Reporting Financial Position And Performance 1 Flashcards
What is the purpose of a trial balance?
To summarize the balances in a business’s books of account after bookkeeping for the period has been completed.
A trial balance lists balances in two columns that add up to the same total.
What are the two columns in a trial balance based on?
The accounting equation, with debit (Dr) items on the left and credit (Cr) items on the right.
A mnemonic for remembering this is ‘Drive on the left, Crash on the right’.
What adjustments are required before preparing financial statements?
- Accruals and prepayments
- Closing inventory
- Cost of sales
- Depreciation
- Bad debts
These adjustments ensure accurate financial reporting.
What are accruals?
Outstanding expenses that need to be recorded for goods or services received but not yet invoiced.
Accruals increase the expense figure in the income statement.
How do prepayments affect the income statement?
They reduce the expense figure for the current year and are recorded as a current asset in the statement of financial position.
Prepayments are expenses paid in advance for future periods.
What is closing inventory?
The value of inventory at the end of the accounting period, used in the cost of sales calculation.
Closing inventory is a current asset in the statement of financial position.
Define cost of sales.
The cost of goods sold during a period, calculated by adding opening inventories to purchases and deducting closing inventories.
This calculation ensures that only costs associated with sold goods are recognized.
When preparing an income statement, what is deducted from gross profit to calculate operating profit?
All remaining expenses, except interest paid.
Operating profit is calculated before interest and taxes are deducted.
What is the first statement usually prepared in financial statement preparation?
The income statement.
The profit figure from the income statement is needed for the statement of financial position.
What is the matching convention in accounting?
Expenses should be matched with the revenues they help to generate, regardless of when cash is paid or received.
This principle ensures accurate profit reporting for a period.
True or False: Closing inventory from one year becomes the opening inventory for the next year.
True.
This continuity is essential for accurate cost of sales calculations.
Fill in the blank: The trial balance is a _______ list of the balances in a business’s books of account.
trial
It reflects all transactions recorded during the financial period.
What should be the value of inventory according to the prudence convention?
The lower of cost and net realizable value.
This approach prevents overstatement of assets.
What adjustment is made to wages expense?
Add £450 to wages expense
This reflects an accrual adjustment for wages.
What adjustment is made to the Statement of Financial Position (SFP) regarding current liabilities?
Add accrual of £450 to SFP
This is for wages that have been incurred but not yet paid.
How much of the purchases did Michael use for his own use?
£300
This amount is deducted from purchases and added to drawings.
What is the adjustment made to purchases in the income statement?
Reduce purchases by £300
This reflects the amount used by Michael for personal use.
What is the total revenue reported in Michael’s income statement?
£37,200
This is the total revenue before any deductions.
What is the opening inventory amount?
£7,552
This is the inventory available at the beginning of the year.
What is the adjusted total for purchases after accounting for personal use?
£22,812
This is calculated as £23,112 - £300.
What is the closing inventory amount in the income statement?
£9,976
This is the inventory available at the end of the year.
What is the gross profit reported in Michael’s income statement?
£16,812
This is calculated as total revenue minus cost of sales.
What is the total amount of salaries and wages expense after adjustments?
£5,344
This includes the original amount plus the adjustment.
What is the adjusted rent and rates expense?
£1,102
This is calculated as £1,152 - £50.
What is the operating profit reported?
£6,634
This is the profit after deducting all expenses from gross profit.
What are the total non-current assets reported in the Statement of Financial Position?
£6,000
This includes fixtures and fittings, and motor vehicles.
What is the total current assets amount?
£27,172
This includes inventory, receivables, prepayments, and cash.
What is the total assets reported in the Statement of Financial Position?
£33,172
This is the sum of non-current and current assets.
