INTRO TO FINANCIAL ACCOUNTING

Question 1

How is profit calculated?

Answer 1

Income - Expenses = Profit

Question 2

What is the income (revenue) recognition principle?

Answer 2

Revenues are recognised when they are realised or realisable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received.

Question 3

What is the expensive recognition / matching principle?

Answer 3

Expenses should be recorded during the period in which they are incurred, regardless of when the transfer of cash occurs.

Question 4

What is the cost flow test?

Answer 4

If the benefit related to the cost is immediate, recognise it as an expense (revenue expenditure); if the benefit related to the cost is in the future, recognise it as an asset (capital expenditure).

Question 5

What is an asset?

Answer 5

A controlled resource with future benefits (current = next 12 months, non-current = >12 months).

Question 6

What is a liability?

Answer 6

3rd party obligations requiring future settlement (current = next 12 months, non-current = >12 months).

Question 7

What is equity?

Answer 7

Net worth. Divided into direct and indirect.

Question 8

What are the distinctions between liabilities and equity?

Answer 8

Liabilities
• 3rd party
• Servicing cost
• Obligation to repay
Equity
• Owners
• No cost
• No obligation to repay

Question 9

What is the link between the SoFP and SoCF?

Answer 9

SoFP’s “Cash / Bank” can show you either the SoCF’s cash at the beginning of the year or cash at the end of year, depending on accounting period.

Question 10

What is the link between the SoPLOCI and the SoCF?

Answer 10

SoPLOCI’s “Profit for the Year” is SoCF’s Operating Activities.

Question 11

What is the link between the SoPLOCI and the SoFP?

Answer 11

SoPLOCI’s “Profit for the Year” is SoFP’s Retained Earnings.

Question 12

What are the 4 steps in the accounting cycle?

Answer 12

Analyse transactions, prepare and record accounting entries, extract a trial balance
Prepare accounting adjustments
Prepare financial statements
Year end closing

Question 13

What is an accrued expense and how is it recorded?

Answer 13

• Expenses include costs consumed/used in an accounting period, whether or not paid; if they are used but not yet paid or record, they must be accrued.

DEBIT expenses (e.g. 'electricity costs')
INCREASE liabilities (e.g. 'expenses accrued')

Question 14

What is a prepaid expense and how is it recorded?

Answer 14

• A prepaid expense is a cost paid in advance of use, and is considered an asset
• As time passes, benefit of asset is used up
• The matching concept dictates that an amount of prepaid cost used in a particular accounting period is transferred to expenses

DEBIT expenses (e.g. 'rent expense')
CREDIT assets (e.g. 'rent prepayment')

Question 15

What is accrued income and how is it recorded?

Answer 15

• If income is ‘earned’ but not yet received or recorded, it must be ‘accrued’

DEBIT assets (e.g. 'rent income accrued')
INCREASE income (e.g. 'rent income'

Question 16

What is advanced income and how is it recorded?

Answer 16

• Income cannot be considered earned if cash has been
received in advance of supplying a good or performing a service
• Recognition must be deferred
• When (advance) cash is received

DEBIT cash (e.g. 'bank')
INCREASE liabilities (e.g. 'deferred income')

Question 17

How to you ‘earn’ unearned income, and how is it recorded?

Answer 17

• When supply/ performance obligation is settled income is
earned

DEBIT liabilities (e.g. 'deferred income')
CREDIT income (e.g. 'fee')