Lecture 2: Transaction Analysis and Financial Statements

Question 1

Accounting equation

Answer 1

Asstes = Liabilities + Equity

Question 2

Duality

Answer 2

Concpt that every transaction must have an effect on at least 2 of the accounting elements so that the accounting equation will still balance e.g. if positive in asset or liability must also be positive in equity OR if positive in asset could be negative in liability to balance.

Question 3

Classifying transactions

Answer 3

Identify which of the elements the transaction impacts upon and record the value of the impact on the elements. Finally, check to ensure the accounting equation still balances.

Question 4

Closing balance of retained earnings (formula)

Answer 4

Closing balance = opening balance + revenues - expenses - dividends paid

Question 5

Necessary line items for an income statement

Answer 5

Listed in order of magnitude (of values in the specific case):
- Net profit (loss) for the period
- Revenues
- Finance costs
- Tax expense
- Additional lines relevant to understanding the entity’s financial performance

Question 6

Net profit

Answer 6

Net profit = all income - all expenses
Tells us how well the business can generate profit.

Question 7

Gross profit

Answer 7

Gross profit = income generated from selling goods - cost of goods sold
Tells us how well the business can sell goods/services to generate profit.

Question 8

Necessary line items for a balance sheet

Answer 8

• Current assets (listed in order of liquidity)
  
  • Cash and cash equivalents - cash and other short-term, fixed value investments
  • Trade and other receivables - amount owed to us by customers and others
• Inventories - the total of raw materials, work in progress and finished goods
• Non-current assets (listed in order of magnitude)
  
  • Property, Plant and Equipment (PPE) - a total figure for the value fo PPE
• Current liablities (listed in order of magnitude)
  
  • Issued capital and reserves - issued capital = value of shares issued and reserves = amount of equity set aside for specific purposes
• Non-current liabilities (listed in order of magnitude)
• Additional line items if relevant to understanding the entity;s financial position.