The Three Financial Statements

Question 1

Balance Sheet

Answer 1

• a statement of financial position
• Assets, liabilities, equity

Question 2

Income Statement

Answer 2

• profitability
• revenue, expenses, profit and loss

Question 3

Cash Flow Statement

Answer 3

• classifies all the different cash flows
• cash flow from operations, financing, and investing

Question 4

The Balance Sheet: Asset

Answer 4

• assets are required for business
  
  1. Current Asset: assets that are quickly liquidated
  2. Non-current Asset:
     
     1. Long term intangible assets
     2. Property, plant and equipment
     3. Financial assets

Question 5

The Balance Sheet: Liabilities

Answer 5

• obligations owed by the company
  
  1. current liabilities: obligations to be paid in under a year
  2. Non-current liabilities: long-term debt

Question 6

The Balance Sheet: Equity

Answer 6

• Equity begins as initial investments
• Equity increases with retained earnings, which increases with positive income and decreases with losses and dividends

Question 7

Balancing the Balance Sheet

Answer 7

Assets = Liabilities + Equity

• this formula must always be true

Question 8

Double entry journal keeping holds that:

Answer 8

• transactions have an equal effect in one or more accounts on the other side of the balance sheet; or,
• Transactions have a positive effect and equal negative effect in one or more accounts on the same side of the balance sheet

Question 9

Company undergoes the following transaction:

• issue shares for 100 in cash

Answer 9

• cash of 100 falls under current assets
• an offsetting effect in equity as 100 to common shares
• asset equals liability and equity

Question 10

Company undergoes the following transaction:

• Four year bank loan of 50

Answer 10

• Company owes 50 to the bank
• this is a non-current liability because 4 year loan

Question 11

Company undergoes the following transaction:

• Buys equipment for 80

Answer 11

• Property cost 80 in cash, in exchange for a non-current asset worth 80
• Assets (+80)
• Assets (-80)
  
  • PP&E increases 50
  • Cash decreases 50

Question 12

Company undergoes the following transaction:

• buys inventory for $60

Answer 12

• Inventory +60
• Cash -60

Question 13

Company undergoes the following transaction:

• sells the inventory for 90

Answer 13

• Selling inventory worth 60 for 90 in revenue
• we lose 60 in inventory, but receive 90 in cash

Alternatively,

• Cash (+90)
• Inventory (-60)
• Retained Earnings (+30)

Question 14

Company undergoes the following transaction:

• pays salaries of 20

Answer 14

• Salaries are paid out in cash or bank deposits
• Salaries are paid in 20 of cash

Question 15

Company undergoes the following transaction:

• Interest of 3

Answer 15

• Paying interest expense of 3
• Interest expense reduces profit by 3

Question 16

Account Receivable

Answer 16

amount owed by customer to the company

Question 17

Account Payable

Answer 17

amount owed by the company to suppliers