Introduction to Financial Statements

Question 1

What are sole traders?

Answer 1

Sole traders run their own businesses. They have unlimited liability.

Question 2

Partnership

Answer 2

When two or more individuals own and run a business together.

Answer 3

Partnerships have unlimited liabilities

Answer 4

Sharing of profits and losses

Question 5

Limited Liability Partnerships (LLPs)

Answer 5

LLPs can put limits on their liabilities for partnership debts.

Question 6

Limited Companies

Answer 6

Separate legal entity
Share capital
Limited liabilities for shareholders
Directors run the company

Question 7

Separate legal entities

Answer 7

Limited Companies can sue and can be sued.
Limited Companies carry on indefinitely no matter what.

Question 8

Share capital

Answer 8

Shareholders subscribe for shares in the Limited Company.
This share capital is recorded as issued share capital in the limited company’s Statement of Financial Position.

Question 9

Limited liability

Answer 9

Shareholders lose money they have already paid to acquire the shares, but they have no further liability beyond this.

Question 10

Statement of Financial Position

Answer 10

Assets
Liabilities
Equity

Question 11

Assets

Answer 11

An economic resource is a right that has a potential to produce economic benefits.

Question 12

Non-Current Assets

Answer 12

Held for long term use in the business to help produce goods or services.

Question 13

Investments

Answer 13

Holdings of shares or other financial assets in other companies.

Question 14

Current Assets

Answer 14

short-term assets that are constantly changing

Question 15

Inventory

Answer 15

Stock of goods

Question 16

Property, plant and equipment

Answer 16

land and buildings, plant, equipment and leasehold improvements.

Question 17

Cash and cash equivalents

Answer 17

Amounts of cash held in tilts at the end of the year.

Question 18

Liabilities

Answer 18

Liabilities are contractual or legal claims of outside parties against an entity.

Question 19

Non-Current Liabilities

Answer 19

Long-term liabilities where the entities will only have to meet in more than one year’s time.

Question 20

Current Liabilities

Answer 20

Short-term liabilities that are constantly changing.

Question 21

The Accounting Equation

Answer 21

Total Assets = Total Liabilities + Equity

Question 22

Equity

Answer 22

The residual interests in the assets of the entity after deducting all of its liabilities.

Question 23

The components of Equity

Answer 23

Share capital
Share premium
Retained Earnings

Question 24

Share capital

Answer 24

Number of shares issued multiplied by the par value (face value or nominal value) of each share.

Question 25

Share premium

Answer 25

Where each share is issued at the amount greater than the par value, then any amount received in excess of par value is entered into the share premium account.

Question 26

Retained earnings

Answer 26

These are profits that the business has earned in the past accounting that have not been issued as dividends to shareholders.