Statements

Question 1

what causes depreciation

Answer 1

• physical deterioration
• economic factors such as technological changes and changes in demand which makes asset redundant
• time as assets which has fixed lifespan loses value over time

Question 2

SOCI

Answer 2

compares income earned with expenses incurred for that period to determine profit or loss and shows operating results of the business

Question 3

SOFP

Answer 3

shows assets, liabilities and owners’ equity on a particular date and shows financial position of the business

Question 4

SOCF

Answer 4

identifies types of cash inflows and outflows of the business over a period of time

• explains changes in cash balance over that period
• used in assessing liquidity and solvency of the business

Question 5

purpose of SOCF

Answer 5

• assess ability of company to generate cash inflows from sale of products or providing services
• assess ability of company to continue trading
• assess ability to generate cash flow in the future to pay debts as soon as they fall due

Question 6

cash equivalents

Answer 6

short term highly liquid assets that can be readily convertible into known amounts of cash within 3 months and are subject to insignificant amounts of change in value

Question 7

+ cash flow form operating activities

Answer 7

• healthy indicator and business can survive medium to long term
• cash flow from operating activities are enough to cover business operating expenses
• caused by:
• high demand in market for products or services
• reduced competition from rival business
• reduced expense payments
• can be used to:
• finance investing activities
• repay debt
• reward shareholders with dividends

Question 8

• cash flow from operating activities

Answer 8

• unhealthy indicator and business can’t survive medium to long term
• cash inflow from operating activities is not enough to cover business operating expenses
• caused by:
• lack of demand in market for products or services
• competition from rival business
• high expense payments
• recommendations:
• increase efficiency in debtor’s collection or cash sales
• find alternative sources of income that can generate cash
• reduce amount company is paying in expenses

Question 9

+ cash flow from investing activities

Answer 9

negative indicator as when NCA are sold, there will be lesser NCA to generate future cash income

Question 10

• cash flow from investing activities

Answer 10

positive indicator as purchase of NCA can generate income for the future

Question 11

cash flow from financing activities

Answer 11

• company borrowing money or raising additional share capital to cover net cash flow from operating activities
• • negative indicator as proceeds from bank loan or share capital should be used to purchase NCA
• company using short term loan to purchase NCA
• • negative indicator as NCA should be purchased using long term loan or equity
• dividends paid to shareholders is more than net cash flow from operating activities
• • negative indicator and may indicate excessive drawings since net cash flow from operating activities is not enough to cover dividends
• company using long term loan or raising additional share capital to purchase NCA
• • positive indicator as NCA can be used to generate income in the future