The main accounts-10

Question 1

The statement of financial position provides a summary of a company’s financial position at a specific point in time. It consists of two main lists:_______and ________

Answer 1

assets (everything owned by the business) and liabilities (sources of finance used to fund acquisitions).

Question 2

The accounting equation establishes a relationship between assets, liabilities, and equity: Assets =

Answer 2

Assets = Equity + Liabilities. This equation must always be in balance.

Question 3

The statement of financial position can be presented in different formats, including Assets = Equity + Liabilities, Assets - Liabilities = Equity, or Non-current assets + Net current assets =

Answer 3

Equity + Long-term liabilities.

Question 4

Non-current assets are long-term assets intended for use in the business. They are often referred to as fixed assets. Examples include

Answer 4

property, plant, and equipment.

Question 5

Tangible non-current assets are valued at cost less depreciation, while intangible non-current assets are non-physical assets like

Answer 5

goodwill, patents, and brand names.

Question 6

Tangible non-current assets are recorded at cost _________accumulated depreciation.

Answer 6

less

Question 7

Depreciation is an

Answer 7

expense that allocates the cost of an asset over its useful life. Land is an exception, as it is typically assumed to have an infinite life and does not depreciate.

Question 8

Intangible non-current assets include assets that cannot be physically touched, such as

Answer 8

goodwill, research and development costs, patents, trademarks, and brand names. To qualify as an intangible asset, it must be identifiable and provide economic benefits.

Question 9

Investments in other companies can be classified as non-current assets if they are

Answer 9

intended to be held for a reasonable period. Investments are usually shown at market value.

Question 10

Revaluation is a process of

Answer 10

periodically adjusting the value of non-current assets, such as land and buildings, to reflect their current market value. This helps address the limitations of valuing assets solely at cost less depreciation.

Question 11

Current assets are items that can be

Answer 11

easily converted into cash within the normal course of business. Examples include inventories (stocks), trade receivables (amounts owed by customers), and cash. Inventories are valued at a lower cost and net realizable value.

Question 12

Equity represents the net value of the company contributed by shareholders through shares and reserves. It consists of

Answer 12

share capital, other reserves (e.g., share premium and revaluation reserves), and retained earnings (profits not distributed as dividends).

Question 13

Liabilities are classified based on their maturity date. Current liabilities are due within ______, while non-current liabilities are due after__________.

Answer 13

one year

Question 14

Current liabilities include trade payables such as

Answer 14

(amounts owed to suppliers), short-term borrowings, current portion of long-term borrowings, current tax payable, and short-term provisions.

Question 15

Non-current liabilities encompass

Answer 15

long-term borrowings (e.g., loans and debentures) and long-term provisions (e.g., deferred taxation and pension commitments).

Question 16

Contingent liabilities are

Answer 16

potential liabilities that are not included in the statement of financial position but must be disclosed in the notes to the accounts. Examples include guarantees and potential court claims.

Question 17

To prepare a statement of financial position, the values of assets, liabilities, and equity are listed. Each item is

Answer 17

categorized appropriately, and the accounting equation (Assets = Equity + Liabilities) must be in balance.

Question 18

State whether each of the following items, which can appear in a financial statement, is a noncurrent asset (NA), a current asset (CA), a non-current liability (NL), a current liability (CL) or
capital (C):
Cash Trade receivable
Building Tax due
Trade payable Land
Inventories Ordinary share capital
Debenture

Answer 18

Solution
Cash CA Trade receivable CA
Building NA Tax due CL
Trade payable CL Land NA
Inventories CA Ordinary share capital C
Debenture NL.

Question 19

The following data was taken from the records of ABC plc and relates to the values of the
company’s assets, liabilities and equity at 31 December 20XX.
Prepare the company’s statement of financial position (its balance sheet) as at 31 December 20XX
using these items.
£000s
Inventories 135
Trade payables 65
Machinery (cost) 347
Machinery (accumulated depreciation) 132
Cash 56
Long-term loans 289
Ordinary share capital 200
Trade receivables 195
Tax provision 67
Retained earnings 230
Land 350
Other reserves 100

Answer 19

page 2 cbi

Question 20

The statement of comprehensive income includes two main components: the

Answer 20

statement of profit or loss and other comprehensive income.

Question 21

The statement of profit or loss provides information about a company’s trading activities by comparing

Answer 21

the income generated from trading with the associated costs, resulting in the profit or loss for the year.

