Reporting Financial Performance Statement of Profit or Loss Keywords and Questions Flashcards
Income statement
Measures the financial performance of the business over a period of time
Accrual accounting
The organisation records transactions that change a company’s financial statements in the period in which the transactions occur
Incurred
Refers to when the business owes money as a result of the transaction
Prepaid expense
Paid in advance
Depreciation
Spreading the cost over the useful life of the asset
Revenue
Represents an increase in the value of a company’s a result of its normal trading activities
Asset
A resource controlled by the organisation
Non-current asset
Cash and other assets that are expected to be converted to cash in longer than a year
Intangible asset
Have no physical substance
Tangible asset
Have physical substance
Accrual principle of accounting
Recognising the effect of a transaction on the business
The matching principle
Cost is matched to revenues asset generates over its life
Liability
Financial obligation that a business has to pay
Non-current liability
A liability that a business has to pay back over a long period of time usually over a year
Current liability
A liability that has to be paid back in less than a year
Current asset
Cash and other assets that are expected to be converted to cash within a year
What is the expense recognition principle?
Matching the expenses with revenues in the period when the company makes efforts to generate those revenues
What is the general rule of the expense recognition principle?
All expenses of a particular accounting period must be matched with the relevant revenue of that period irrespective of whether the expenses have been paid in cash
What happens to a business if bad debt occurs?
Reduced receivables and increased expenses
What are the ethical issues in accrual accounting?
1) Estimates aren’t always going to be right
2) A dishonest businessperson could omit depreciation expense at the end of the year
3) Failing to record depreciation would overstate profit as calculated by mandated accrual principles and disclose a more favourable picture of the business’ financial position than existed
4) Some accruals are based on estimates, such as depreciation and revenue, and these can be manipulated
What does initial costs include?
Costs that are directly attributable to brining the asset to the location and condition necessary for it to operate as management intended
What does cost of assets include and what are some examples?
Costs that can’t be avoided by purchasing assets
Purchase price
Construction
Delivery and handling costs
Installation
Dismantling, removal and site restoration
What happens if a business sells an assets before it reaches the end of its useful life?
Implications for - Income statement, statement of financial position and cash flow statement
