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Introduction To Financial Accounting > Introduction To Financial Statements > Flashcards

Introduction To Financial Statements Flashcards

1
Q

What is the purpose of the statement of financial position?

A

It shows the accumulated wealth of the business at a particular date, including assets, liabilities, and capital/equity.

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2
Q

Define the business entity convention.

A

This convention holds that, for accounting purposes, the business and its owners are treated as separate and distinct entities.

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3
Q

What does the prudence convention entail?

A

Financial statements should err on the side of caution, recognizing revenue and profits only when realized and making provisions for all known liabilities.

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4
Q

What is the going concern convention?

A

This convention assumes that the business will continue operations for the foreseeable future unless there is reason to believe otherwise.

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5
Q

Explain the matching convention.

A

In measuring income, expenses should be matched to revenues that they helped generate in the same accounting period.

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6
Q

List the components of a statement of financial position.

A
  • Assets
  • Liabilities
  • Equity
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7
Q

What is an asset?

A

A resource held by a business that is expected to provide future economic benefits.

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8
Q

What are the characteristics that must be met for an item to qualify as an asset?

A
  • It must be an economic resource
  • The business must have the right to control the resource
  • The resource must be measurable in monetary terms
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9
Q

Differentiate between non-current and current assets.

A
  • Non-current assets: Used long-term to generate wealth
  • Current assets: Held for a short period of time
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10
Q

What are examples of non-current assets?

A
  • Land and buildings
  • Plant and equipment
  • Fixtures and fittings
  • Motor vehicles
  • Computers including software
  • Intangible assets like goodwill
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11
Q

Define equity in the context of financial statements.

A

The amount the owner(s) has invested in the business, which they can claim back.

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12
Q

What are liabilities?

A

Claims of other parties that represent an obligation to transfer economic resources as a result of past transactions.

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13
Q

What distinguishes current liabilities from non-current liabilities?

A

Current liabilities are due for payment within the next 12 months, whereas non-current liabilities are due beyond that period.

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14
Q

What is the primary purpose of the income statement?

A

To measure and report the profit or loss generated by the business during an accounting period.

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15
Q

What is revenue?

A

A measure of the inflow of assets or reduction in liabilities arising from trading activities.

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16
Q

List the criteria for revenue recognition.

A
  • The revenue amount can be measured reliably
  • It is probable that economic benefits will be received
  • Ownership and control should pass to the buyer
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17
Q

What are expenses?

A

A measure of the outflow of assets or increase in liabilities incurred as a result of generating revenues.

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18
Q

What key error did Tesco plc make regarding revenue recognition?

A

They failed to match revenue and expenses properly, recognizing discounts as income before they were earned.

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19
Q

Describe the relationship between the statement of financial position, income statement, and statement of cash flows.

A

These statements are linked through the timing and recognition of assets and liabilities, affecting cash position and profit.

20
Q

What is the accounting equation?

A

Assets = Equity + Liabilities

21
Q

Expand the accounting equation to include profit.

A

Assets = Equity (at start of period) + Profit (for period) + Liabilities

22
Q

What are drawings in accounting?

A

Amounts that the owners remove from the business for personal use, reducing owner’s investment or capital.

23
Q

What mnemonic can help remember the debit and credit rules?

A

DEAD CLIC (Debits are for Expenses, Assets, and Drawings; Credits are for Liabilities, Income, and Capital)

24
Q

What do the terms ‘debit’ and ‘credit’ refer to in accounting?

A

‘Debit’ means ‘left’ and ‘credit’ means ‘right’

25
Q

What is a fundamental aspect of financial accounting regarding debits and credits?

A

Debits should always equal credits

26
Q

What mnemonic can help remember the relationship between debits and credits?

A

DEAD CLIC

27
Q

In the mnemonic DEAD CLIC, what do the letters stand for?

A
  • D - Drawings
  • E - Expenses
  • A - Assets
  • C - Capital
  • L - Liabilities
  • I - Income
28
Q

What does SFP stand for in accounting?

A

Statement of Financial Position

29
Q

According to the accounting equation, how is the SFP presented?

A

Assets = Equity + Liabilities

30
Q

What is the total assets value in the example for Brie Manufacturing?

A

£147,000

31
Q

What are the two main sections of the SFP?

A
  • Assets
  • Equity and Liabilities
32
Q

What are the two types of assets listed in the SFP?

A
  • Non-current assets
  • Current assets
33
Q

In the SFP layout, how are assets typically listed?

A

From least liquid to most liquid

34
Q

What is the alternative presentation of the accounting equation shown in Example 2.4?

A

Assets - Liabilities = Equity

35
Q

What does equity in the SFP also refer to?

A

Capital or Share capital and Reserves

36
Q

What is the layout of the income statement primarily used to show?

A

How the business has generated profit over an accounting period

37
Q

What is typically shown at the top of the income statement?

A

Sales revenue

38
Q

What is deducted from sales revenue in the income statement?

A

Cost of sales and expenses

39
Q

What is the gross profit calculated as?

A

Sales revenue - Cost of sales

40
Q

What is the total for profit for the year in the H & S Retailers income statement?

A

£7,230

41
Q

What is the purpose of the heading in financial statements?

A

To indicate the name of the individual or company whose statement it is

42
Q

What does the date in the income statement signify?

A

‘For the year ended’

43
Q

How is loan interest treated in the income statement?

A

Shown separately from operating expenses

44
Q

Fill in the blank: The total of equity and liabilities in the SFP should _______.

A

balance

45
Q

Monetary stability accounting convention

A

ignore changes in moneys value due to inflation

46
Q

objectivity accounting convention

A

financial statements should be based on verifiable evidence

47
Q

dual aspect accounting convention

A

every transaction affects two accounts ensuring the balance

Introduction To Financial Accounting (11 decks)

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