Lecture 5-6 (Financial statements from the accounting equation)

Question 1

RUNNING BALANCE

Answer 1

A record of all transaction in one area.

Question 2

Rules for running balances.

Answer 2

Debit left credit right.
Label carefully.
Single lines for subtotals and double underline for final totals.

Question 3

CASH PURCHASES (Dr/Cr)

Answer 3

The entity receives goods and/or services in exchange for a cash payment made at approximately the same time.
Dr Purchases
Cr Bank

Question 4

CASH SALES (Dr/Cr)

Answer 4

The entity dispatches/sells goods and/or services in exchange for a cash receipt at approximately the same time.
Dr Bank
Cr Sales

Question 5

PAYABLES (Dr/Cr)

Answer 5

The entity purchases goods and/or services but does not pay for them immediately. It therefore owes money to the supplier.
Payables set up:
Dr Purchases
Cr Payables

Payables discharged:
Dr Payables
Cr Bank

Question 6

RECEIVABLES

Answer 6

The entity dispatches/sells goods an/or services in return for a promise of a cash receipt some time in the future. It is therefore owed money by its company. 
Receivables set up:
Dr Receivables
Cr Sales
Receivables discharged:
Dr Bank
Cr Receivables

Question 7

INVESTMENT AND LOANS BY THE ENTITY

Answer 7

The entity makes a cash payment in anticipation of receiving a cash return at a future date (in interest or dividends plus repayment of initial sum). 
Investment or loan by the entity set up:
Dr Investment
Cr Bank
OR
Dr Loan granted
Cr Bank

Discharge (payment received):
Dr Bank
Cr Investment &/or dividends
OR
Dr Bank
Cr Loan &/or interest

Question 8

CAPITAL FOR AND LOANS TO THE ENTITY

Answer 8

Cash is paid to the entity in the expectation that the entity will provide a cash return at sometime in the future.
Capital for/loans to the entity- set up:
Dr Bank
Cr Capital
OR
Dr Bank
Cr Loans received
Capital for/loans to entity- discharge:
Dr Capital &/or dividends
Cr Bank
OR
Dr Loan &/or interest
Cr Bank

Question 9

GRANTS AND TAXES PAID BY THE ENTITY

Answer 9

The entity makes a cash payment but receives nothing directly and obviously in return.
Dr Grants or taxes account
Cr Bank

Question 10

GRANTS TO THE ENTITY

Answer 10

Cash is received by the entity in recognition of or in expectation of certain aspects of its activity. No direct, obvious output is made by the entity.
Dr Bank
Cr Grants received

Question 11

TRIAL BALANCE

Answer 11

A big list of all the balances of the running balance accounts.
TOTAL DEBITS = TOTAL CREDITS

Question 12

What can you do if trial balance doesn’t balance?

Answer 12

Check additions
Look for difference and also half of difference
Check running balances and make sure items are recorded on the correct side of the TB.

Question 13

STATEMENT OF FINANCIAL POSITION

Answer 13

Purpose is to report financial position.
Reflects the accounting equation in the form:
Assets - Liabilities = Ownership Interest
Shows the positions at a particular point in time- as at particular date.

Non-current assets
\+
Current Assets
- 
Current Liabilities
-
Non-current liabilities
=
Capital at start of year
\+/-
Capital contributed or withdrawn
\+
Profit of period

Question 14

INCOME STATEMENT

Answer 14

Purpose is to report performance.
Reflects the part of the accounting equation which defines profit:
Profit = Revenue - Expenses
Shows position over the course of the year - for year ended. 
Revenue
-
Expenses
=
Profit

Question 15

STATEMENT OF CASH FLOWS

Answer 15

Purpose is to report financial adaptability.
Cash inflows
-
Cash outflows
=
Change in cash and similar liquid assets

Question 16

LIQUIDITY

Answer 16

Measured by the cash and near-cash assets and the changes in those assets.

Question 17

WORKING CAPITAL CYCLE

Answer 17

Inventory -> Receivables -> Cash -> Payables -> Inventory