Statement of Financial Position Flashcards
What is the Business Entity Concept?
A business is a separate entity from its owner and so the transactions of the business must be recorded separately from those of its owner and any other business.
What businesses does the business entity concept apply to?
All types of businesses (sole trader, limited liability company, partnership etc.)
What are the key features of the business entity concept?
Applies to all types of businesses
Separately measures performance (profitability and cash flows)
Enables effective auditing and ensures each entity is taxed separately.
What is a statement of financial position? (Balance sheet)
A statement which shows all the items (Assets) owned by the enterprise and all the claims on those assets.
What is the purpose of the statement of financial position?
Summarise and communication information at a given time point.
Help users assess the financial health of an entity
Identify underlying trends in financial position over several periods.
Key in determining (liquidity/ financial/ credit/ business) risl.
Can help predict amount, timing and volatility of future earnings.
What are the limitations of the statement of financial position?
Cannot meet information needs of decision-makers on its own.
Lists assets but doesn’t consider their future earning capacity.
Contains past information- may be of little use in a volatile economy or high inflation environment.
Historical cost basis of valuation makes information unreliable.
Only includes information that can be quantified
Many of the reported items involve estimation
“Off-balance sheet” financing tactics distort information.
What are the main components of a statement of financial position?
Assets and Liabilities.
What are assets?
Assets is a resource controlled by an entity as a result of past events form which future economic benefits are expected to flow to the entity.
What are the two types of assets?
Non-Current Assets (Fixed)
Current Assets
What are the two types of non-current assets?
Tangible
Intangible
What are non-current assets?
Assets which are intended to be used by the business on a continuing basis and include both tangible and intangible assets.
What are tangible non-current assets)?
Are held for use in production or supply of goods or services or for administrative purposes; and are expected to be used during more than one period.
What are intangible non-current assets?
Identifiable non-monetary assets without physical substance.
Examples of intangible assets include:
Development Expenditure
Goodwill
Patents, Intellectual Property, Trademarks, Copyrights etc.
What are Current Assets?
A business should classify an asset as current when:
It expects to realise, sell or consume the asset in its normal operating cycle.
It holds the asset primarily for the purpose of trading;
The asset is cash or a cash equivalent.
What is the operating cycle of a manufacturer?
Use cash to buy raw materials.
Process the raw materials
Sell finished products to customers
Collect cash from customers
Repeat.
