Financial Statement Preparation

Question 1

Name the 3 Types of Financial Statements

Answer 1

• Income Statement
• Statement of Financial Position
• Cash Flow Statement

Question 2

What is the Statement of Financial Position (SOFP)?

Answer 2

• What a firm owes and owns on a particular date (Assets and Liabilities)

Question 3

Why is the SOFP used?

Answer 3

• Shows the liquidity of a business
• Shows mix of assets & financial structure

Question 4

What form does the SOFP take on a balance sheet?

Answer 4

• On the Top, there are Assets
• Current Assets: Closing value, Prepayments, Net TR, Cash
• Non-Current Assets: Vehicles and Machinery (NET VALUE)
• On the Bottom, there are Equities and Liabilities
• Equities: Capital, Reserves, Share Premium, Profits
• Current Liabilities: TP, Accruals
• Non-Current Liabilities: Long-term loans
• The Top and the Bottom must balance

Question 5

What is an Income Statement?

Answer 5

• Tells us whether a business has made a Profit/Loss in that given year

Question 6

What are the Equations for an Income Statement?

Answer 6

• Profit = Revenue - Expenses
• Profit = Sales - Cost of Sales - Operating Expenses - Non-Operating Expenses - Non-Operating Income
• Gross Profit = Sales - Cost of Sales
• Operating Profit = Sales - Cost of Sales - Operating Expenses

Question 7

What is the Equation for the Cost of Sales?

Answer 7

• Cost of Sales = Opening Value + Purchases - Closing Value

Question 8

What is Depreciation?

Answer 8

• Matching the Cost of Assets to the Revenues that the Asset helps to generate each year
• Amount of assets ‘used up’ in generating yearly sales revenue
• An expense on the income statement

Question 9

What are the 4 Types of Calculations that can be used to work out depreciation

Answer 9

• Straight Line (SL)
• Reducing Balance (RB)
• Sum of Digits (SoD)
• Units of Service (UoS)

Question 10

What is Straight Line Depreciation? What is the Calculation for SL?

Answer 10

• Equal annual charge to income statement
• (Cost - Residual Value) / Life of Asset (yrs)

Question 11

What is Residual Balance Depreciation? What is the Calculation for RB?

Answer 11

• Produces the highest depreciation in one year, then reduces by less
• You must apply the RB rate (given) and times by start value, giving a Net Book Value

Question 12

What is Sum of Digit Depreciation? What is the Calculation for SoD?

Answer 12

• Less common method
• (Cost - Residual Value) / Sum of Digits {SoD = Life at start yr X sum of years of life}

Question 13

What is Unit of Service Depreciation? What is the Calculation for UoS ?

Answer 13

• Depreciation is Proportional to Asset’s Use
• (Cost - Scrap) X Units in Time / Total Units

Question 14

What could be included under ‘Operating Expenses’?

Answer 14

• Vehicle or Machine Depreciation
• Bad Debts
• Increased Provision for Doubtful Debts
• Rent
• Rates (Electricity, Gas)
• Wages
• Advertisement
• Insurance