Measuring And Reporting Financial Statemenfs

Question 1

What are the three major financial statements?

Answer 1

The statement of cash flows.
The income statement.
The statement of financial position (balance sheet)

Question 2

What is equity?

Answer 2

The investment or stake of the owners. It is the claim they make upon the business.

Question 3

What four characteristics much an asset follow to be deemed an asset?

Answer 3

1. A probable future benefit must exist.
2. The business must have the right to control the resource.
3. The benefit must arise from some past transaction or event.
4. The asset must be capable of measurement in monetary terms.

Question 4

What is a claim?

Answer 4

A claim is an obligation by the business to provide cash or some other benefit to an outside party.

Question 5

What is a liability?

Answer 5

Liabilities represent the claims of all individuals and organisations, except the owners claims.

Question 6

What is a current asset, what are its characteristics?

Answer 6

1. Assets that are held for the short term.
2. They are held for sale or consumption during the businesses operating cycle.
3. They are held principally for trading.
4. They are cash or nest cash such as easily marketable short-term investments.

Question 7

What are non-current assets?

Answer 7

They’re held in the long term and do not meet the defining characteristics of current assets.

Question 8

Why may a particular asset be classified differently between two businesses?

Answer 8

The purpose of the asset may differ.

Question 9

What are the characteristics of current liabilities?

Answer 9

1. Expectation that they will be settled within the businesses operation cycle.
2. They’re held principally for trading purposes.
3. They are due to be settled within a year of the reporting period.
4. There is no right to defer settlement beyond a year after the reporting period.

Question 10

What is the business entity convention?

Answer 10

The business and its owners are treated as being separate and distinct for accounting purposes.

Question 11

What is the historic cost convention?

Answer 11

This holds that the value of assets shows on the statement of financial position should be based on their acquisition cost.

Question 12

What are two ways of working out the current cost?

Answer 12

Benchmarking against assets of similar type and condition.

Getting a quote on the asset.

Question 13

What is the prudence convention?

Answer 13

Caution should be exercised when making accounting judgments. Assets and profits should not be understated. Profits aren’t recorded until they’re realised whilst costs are made in advance.

Question 14

What is the going concern convention?

Answer 14

Financial statements are prepared on the assumptions that the business will continue operations for the foreseeable future.

Question 15

What is the dual aspect convention?

Answer 15

This asserts that each transaction has two aspects, both of which affect the statement of financial position.

Question 16

What do tangible non-current assets normally consist of?

Answer 16

Property, plant and equipment.

Question 17

What is depreciation?

Answer 17

How much an asset has been used up, measured against its historic cost.

Question 18

Outside of historic cost, what can PPE be measured by?

Answer 18

Fair values: the current market or exchange values of these goods.

Question 19

What value do companies have to record if the value-based measure is smaller than the historic cost value?

Answer 19

The value based measure.

Question 20

Why is monetary stability and issue for historic cost?

Answer 20

Inflation of money can result in the understatement of an assets value if the historic cost came before inflation hit.

Question 21

What could cause non current assets such as inventories to fall sharply in value?

Answer 21

1. Selling prices. The price mechanisms revaluation.
2. Obsolescence.
3. Deterioration.
4. Damage.

Question 22

What are some ways in which the statement of financial position benefit users?

Answer 22

1. Providing insight into how the business is finances and how its funds are deployed.
2. It can provide a basis for assessing the value of the business.
3. Relationships between assets and claims can be assessed.
4. Performance can be assessed.

Question 23

What are some ways in which the statement of financial position benefit users?

Answer 23

1. Providing insight into how the business is finances and how its funds are deployed.
2. It can provide a basis for assessing the value of the business.
3. Relationships between assets and claims can be assessed.
4. Performance can be assessed.