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Accounting > Statement of Financial Position > Flashcards

Statement of Financial Position Flashcards

1
Q

What is the statement of financial position?

A

Shows the financial position of the business at a particular point in time.

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2
Q

What does it list?

A

The assets, liabilities and owners equity of the business. Or the assets and the claims against those assets (liabilities and owners equity)

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3
Q

What is an asset?

A
  • business RESOURCE
  • Has EXPECTED FUTURE ECONOMIC BENEFIT
  • the business has EXCLUSIVE RIGHT TO CONTROL the benefit
  • Arise from some past transaction or event (already occurred)
  • must be capable of MEASUREMENT IN MONETARY TERMS
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4
Q

How should current assets be listed

A

In order of liquidity or nearness to cash first

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5
Q

What is a current asset?

A

an asset that is

  • consumed or converted to cash within 12mths or within one operating cycle
  • not held on a continuing basis
  • held as part of the day to day trading activities of the business
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6
Q

What is a non current asset?

A
  • Held for generating wealth

- held on a continual basis

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7
Q

How are non-current assets shown on the statement of financial position?

A

Shown at cost less accumulated depreciation (called the written down value)

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8
Q

What are the claims against assets

A

Internal - owners equity

External - liabilities

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9
Q

What is a liability?

A
  • External claim against business assets
  • a present obligation of the entity
  • settlement is expected to result in an outflow from the entity
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10
Q

What is a current liability?

A
  • Amounts due and payable to external parties within 12 months or one operating cycle
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11
Q

Examples of current liabilities

A
  • Accounts Payable
  • Bank loan (short term)
  • bank overdraft
  • revenue received in advance
  • accrued expenses
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12
Q

Example of current asset (listed in terms of liquidity)

A
  • Cash at bank
  • Accounts Receivable
  • Inventory
  • Prepayments
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13
Q

What is a non-current liability

A

Amounts due to external parties that are not due for repayment within 12 months or within the next operating cycle after the SOFP

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14
Q

Examples of non current liabilities

A

Mortgage Loan
Debentures
Long Term Loan
Provisions

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15
Q

What is owners equity?

A

The claim of the owners against the business

- The owners interest in the assets of the business after deducting liabilities

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16
Q

What is the accounting equation

A

Assets = Liabilities + Owners Equity

This equation must hold at all times

17
Q

Owners Equity will increase when a …. is realised

A

Profit

18
Q

What are the limitations to a Statement of Financial Postion

A
  • drawn up at a point in time and is relevant only at that point
  • does not give a figure for assets in terms of realisaton value
  • does not consider other factors of the business such as customer relations, market position, staff loyalty, quality of products etc when determining the financial wealth of the business
19
Q

What other factors would show how much the business is worth

A
  • reputation
  • product quality
  • skills of employees
  • market position
    These all do not appear on the statement of financial postilion but can add value to a business.
20
Q

What is the historic cost convention and how does it relate to non current assets

A

States that assets are recorded at their original cost rather than their current value
- assets may have a higher value that what they are represented on the SOFP as they may have appreciated in value eg land

21
Q

Why must the accounting equation allways hold

A

Business acquires assets
must do so with funds equal to the cost of the assets.
Funds are provided through external parties (liabilities) or owners (owners equity)

22
Q

What is depreciaiton?

A
  • Process of ALLOCATING THE USE of the non current asset used in the production of income for the period.
  • the cost of the economic benefit of the tangible asset used up during the period.
23
Q

FORMAT OF THE SOFP

A 
Current Assets
- Cash
- Accounts Receivable
- Inventory
- Prepayments
- Commissions owing
Non Current Assets
- Furniture and Fittings
- Land
- Buildings

TOTAL ASSETS

Current Liabilities
- Accounts Payable
- Short Term bank loan
- overdraft
- accrual expenses
Non Current Liabilities
- Bank Loans
- Debentures
TOTAL LIABILITIES
Owners Equity
- Opening Capital
- PLUS Realized profit or LESS loss
- Plus Retained Profit or Reserves
- Less Drawings
TOTAL OWNERS EQUITY

TOTAL OWNERS EQUITY AND LIABILITES

Accounting (5 decks)

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