Topic: 4 Financial Statements

Question 1

What is Income Statement?

Answer 1

Income Statement which describes a company’s revenues and expenses and the resulting net profit or loss over a period of time (Accounting Period concept) due to earnings activities

Question 2

What is Statement of Changes in Equity?

Answer 2

Statement of Changes in Equity which reports the changes that occurred in the owners’ financial interest during the reporting period

Question 3

What is Balance Sheet?

Answer 3

Balance Sheet which describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time

Question 4

What is Statement of Cash Flows?

Answer 4

Statement of Cash Flows which identifies cash inflows (receipts) and cash outflows (payments) over the reporting period.

Question 5

When is Income considered earned? (Trading Business)

Answer 5

For a trading business, income is considered as earned when goods are delivered to or received by the customer or when sufficient risk has been transferred

Question 6

When is Income considered earned? (Service Business)

Answer 6

For a service business, income is considered as earned when the service has been performed.

Question 7

What is Liquidity?

Answer 7

Ease with which assets can be converted into cash

Question 8

What is the Accounting Period Process?

Answer 8

The Accounting Period principle presumes that operating life of a business can be divided into SPECIFIC TIME PERIODS to facilitate meaningful reporting and comparisons.

Question 9

What is Revenue?

Answer 9

Revenue represents an economic benefit or resources that a company obtains by providing customers with goods or services

Question 10

What is the Matching Concept?

Answer 10

This concept states that expenses should be recognised and recorded when those expenses helped to generate for a given accounting period.

Question 11

When is Income considered as earned? (Trading business)

Answer 11

Income is considered as earned when goods are delivered to or received by the customer or when sufficient risk has been transferred.

Question 12

When is Income considered as earned? (Service business)

Answer 12

Income is considered as earned when the service has been performed.

Question 13

What is Net Profit?

Answer 13

Net Profit is the overall profit of the business. This is the profit of the business after all expenses of operating the business have been considered. It includes both operating and non-operating revenue and expenses.

Question 14

What are the 3 components of the shareholder’s equity?

Answer 14

i) Share Capital
ii) Retained earnings
iii) Asset Revaluation Reserve

Question 15

What is Share Capital?

Answer 15

Share Capital is the amount invested by shareholders.

Question 16

What is Retained Earnings?

Answer 16

Retained earnings is profit (past-year’s profit + current-year’s profit) that has not been distributed to shareholders.

Question 17

What is Asset Revaluation Reserve?

Answer 17

Asset Revaluation Reserve is the surplus created when assets are revalued

Question 18

What is the Statement of Changes in Equity?

Answer 18

The Statement of Changes in Equity explains the effects of transactions on shareholders’ equity during the accounting period.

Question 19

What is the Balance Sheet?

Answer 19

The Balance Sheet is an accounting report that shows the financial position of a business at a particular point in time.

Question 20

What is Financial Position?

Answer 20

The Financial Position refers to resources owned (assets) and owed (equity and liabilities).

Question 21

What is Liquidity?

Answer 21

Liquidity is the ease with which assets can be converted into cash.

Question 22

How are Assets classified?

Answer 22

i) Current Assets
ii) Non-Current Assets

Question 23

What are Current Assets?

Answer 23

Current assets are cash and other resources which are expected to be sold, collected, or used. WITHIN ONE YEAR, or the company’s OPERATING CYCLE, whichever is longer.

Question 24

What is Operating Cycle?

Answer 24

Operating cycle is the average length of time it takes to acquire stock, sell it and collect cash.

Question 25

What are Non-Current Assets?

Answer 25

Non-current assets are long term resources of a business which are NOT EXPECTED to be converted into cash within an operating cycle.

Question 26

What are Liabilities?

Answer 26

Liabilities are amounts owing to external parties for resources supplied and are classified on the basis of time of repayment.

Question 27

What are the two main categories of liabilities?

Answer 27

i) Current Liabilities
ii) Long Term Liabilities

Question 28

What are Long Term Liabilities?

Answer 28

Debts which are due to be repaid over more than one accounting period.

Question 29

What are Current Liabilities?

Answer 29

Debts which are due to be repaid or settled WITHIN one accounting period

Question 30

What is Equity?

Answer 30

Equity is the claims of the owners on assets of the business.

Question 31

What are the two main sections of Equity?

Answer 31

i) Issued Share Capital
ii) Reserves

Question 32

What is Issued Share Capital?

Answer 32

Capital Contributed by owners

Question 33

What are Reserves?

Answer 33

Undistributed profits of the business. These include retained earnings and asset revaluation reserve