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Accounting for Business Management NAPIER YEAR1 > Financial Statements > Flashcards

Financial Statements Flashcards

1
Q

Characteristics of a asset (4)

A
  1. A probable future benefit exists
  2. Business must have an exclusive right to control the benefit
  3. Must arise from a past transaction
  4. Asset must be capable of measurement in monetary terms.
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2
Q

What is a claim? (1)

A

Obligation to provide cash or some other benefit to an outside party.

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3
Q

What is one claim against a business? (2)

A

Equity - represents the claims of the owner(s) to the business
Equity= capital (investment by owner) + profit

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4
Q

What is one claim against a business? (1)

A

Liability - represents the claims of outside parties

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5
Q

Statement of financial position/ balance sheet equation.(1)

A

Assets= claims

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6
Q

Define Non-Current Assets (3)

A
  1. NOT for resale - to be used by business
  2. Owned for MORE than a year
  3. e.g. computer, property & plant
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7
Q

Define Current Asset (3)

A
  1. Involved in day-to-day running of business
  2. Value changes constantly
  3. e.g. inventory, trade receivables, receivables & cash
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8
Q

Define Non-Current Liabilities (1)

A

Amounts due to other parties that are not liable for repayment in next 12 months. e.g. long term loan

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9
Q

Define Current Liabilities (1)

A

Amount due within the next 12 months

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10
Q

What are two financial statements and what is the purpose of each statement? (2)

A

Income statement - how much profit a business has generated during a trading period.
Statement of financial position/ balance sheet - how much a business is worth of a specific day

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11
Q

Statement of financial position/ Balance sheet layout

A

Balance sheet as at 31st Sept 20x1
£ £
NON-CURRENT ASSET 500
CURRENT ASSETS 350
TOTAL ASSETS 850
CURRENT LIABILITIES (150)
NON-CURRENT LIABILITIES (400)
TOTAL LIABILITIES 550
NET ASSETS 300
CAPITAL 100
RETAINED PROFIT 200
EQUITY 300

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12
Q

Income statement layout

A 
Income statement for the year ended 31st Sept 20x1
Sales Revenue                    1000
Cost of sales                       (450)
Gross profit                         550
Operating expenses          (250)
Operating profit                  300
Interest/Finance cost          (25)             
Profit BEFORE tax                275
Corporation tax                     75
Profit AFTER tax                  200
Dividends PAID                     80
Retained profits                  120
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13
Q

What term is being described?
Sales - cost of sales
Profit from buying & selling

A

GROSS PROFIT

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14
Q

What term is being described?
Cost of buying & selling
Opening inventory + purchases - closing inventory

A

COST OF SALES

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15
Q

What term is being described?

Profit once expenses deducted from gross profit

A

NET PROFIT

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16
Q

Accounting convention: REALISATION

A

Revenue is generated when goods/service has been provided to customer.
DO NOT need to wait until customer pays
Revenue generated even when customer doesn’t pay.

17
Q

Accounting convention: MATCHING/ACCURALS

A

States that expenses should be matched to the revenues that they have helped to generate.
e.g. Andy & CO paid £15,000 on 1st Jan for the next 15 months of factory rent. What impact would this have on the financial statements to 31st Dec?
INCOME STATEMENT - Expense = £12,000
BALANCE SHEET - Rent Receivable = £3000 (future benefit)

WORKING PAPER - Cash column = £15000

18
Q

Accruals/payables:

A

Expenses occurred but not yet paid for.
At 31st Dec, Andy & CO have only been charged for nine months of rent at £900 p/m, when they have been in the premises for 12 months. What impact would this have on the financial statement?
INCOME STATEMENT - Expense £6000
BALANCE SHEET - Accural £1500

