Unit 1 Outcome 1 Flashcards
What is an Asset?
Assets are a present economic resource that are controlled by an entity as a result of a past event that has the potential to produce economic benefit.
Current - In less than 12 Months
Non-Current - In more than 12 Months
What is a Liability?
Liabilities are a present obligation of the entity as a result of past events that will result in the transfer of economic resources.
Current - In less than 12 Months
Non-Current - In More than 12 Months
What is Owner’s Equity?
Owner’s Equity is the residual interest in the assets of the entity after the deduction of its liabilities.
What is the Going Concern Assumption?
The assumption that the business will continue to operate in the future, and its records be kept on that basis.
What is the Accrual Basis Assumption?
The assumption that revenues is recognised when earned and expenses are recognised when incurred, so profit is calculated as revenue earned in a particular period less expenses incurred in that period.
What is Revenue?
A sale and it must be recorded in your accounts.
What is an Expense?
It is cost of the business and it is to be recorded as soon as it is (Incurred/Used by)
What is the Period Assumption?
The assumption that records are prepared for a particular period of time, such as a month or year, in order to obtain comparability results.
What is the Entity Assumption?
The assumption that the records of assets, liabilities and business activities of the entity are kept seperate from those of the oner of the entity as ell as those from other entities.
What is Relevance?
Includes all information which is useful for decision making.
Excludes that which is not useful or decision making.
What is Faithful Representation?
Reports should be complete so that it is free from errors (accurate) and neutral (free from bias)
What is Comparability?
Reports should be able to be compared over time through the use of consistent accounting procedures.
What is Verifiability?
Reports should contain information which is supported by source document evidence.
What is Timeliness?
Requires information be presented in
a timely manner, so that it is available for the decision-maker in time to influence decisions.
What is Understandability?
Reports should be presented in a manner that makes it easy for as many users as possible to comprehend their meaning.
What are the ethical Considerations that need to be considered?
Treatment of Employees
Sustainable Resources
Emissions Of Transport
What is Liquidity?
Liquidity refers to the ability of a business to meet its short-term
debts as they fall due and can be measured using the Working
Capital Ratio, which should be above 1:1.
What is Stability?
Stability refers to the ability of a business to meet its long-term
obligations and remain a Going concern.
What does the Working Capital Ratio indicate?
The ratio indicates that there are sufficient current assets to cover current liabilities as it is above the minimum of 1:1. This indicates that the
business will be able to meet its short-term debts as they fall due as there
are __ of current assets for every __ of current liabilities.
What does the debt ratio indicate about risk?
The Debt Ratio provides a good indication of risk. This is the business’s
risk of financial collapse due to the burden of servicing debt in regards to
principal and interest repayments. If a business has too much debt,
servicing it may put too much pressure on the cash flow of the business
and force it into liquidation.
What is the Benefit of the Classified Balance Sheet
A classified Balance Sheet separates assets and liabilities into current
and non-current, allowing the comparison of a business’s short-term
assets to its short-term liabilities to determine whether the business has
sufficient liquidity, i.e. enough current assets to meet its short-term
obligations as they fall due. This allows the business to determine the
short-term liquidity and the long-term stability of the business, improving
the quality of information and hence decision-making. It also allows for
the calculation of financial indicators such as the Working Capital Ratio.
Why do businesses choose to conduct ethical practices?
Legal Practices
Reputation - Sales decrease, Profits decrease, Going concern Issues.
How can businesses be ethical?
Environment
People
General Community
What is Debt Ratio?
The Debt Ratio measures the percentage of the firm’s assets that
are funded by external (outside) sources, and it is a good indicator
of financial risk.
