Financial Transaction & Statement Of Financial Position

Question 1

What does a statement of financial position tell us?

Answer 1

Tells us the accumulated wealth of the business and the form it takes
- a snapshot of the companies financial health

Question 2

What does the income statement tell us?

Answer 2

How much wealth is generated over time?

Question 3

What does the statement of cash flow tell us?

Answer 3

The cash movements that took place

Question 4

What does the statement of changes in equity tell us?

Answer 4

The changes in capital

Question 5

Equity equation

Answer 5

Equity = Assets - Liability

Question 6

What is an asset?

Answer 6

• Resources a business owns or controls
• Provide future services or benefits
• An asset of inventory is a good or item of value that a company plans to sell for profit

Question 7

What are liabilities?

Answer 7

• Debts, obligations
• Creditors
• e.g. trade payable…

Question 8

What is equity?

Answer 8

• shows the amount that is owned by shareholders and the accumulated profit
• equity = net worth of the business

Question 9

What are retained earnings?

Answer 9

• the accumulation of profit over a period of time
• the company can pay dividends (the return shareholders get) with retained earnings

Question 10

What is included in the statement of financial position?

Answer 10

1. Assets
   a) cash, accounts receivable, inventory…
2. Liabilities
   a) accounts payable, long term loans, accrued expensive
3. Equity
   a) share capital, share premium, retained earnings, reserves

Question 11

Fundamental qualitative characteristics

Answer 11

Relevance: Information is relevant if it influences stakeholder decisions
Faithful representation: Financial statements must capture the economic activity of an entity. Information must be: complete, free from bias, free from error

Question 12

Enhancing qualitative characteristics

Answer 12

Comparability: provides users with comparable information
Verifiability: users should find similar items
Understandability: prepared for stakeholders with reasonable understanding of business
Timeliness: shouldn’t be out of date

Question 13

What is the accrual concept

Answer 13

• Transactions recorded in the periods in which the events occur.
• Revenues are recognized when earned, rather than when cash is received.
• Expenses are recognized when incurred, rather than when paid.