Topic 1: Introduction to Financial Accounts (Part 2)

Question 1

What is the circulating nature of current assets?

Answer 1

Cash -> Inventories -> Trade receivables ->

Question 2

Define current assets

Answer 2

Are assets that are expected to be converted to cash within a year.

Question 3

Define trade receivables

Answer 3

the amount owed to a business by its customers following the sale of goods or services on credit.

Question 4

What is current liabilities?

Answer 4

Will be paid in the next financial year

Question 5

What is non-current liabilities?

Answer 5

Due after a year or more

Question 6

What is the formula of SoFP for working capital?

Answer 6

Current assets - current liabilities

Question 7

Define working capital

Answer 7

Is the amount of cash a business can safely spend

Question 8

What are accounting conventions?

Answer 8

Are guidelines used to help companies determine how to record certain business transactions that have not yet been fully addressed by accounting standards

Question 9

Define accounting concepts

Answer 9

are a set of general conventions that can be used as guidelines when dealing with accounting situations.

Question 10

What are the main accounting concepts?

Answer 10

Business entity
Historic Cost
Prudence
Going concern
Dual aspect

Question 11

Define each accounting concept

Answer 11

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.)

Question 12

Define total shareholder equity

Answer 12

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

Question 13

What parts are included in total shareholder equity?

Answer 13

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

Question 14

Define money measurement

Answer 14

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

Question 15

What can be difficult in measuring the value of a company (money measurement)?

Answer 15

Goodwill and brands

Human resources

Question 16

Define goodwill

Answer 16

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.)

Question 17

What are the benefits of using SoFP?

Answer 17

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

Question 18

Define revenue recognition (links with income statement topic)

Answer 18

The principle states that one should only record revenue when it has been earned, not when the related cash is collected

Question 19

What do the terms in revenue recognition mean?

Answer 19

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

Question 20

What is the formula for measuring profit?

Answer 20

Profit (or loss) for the period = Total revenue for the period - Total expenses incurred in generating that revenue

Question 21

What to do when you have bad debt?

Answer 21

Reduce trade receivables

Increase expenses

Question 22

What are the main types of accounting convention?

Answer 22

Conservatism
Materiality
Full disclosure
Consistency
(Accruals)

Question 23

Why do receivables decrease/reduce trade receivables?

Answer 23

The asset trade receivables reduce by the amount of payment, and cash at the bank increases by the same amount.

Question 24

How to reduce (outstanding) trade receivables?

Answer 24

Implement upfront fees
Structure a payment plan for the remaining balance
Stick to the payment deadlines
Offer incentives for early payers
Stay in contact

Question 25

Define each accounting convention

Answer 25

Materiality: Items, transactions or event (any info) that could influence a person’s decision looking at the financial statement/accounts must be included.

Accruals accounting: This is an accounting method where revenue or expenses are recorded when a transaction occurs rather than when payment is received or made.

Question 26

What factors must be considered when calculating depreciation?

Answer 26

The cost (or fair value) of the assets
The useful life of the asset
Residual value (disposal value)
Depreciation methods

Question 27

Define depreciation

Answer 27

Is when a business asset loses value over time.