Question 22

Other comprehensive income includes items that are not recognized in the profit or loss but contribute

Answer 22

to a comprehensive picture of the organization’s income.

Question 23

The statement of profit or loss follows a specific format and includes various elements: these are

Answer 23

Revenue: Recorded when earned, representing turnover or sales.
Cost of sales: Reflects the costs incurred in producing the goods sold, including raw materials, components, wages, salaries, depreciation, and changes in inventory levels.
Gross profit: The difference between revenue and cost of sales.
Other operating income: Income from investments, such as rent, interest, and dividends.
Distribution costs: Costs associated with sales, distribution, and advertising.
Administrative expenses: Costs related to administration, wages, salaries, and directors’ remuneration.
Operating profit: Profit earned after all expenses except finance costs.
Finance income: Income from investments, such as interest and dividends.
Finance costs: Interest payments made on loans.
Profit before tax: Operating profit adjusted for financing costs and income.
Tax expense: The tax charge on adjusted profit figures, taking into account potential disputes, negotiations, and tax adjustments.
Profit for the year: Profit after deduction of tax.

Question 24

Earnings per share (EPS) is a key metric that companies calculate and disclose on their statements of profit or loss. It

Answer 24

represents the earnings attributable to ordinary shareholders divided by the number of ordinary shares in issue.

Question 25

Realized capital gains or losses occur when a company sells an asset for a different amount than its recorded value,

Answer 25

affecting the operating profit. Realized capital gains are subject to capital gains tax.

Question 26

Other comprehensive income includes income and expenses that are not recognized in the profit or loss but contribute to a

Answer 26

comprehensive understanding of the organization’s income.

Question 27

Examples include

Answer 27

gains/losses from revaluation of assets, currency translation differences, actuarial gains/losses on pension schemes, and losses/gains on cashflow hedges.

Question 28

Revaluation involves recording

Answer 28

non-current assets at the market or fair value.

Question 29

If the asset is used in the company’s business, an upward revaluation increases the revaluation reserve

Answer 29

in the equity section and has no impact on the profit or loss.

Question 30

Earnings per share (EPS) is a key metric that companies calculate and disclose on their statements of profit or loss. It

Answer 30

represents the earnings attributable to ordinary shareholders divided by the number of ordinary shares in issue. represents the earnings attributable to ordinary shareholders divided by the number of ordinary shares in issue.

Question 31

A company’s statement of profit or loss shows that it has generated substantial profits but its
cashflow statement indicates that it has suffered a large outflow of cash during the same period.
The figures are reliable and free from distortion.
Explain whether this set of circumstances warrants any major concern. [5

Answer 31

Profit could look healthier than cash because:
 the full value of goods and services sold on credit is credited under sales revenue, and will
therefore contribute to profit, even though cash may not be received for some time [1]
 inventories (the stock of materials, components, work-in-progress and finished goods) are
only treated as a cost when the they are used to produce the goods sold, so the build up
of inventories will reduce cash by more than it will reduce profit. [1]
In addition, cash balances are affected by items that do not affect the statement of profit or loss,
eg the purchase of a non-current asset. [1]
Cause for concern
It is quite normal for a new business to show substantial profit and yet experience large cash
outflows as it invests in new equipment, builds up stock and sells on credit, and so the
discrepancy between the profit position and the cash position may not be a cause for concern. [1]
However, many profitable businesses fail because they run out of cash and/or exceed their
overdraft limits. [1]
Therefore, although a discrepancy between profit and cash is inevitable and not a problem in
itself, a large cash outflow is potentially a cause for concern. [1]
Companies should forecast and monitor their cash positions and should take action to remedy
any unplanned shortages. [1]
[Maximum 5]

Question 32

Explain why financial statements must be supplemented and supported by notes to the accounts.
[5

Answer 32

The notes give detailed explanations and additional information to provide shareholders with a
better understanding of the position of the company by helping them gain a true and fair view. [1]
Many of the disclosures in the notes are required by law or by accounting standards. [1]
Notes might deal with qualitative matters and disclosures that could not be reflected in the
financial statements. For example, descriptions of contingent liabilities could be vitally important,
as could information about post-balance sheet events. [1]
The notes will also cover details of the accounting policies used in the preparation of the
statements, which will make the accounts more useful to users, eg aiding comparisons between
companies. [1]
Providing an overview in the main statements and supplementing that with the notes gives
shareholders and other readers the choice of reading further if they wish. [1]
Notes and appendices avoid burdening the statement of financial position and statement of profit
or loss with excessive information