Financial Statement (2) Flashcards
What’s the purpose of Financial statement?
Is to provide a clear picture of the financial performance of a business over a particular period.
It, therefore, makes sense that the financial transactions of a business are recorded, summarised and reported in a way that is both clear and understandable to both internal and external users.
The following are the most common financial statements?
Statement of:
- Profit or Loss & Other Comprehensive Income
- Financial Position
- Cash Flows; and
- Statement of Changes in Equity
Define Debtor?
Any person/business who owes the business money.
Define Creditor?
Any person or business to whom the business owes money.
Define Economic benefits?
Accruing from the use of economic resources that can be measured in monetary terms.
Define Financial period?
The period for which financial records have been compiled.
Define Financial statements?
A formal presentation of the operations of the business/entity showing the entity’s financial performance and position over a specific period.
Define Intangible assets?
Assets with no physical substance. Thus, cannot be seen and touched.
Define Tangible assets?
Assets with physical substance. Thus, can be seen and touched.
The Conceptual Framework for Financial Reporting defines an asset as?
a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
Breaking the definition down
- Economic resource (An item is classified as an economic resource only if an entity is entitled to use the item in order to generate an income, either directly or indirectly.)
- Potential to produce economic benefits (In order for an item to be classified as an asset, it does not have to be certain or likely that the item will produce economic benefits.)
- Controlled by an entity (Do you notice how the definition of an asset does not use the word ‘owned’ but carefully uses the word ‘controlled’? This is because the legal ownership and control of an asset can vest with two different parties simultaneously. In classifying an item as an asset,)
- Past event (For there to be an asset, an event, usually the purchase or donation of the item, must have already happened, resulting in the ownership and/or control of the asset)
It is possible to have control over the economic benefits embodied in an asset but not legally own it?
It is important to note that, for an entity to recognise an item as an asset, it does not need to legally own the item. The main requirement is that the entity must have control over the economic benefits that will flow to the entity, from the item, even if it is not legally owned by the entity. For instance, if a machine is leased to a company for the majority of its useful life, the machine may be recognised in its statement of financial position as an asset, since the entity has control over the economic benefits that would be derived from the use of the asset.
Define Non-current assets?
Non-current assets are those assets that the business expects to use and/or sell more than 12 months after the reporting date. In addition, the entity does not intend to consume or sell such assets during its normal operating cycle; thus, they are long-term in nature.
Examples of non-current assets include?
- Land and buildings
- Plant and machinery
- Motor vehicles
- Financial assets
- Copyrights
- Trademarks
- Patents
- Land and buildings – property controlled by the business and used either for production or as business premises, or both.
- Plant and machinery – movable equipment and machinery that the business uses for production of goods and services.
- Motor vehicles – vehicles owned by the business for use as either delivery vehicles or by its employees.
- Financial assets – an entity’s contractual right to receive cash or a financial asset from another entity in the long term. A financial asset can be an investment in shares of another company or a loan receivable.
- Copyrights – exclusive rights held by the business to reproduce, publish or sell a product.
- Trademarks – symbols, logos, words or a combination of these, legally registered to be used to represent an entity or a - product.
- Patents – official and exclusive rights given to the business by the government, to solely use or sell an invention or a solution.
Explain Current assets?
Current assets are those assets that an entity expects to use or sell within 12 months after the reporting date. Furthermore, an entity should expect to consume or sell such assets during its normal operating cycle; as such, they are short-term in nature.
Give some Examples of current assets?
- Trading inventory
- Trade receivables
- Cash and cash equivalents
-Trading inventory − This is a term used for the goods that a business buys or manufactures with the sole purpose of selling.
- Trade receivables – Monies owed and payable to the business for the sale of goods and services on credit.
- Cash and cash equivalents – The term ‘cash and cash equivalents’ encompasses cash in the bank, petty cash, cash float, marketable securities and money market accounts.
What type of asset is Copyright?
Intangible, non-current assets
What type of asset is a Motor vehicle?
Non-current asset (Delivery income)
What type of asset is Machinery?
Non-current asset (Sales income from the sale of goods manufactured using the machinery)
What type of assets is an Office building?
Non-current asset (Income from the sale of goods manufactured, and/or services performed, from the building)
What type of asset is a Bank?
Current asset (Cash in the bank)
What type of asset is Trading inventory?
Current asset (Cash from the sale of the trading inventory)
What type of asset is a Trade receivables?
Current asset
Cash received from debtors for goods previously sold, and services previously provided, to them on credit.
Define liability?
'’as a present obligation of the entity to transfer an economic resource as a result of past events.’’
In layman’s terms, a liability is what you owe. It is a promise to pay, which leaves one with an obligation. When the obligation is honoured, it results in a transfer of economic benefits (cash or any other form of payment).
Breaking the definition down
- Present obligation (For there to be a liability, as at the reporting date, the business should be currently liable to transfer economic benefits (in the form of cash, services or other assets) to another party.
-Transfer of an economic resource (In order for a liability to exist, an entity must have an obligation to transfer an economic resource. In other words, the obligation must have the potential to require the entity to transfer an economic resource to another party.)
- Past event(As with assets, something must have already happened in the past for there to be a liability. This usually takes the form of signing a non-cancellable agreement, taking delivery of the goods acquired on credit, or receipt of a loan. )
Define Non-current liabilities?
are debts that the business is expected to pay over a period longer than one year from the current reporting date. In addition, the business does not expect to settle such debts during its normal operating cycle.
Examples of non-current liabilities include:
- Mortgage loan, which is a loan agreement entered into by an entity, with a bank, to finance an acquisition of property. In terms of this agreement, the same property is used as collateral or security on the loan in order to cover the bank, should the entity default on the loan repayments.
- Bank loans with a maturity greater than one year.
Define Current liabilities?
Current liabilities are debts that the business is expected to pay within 12 months from the current reporting date. In addition, the business should expect to pay the debt within its normal operating cycle.
Examples of current liabilities include:
- Bank Overdraft
- Trade payables
- SARS payable
- Current portion of long-term loan
Examples of current liabilities include:
- Bank overdraft − A credit facility that an entity arranges with its bank in term of which the entity can withdraw/use more money than it actually has in its account, resulting in the entity having a negative bank balance.
Trade payables − monies owed by the business to its suppliers.
SARS payable – unpaid taxes (income tax and Value Added Tax [VAT]).
- Current portion of long term loan − loan repayments that are due within 12 months from the current reporting date.