WORKING PAPER - Cash Column = £4500

19
Q

Depreciation

  • Definition
  • Formula
A

Depreciation - when a NCA goes down in value due to general wear&tear.
Depreciation per year=
(asset cost - disposal value)/estimated USEFUL life

e.g. Andy & CO purchase a Asset worth £40,000 on 1st Jan YR 1. Show how this would appear in financial statements to 31st Dec YR1.
Asset cost= £40,000
Disposal value= £5000
Estimated useful life= 5 years

Depreciation of per year=
(asset cost -disposal value)/estimated useful life
(40,000-5000)/5
£7000

This is recorded in the financial statements as:
INCOME STATEMENT - EXPENSE of DEP’N= £7000
BALANCE SHEET - NON CURRENT ASSET (value of asset at end of financial year once depreciation is deducted) = £33,000

WORKING PAPER - CASH COLUMN= £33,000

20
Q

Limited Liability Company (PLC & LTD) [4]

  1. Owned by?
  2. Limited liability?
  3. Legal identity?
  4. Registered?
  5. Advantage & disadvantages
A
  1. Shareholders.
    Shares e.g. 200,000 divided into 1million £0.20 nominal value.
  2. Will only lose capital invested in business- no personal possessions should business fail.
  3. Shareholders cannot be sued directly because of business’s actions.
  4. Registrar of companies
    • Easy to raise funds by selling SHARES (1) & debentures (1) on stock market.
      + Limited liability
      - More legal regulations compared to sole traders e.g. HMRC.
21
Q

Ordinary shares vs Preference shares

A

All companies issue ordinary shares and some may offer preference shares too.
PREFERENCE SHARES:
Know the dividend you are going to get.
e.g. 10% preference share of £1 = £0.10 dividend a year.
The dividend is NOT related to success of company but how much you invest in company.
Normally cumulative = if company doesn’t make profit one year, dividend due is carried over to next year business makes profit.
Non-voting: Don’t get a say in running of company

Ordinary shares - are entitled to all profits not appointed by prior chares e.g. loan interest, tax, preference dividends, retained profits.

RISKIER SHARES!!!

22
Q

What is another name for loan interest?

A

Finance cost

23
Q

Most companies classify expenses into four main functional areas

A
  1. Production (COST OF SALES)
  2. Selling/distribution -
  3. Administration - OPERATING COST
  4. Finance/ Loan interest -
24
Q 
What are retained profits? (3)
Accounting implication (1)
A

Profits reinvested back into business for future growth
Forms part of owner(s)’ claims against business
Largest source of new financce

Accounting implication:
Added to share capital of B/S to form total equity

25
Q

What term is being described? (1)
An asset that you can touch
e.g. premises, machinery

A

TANGIBLE

26
Q

What term is being described? (1)
An asset that you CANNOT touch. No physical substance
e.g. goodwill, footballers

A

INTANGIBLE

27
Q

BALANCE SHEET companies

A

CURRENT LIABILITIES - Corporation tax

NON-CURRENT LIABILITIES - deferred tax, debentures & long term loans

28
Q

What does the appropriation account show?

A

How profit is divided between:

  1. Tax authorities
  2. Shareholders
  3. Amounts ploughed back into business
29
Q

Dealing with Dividends

INTERIM & FINAL

A

A interim dividend - normally a small amount is paid during the year. As a ‘thank you’.
Accounting implication - reduction in cash balance & a expense in income statement

A final dividend is usually PROPOSED at end of financial year,.
Accounting implication - NONE if only a proposed dividend

30
Q

Dealing with TAX

A

TAX WILL NEVER APPEAR IN CASH COLUMN
INCOME STATEMENT - EXPENSE
BALANCE SHEET - CURRENT LIABILITY

31
Q

Dealing with INVENTORY

A

Income Statement - Expense

Balance Sheet - Current Asset

32
Q

Dealing with LOANS

A

Loan -
WORKING PAPER - CASH COLUMN
BALANCE SHEET - NON-CURENT LIABILITY

33
Q

Finish this statement:

CASH HAS NOTHING TO DO WITH ………………..

A

Income Statement

Accounting for Business Management NAPIER YEAR1 (1 decks)

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