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11ACC > Review questions External 1.1 > Flashcards

Review questions External 1.1 Flashcards

1
Q

what are the characteristics of an asset?

A

It MUST be the: -result of a past transaction -the asset must be under the business’s current control. -Will provide the business with future economic benefit.

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2
Q

What is profit?

A

profit is a businesses -> “Revenue - Expenses.

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3
Q

What is a liability?

A

A liability is what you owe e.g borrowed money

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4
Q

What are the characteristics of a liability?

A

-a liability is the result of a past transaction -There is a present obligation (e.g need to pay for the borrowed money -There is/will be a future economic sacrafice (e.g when you finally pay for the borrowed money etc)

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5
Q

How is a bank loan a liabilty? (include characteristics of a liability)

A

You borrowed the money from the bank previously (previous transaction). There is a current obligation to pay back the money that you borrowed. There will be a future economic sacrafice when you pay back the bank for the money you borrowed.

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6
Q

Why is the oven used at a bakery an asset? (include characteristics of an asset)

A

The bakery purchased the oven in the past. The bakery decides when and how it will be used (e.g to serve customers) which means it is under the bakery’s present control.

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7
Q

What are the characteristics of income?

A

There will be an increase in economic benefit. E.g either through an increase in an asset or a decrease in a liability. Which means an increase in profit, which means an increase in equity (income is not a contribution from the owner)

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8
Q

What are the characteristics of an expense?

A

Expenses are just the opposite of income

  1. There will be a decrease in economic benefit
  2. In the form of a decrease in an asset or an increase in a liability.
  3. Which leads to a decrease in profit
  4. Which results in a decrease in equity
  5. An expense is NOT drawings from the owner
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9
Q

What is equity?

A

Asset - Liability = Owners equity

E.g

Asset - Liability = Equity

150,000 - 50,000 = 100,000

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10
Q

What is capital expenditure?

A

Capital expenditure is a one-off purchase, that will provide economic benefit for more than the current year.

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11
Q

What is revenure expenditure?

A

Revenue expenditure is a day-to-day purchase, e.g rent and/or wages, that will only benefit the business for the current year.

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12
Q

What are examples of Current Assets?

A
  • Accounts reveivable
  • Bank
  • Inventory/stock
  • Pre-Payments
  • Accrued revenue
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13
Q

What are examples of Non-Current Assets?

A
  • Land
  • Buildings
  • shop fittings
  • Delivery vehicles
  • Office equipment
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14
Q

What are examples of Current Liabilities?

A
  • Accounts payable
  • GST payable
  • Accrued expenses
  • Revenue received in advance
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15
Q

What are examples of Non-Current Liabilities?

A
  • Mortgage
  • Loan
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16
Q

Features written as opposites will only receive credit for one expenditure.

E.g

—–>Ans

A

DON’T SAY!

Vehicle is a one-off purchase. Insurance is not a one-off purchase.

SAY!

Vehicle is a one-off purchase. Insurance is a day to day purchase

17
Q

What is the difference between Capital Expenditure and Revenue Expenditure?

A
  • Capital Expenditure is a one-off purchase which will give economic benefit for more then the current year.
  • Revenue expenditues is a day to day purchase which gives economic benefit for less then the current year
18
Q

E.g: how is an electricity invoice classified as an expense?

A

The invoice will provide the business with a decrease in economic benefit. This is through a decrease in their asset bank when the business pays for the invoice with cash. This decreases the businesses profit which decreases equity. An expense is not drawings from the owner.

19
Q

What are the characteristics of an expense?

A

There will be a decrease in economic benefit either through an increase in a liability or a decrease in an asset. This will decrease profit which decreases owner’s equity. An expense is NOT drawings from the owner of a business

  • Remember to mention what asset is decreasing or what liability is increasing.
20
Q

What is the Going Concern concept?

explain what evidence is there of it in the financial statement.

A

Going Concern is a concept that applies to businesses that will continue to operate into the foreseeable future. If said business is using this concept, there will be evidence of business assets being greater than the expense of the business, and that non-current assets/liabilities are reported in the financial statements.

21
Q

Describe the concept of “Monetary Measurement”

A
  • All transactions, assets, liabilities, incomes, expenses and equity are recorded and reported using the same currency (e.g New Zealand Dollars (NZD))
  • This is done so that businesses can total up the value of their assets in a common unit
22
Q

Define the concept of “Historical Costs”

A

Prices recorded in the statement of financial position are reported at the original acquisition cost (what the business originally paid for the asset etc.)

23
Q

Define the “Accounting Entity” concept

A

This means to keep the owner’s financial affairs e.g assets and liabilities, seperate from the business financial affairs when preparing the Statement of Financial Position and the Income Statement.

24
Q

A lawnmowing business has

  • A ride on mower worth $10000
  • Buildings (historical cost) worth $80000
  • Garden tools worth $6000

The capital (owners equity) of this business is $60,000

Calculate the liabilities of the business and show working.

A

Total assets = $96,000

Equity = $60,000

Assets - Equity = Liabilities

96,000 - 60,000 = 36,000

The liabilities of the business are $36,000 total.

25
Q

What is the purpose of all financial statements?

A

To help users make economic decisions

26
Q

What is the purpose of a cash budget?

A

A cash budget helps users make economic decisions. It includes all estimated cash receipts and cash payments for a period of time (e.g year etc) it will identify the expected change in the bank balance..

Businesses can use the cash budget to determine whether they are losing money and if so they can decide where the business needs to cut costs to prevent itself from going into overdraft.

27
Q

What are balance day adjustments?

A

balance day adjustments are used explain the effect of transactions that do not relate to the businesses current accounting period on the income statement and statement of financial position.

e.g.

The insurance expense is $4,000 and of that $500 has been prepaid.In the income statement the insurance expense will be $3,500 as this is the expense for the period. In the statement of financial performance (or position) a new account is created called pre-payments, where $500 is added, (written as “Pre-payments: $500”) it is a currentasset. The future economic benefit of the insurance will benefit the business in the next accounting period.

28
Q

What is the purpose of the income statement?

A

To report the profits, expenses and revenue of a business for the current accounting period e.g year. This helps users make economic decisions for their business.

Revenue - expenses = Profit.

29
Q

What are examples of expenses?

A
  • Insurance
  • Advertising
  • Sales wages
  • Sales commision
  • salaries - office
  • Rates
  • Electricity
  • Bad Debts
  • Interest mortgage
  • Repairs & maintenance
30
Q

What are examples of Income/Revenue?

A
  • Sales
  • Sales Returns and Allowances
  • Commiissions received
  • Discount Received
  • Rent
  • Interest
31
Q

Define the accounting concept “Period reporting”

A

The life of business is broken up into periods of equal length for reporting purposes: for example, to calculate the profit for the year and make decisions using the information.

Businesses have a consistent financial period, (usually the period is a total of one year in duration and it ends every year on 31st march) having a fixed financial period means businesses can compare results from one period to another.

32
Q

Describe the accounting concept of the “Accrual Basis”

A

Transactions are recognised when they occur and are reported in the period in which they relate regardless of whether cash has been received or payed.

In order for an entity to accurately prepare its income statement and statement of financial position, it must account for transactions or events that occured during this period but have not yet been recorded - these are called balance-day adjustments.

33
Q

What is the definition of Depreciation?

A

Depreciation is used to spread the cost of the asset over its useful life. A business will depreciate their asset by a certain amount per year to spread the cost of the asset over its estimated useful life of years

11ACC (2 decks)

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