Financial Statements

Question 1

What is the purpose of financial reporting?

Answer 1

To provide financial information about the entity that is useful to existing and potential investors, lenders and other creditors in making decisions.

Question 2

How does a business increase the owner’s wealth?

Answer 2

By making decisions which cause a NET increase in equity not through transactions with the owner. i.e PROFIT (earning more income than the expenses incurred)

Question 3

What does the statement of financial position (SOFP) report, at a point in time? (3)

Answer 3

1. Assets
2. Equity
3. Liabilities

Question 4

What does the statement of changes in equity (SOCE) report? (2)

Answer 4

1. Changes due to transactions with owners

2. Changes not due to transactions with owners

Question 5

What are the two statements of “financial performance”? (2)

Answer 5

1. Statement of cash flows

2. Statement of comprehensive income

Question 6

How id the statement of comprehensive income (SOCI) subdivided? (2)

Answer 6

1. Profit and loss section (income statement)

2. OCI (other comprehensive income) section

Question 7

What does the profit or loss section (income statement) include on the SOCI? (5)

Answer 7

1. Sales income
2. Cost of sales expense
3. Gross profit
4. Other income
5. Other expenses

Question 8

What does the other comprehensive income section include on the SOCI?

Answer 8

Revaluation gain

Question 9

How does a statement of financial position divide assets? (2)

Answer 9

1. Current assets: all their potential economic benefits are expected to be obtained within 12 months.
2. Non-current assets: all other assets

Question 10

How does a statement of financial position divide equity? (2)

Answer 10

1. Capital: total capital contributions

2. Retained earnings: all profits ever earned less all distributions ever made to owner(s).

Question 11

How does a statement of financial position divide liabilities? (2)

Answer 11

1. Current liabilities: these obligations are expected to be settled within 12 months.
2. Non-current liabilities: all other liabilities

Question 12

What is the reporting period?

Answer 12

The period of time up to the reporting date which contains the transactions whose effects are reported on the SOCI, SOCF and SOCE.

Question 13

What is a reporting date?

Answer 13

The date on which the financial statements are prepared.

Assets, equity + liabilities on the SOFP are reported as at the reporting date.

Question 14

What is a financial period?

Answer 14

Reporting period=financial period

Question 15

What does the statement of changes in equity show? (2)

Answer 15

1. Changes due to transactions with owners

2. Changes not due to transactions with owners

Question 16

What is shown on the statement of changes in equity? (6)

Answer 16

1. Balances from previous month ended
2. Profit for month
3. Capital contributions
4. Drawings
5. Transactions with owner
6. New Balances