Topic 1: Introduction to Financial Accounts (Part 2) Flashcards
What is the circulating nature of current assets?
Cash -> Inventories -> Trade receivables ->
Define current assets
Are assets that are expected to be converted to cash within a year.
Define trade receivables
the amount owed to a business by its customers following the sale of goods or services on credit.
What is current liabilities?
Will be paid in the next financial year
What is non-current liabilities?
Due after a year or more
What is the formula of SoFP for working capital?
Current assets - current liabilities
Define working capital
Is the amount of cash a business can safely spend
What are accounting conventions?
Are guidelines used to help companies determine how to record certain business transactions that have not yet been fully addressed by accounting standards
Define accounting concepts
are a set of general conventions that can be used as guidelines when dealing with accounting situations.
What are the main accounting concepts?
Business entity Historic Cost Prudence Going concern Dual aspect
Define each accounting concept
BE: The business is separate from the owner(s) of the business. The accounting records of the business must be kept separate from the
personal transactions of its owner or owners.
HC: Is the original cost of an asset, as recorded in an entity’s accounting records.
P: Policy of anticipating possible future losses but not future gains. This policy tends to understate rather than overstate net assets and net income, and therefore leads companies to “play safe”.
GC: A company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary.
DA: Every business transaction needs to be recorded in two separate accounts (e.g. goods purchased for cash has two aspects which are (i) Giving of cash (ii) Receiving of goods. These two aspects are to be recorded.)
Define total shareholder equity
Shareholder equity: This is the shareholders’ claim on assets after all debts owed are paid up
Is the difference between total assets and total liabilities
What parts are included in total shareholder equity?
Equal to the net assets
Share capital: Shares sold to raise money
OR
money invested in a company by the shareholders
Share premium: Gain in value of shares over the sold price
Reserves: Retained earnings from yearly profits
Define money measurement
The concept states that a business can only record accounting transactions if it can be expressed in terms of money
Can only record if someones bought it
What can be difficult in measuring the value of a company (money measurement)?
Goodwill and brands
Human resources
Define goodwill
Is an intangible asset that is associated with the purchase of one company by another.
(Valuing the future revenue of the client base/company etc.)
What are the benefits of using SoFP?
Shows how the business has been financed, where the money has come from, and how it has been spent
Can provide a basis for assessing the value of the business
Performance can be better assessed
Define revenue recognition (links with income statement topic)
The principle states that one should only record revenue when it has been earned, not when the related cash is collected
What do the terms in revenue recognition mean?
Revenue: Total amount of income generated by the sale of goods or services related to the company’s primary operations. (Also known as gross sales)
OR
the amount agreed for the transfer of goods/services
Recognition: When control of the goods/services passes to the customer
What is the formula for measuring profit?
Profit (or loss) for the period = Total revenue for the period - Total expenses incurred in generating that revenue
What to do when you have bad debt?
Reduce trade receivables
Increase expenses
What are the main types of accounting convention?
Conservatism Materiality Full disclosure Consistency (Accruals)
Why do receivables decrease/reduce trade receivables?
The asset trade receivables reduce by the amount of payment, and cash at the bank increases by the same amount.
How to reduce (outstanding) trade receivables?
Implement upfront fees Structure a payment plan for the remaining balance Stick to the payment deadlines Offer incentives for early payers Stay in contact
