested by the owner
• amounts taken out of the business by the owner i.e. Drawings

n.b. Profit - Increase Capital
Losses- Decrease Capital

Question 4

Five Main adjustments to Trial Balance

Answer 4

Closing Stock
-asset entered twice 1. T,P&L account 2. CA of Balance sheet

Accruals

Prepayments

Depreciation

Bad/Doubtful Debts

Question 5

Revenue

Answer 5

revenue is recognised (included in SoPL) when the underlying transactions that gives to it occurs
e.g. sale of goods is made, a service is performed

Accruals Concept

Question 6

Expenses

Answer 6

Irregular Costs

• items which will be in the business for some time i.e. on assets
• Capital Expenditure

Ongoing Costs
-incurred regularly by a business
deducted from revenue in SoPL to give profit
expenses are matched against revenues earned in a period
-Revenue Expenditure

Matching Concept

Question 7

Comparison of Balance Sheet and Profit & Loss Account

Answer 7

SoPL
prepared from: Trial Balance
Main elements: income, expenses, profit
period covered: a year
main focus: profitability

BS
prepared from: Trial Balance
main elements: assets, liabilities, capital
period covered: a point in time
main focus: net assets

Question 8

4 types of tangible/non-current/fixed assets

Answer 8

Land and Buildings
Plant and Machinery
Fixtures and Fittings
Motor Vehicles

n.b. for listed company collectively called property, plant & equipment

valued at historical cost

Question 9

Wider roles of accounting

Answer 9

corporate social responsibility

how businesses are run and who runs them matter

includes concerns over corporate governance, ethics, social welfare and environmental practices

all stakeholders have interest

Question 10

Boundaries of information

Answer 10

Information:
is restricted to the business =Business entity
is that which can be measured in monetary terms= Money Measurement
Is reported regularly, usually annually=Periodicity

underlying assumption= going concern

useful=
relevant to decision a user takes
faithfully represent the underlying transaction/item

Question 11

Provision for Doubtful debt

Answer 11

set up for those debts it is dubious about collecting

increase = expense
decrease= income

Question 12

define overhead expenses

Answer 12

expenses deducted from gross profit are regular, ongoing costs of a business
e.g. salaries, rent, heat and light, insurance…

Question 13

Revenue

Answer 13

revenue is recognised (included in STP&L) when the underlying transaction that gives to it occurs
e.g. sales fo goods made, a service is performed.

Question 14

Types of Expenses

Answer 14

1. Irregular costs
   on items which will be in the business for some time = Capital Expenditure
   (recorded as an asset in STFP)
2. On-going costs
   will be incurred regularly buy a business = Revenue Expenditure
   (deducted from revenue is STPL to give profit)

expenses are matched against revenues earned in a period = Matching Concept

Question 15

Matching concept

Answer 15

• income/profit is matched with any associated expenses/ revenue to determine appropriate profit or loss
• the measurement of profit, costs should be set against the revenue that they generate at the time this arises i.e. cause and effect relationship
• however- Not all costs can be directly matched to related revenues, and if this is the case, these costs should be written off as they are incurred

Question 16

What is it when you purchase goods for resale?

Answer 16

recorded as purchases i.e. an expense
unsold goods are counted and recorded as inventories

Cost of Sales = Opening inventory + Purchases - Closing Inventory

Question 17

Regulation of Listed Companies

Answer 17

In Europe, follow International Financial Reporting Standards (IFRS)
(under IFRS,
-P&L account called income statement;
-sales called revenue; assets,
-capital and liabilities called equity
-stock called inventories
debtors called trade receivables)

Question 18

Interpretation of Capital/revenue expenditure

Answer 18

• used for performance comparisons between companies for the same company over time
• used for the basis of investment decisions
• profitability ratios are used to assess a company’s performance over time relative to other companies

Question 19

Methods of depreciation

Answer 19

Straight-line method

Reducing Balance method

Question 20

Types of Stock

Answer 20

Raw Material Stocks
-stocks a company purchased and ready for use

Work-in-progress

• partially completed stocks (in process), neither raw nor finished goods
• partially manufactured goods

Finished goods stock

• end of the manufacturing process
• costs include material and other manufacturing costs e.g. labour and manufacturing overheads

n.b. stock valued at net realisable value/ lower costs

Question 21

5 most common current assets

Answer 21

1. stock
2. prepayments
3. debtors
4. cash
5. bank

Question 22

define debtors

Answer 22

sales which have been made, but for which customers have not yet paid
-adjusted for those believe haven’t paid = B&D debts

in P and L account

Question 23

Cash and Bank

Answer 23

actual money held by the business
cash comprises:
-petty cash
-unbanked cash

bank comprises:

• money deposited at the bank
• short-term loan

Question 24

Types of Current Liabilities

Answer 24

1. Creditors (Trade Payables)
   - the amounts which are owed to suppliers for goods received, but not yet paid
2. Accruals
   - expenses owed at the trial balance or balance sheet due
   - an expense incurred but not yet paid (not excluded from PandL account)
3. Loans
   - amounts a third party e.g. bank, loaned the company on short-term basis and due for repayment with 1 year

Question 25

Define the Accruals Concept

Answer 25

• effects of transactions and other events are recognised when they occur, not as cash or its equivalent is received or paid, and they are recorded in the accounting records and reported in the financial statements in the periods to which they relate
  e. g. sale occurs on date of delivery not when paid/ when invoice is received
• provides useful information to users as it identifies the pattern of business transactions rather the flow of cash.
• includes definition of accruals and prepayment

Question 26

Define Prudence

Answer 26

• assumes that the financial statements have been prepared on a prudent basis.

=user has confidence that no profits included are not earned / reasonably certain to be received.

Question 27

define Materiality

Answer 27

• an item is considered material if its disclosure or non-disclosure could affect a decision taken by a user,
• assumes that only material items should be disclosed in financial statements
• applies to both the amount of an item and the nature of an item

Question 28

define going concern

Answer 28

an entity will continue in operational existence for the foreseeable future.

• any user looking at FS has the right to assume that the company is not going to liquidate

prior activities can indicate future activity

• assets will normally be valued at their historical cost = entity will operate for the remaining useful life of the non-current assets,

Question 29

define entity concept

Answer 29

• allows the user to look at a reporting entity’s financial statements and to know that these represent the financial performance and position of the business unit and do not include any assets, liabilities, income and expenses that are not related to the business.

Question 30

define substance over form

Answer 30

• when accounting for transactions and items the preparer should look at the economic or commercial substance of a transaction rather than its legal form.
• balances left e.g. debt/liability to make firm look healthier

Question 31

define historic cost

Answer 31

• the transactions in an entity’s financial statements reflect the actual cost billed, or revenue charged, for items.
• it allows the user to see the history of management’s investment decisions from the statement of financial position