Unit 2 Measuring and evaluating financial position & financial performance

Question 1

The accounting cycle

Answer 1

Transactions > source documents > journals > ledgers > trial balance > reports

Question 2

What is a transaction?

Answer 2

Events that alter the financial position of a
business and require the entering of information in
accounting records

Question 3

The elements of a transaction

Answer 3

Buying
Selling
Exchanging of goods and services for cash or on credit

Question 4

The breakdown of the Profit and Loss statement

Answer 4

Revenue (Sales) - (COGS) = Gross profit

Gross profit + other revenue - other expenses = Net profit

Question 5

What is revenue?

Answer 5

Gross inflows of economic benefits during the period arising in the
ordinary activities of an entity when those inflows result in increases in equity
other than those relating to contributions from equity participants

Question 6

Some examples of Revenue

Answer 6

Sales Revenue
 Service Revenue
 Interest Revenue
 Rent Revenue
 Dividends Revenue

Question 7

What is expenses?

Answer 7

Represents decreases in the entity’s wealth. They are incurred in
order to earn revenue

Question 8

The accounting equation

Answer 8

Assets = Liabilities + Equity

Question 9

The identifying information on a B/S

Answer 9

Name of the reporting entity, type of financial statement, date, currency

Question 10

What is liabilities

Answer 10

A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits

Question 11

What is S/E

Answer 11

The residual interest in the assets of the entity after deducting all its liabilities (Share capital, retained profits, reserves)

Question 12

What is entity assumption?

Answer 12

A term used to refer to an accounting principle that declares the separation of every financial record of the business from any of the financial records of its owners or that of other businesses

Question 13

What is an account?

Answer 13

A record in an accounting system tracking the financial activities of a specific asset, liability, equity, revenue, or expense

Question 14

Share capital?

Answer 14

The money a company raises by issuing common or preferred stock

Question 15

Retained profits?

Answer 15

The accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period

Question 16

Dividends?

Answer 16

A token reward paid to the shareholders for their investment in a company’s equity (Usually originates from the company’s net profits)

Question 17

Prepayments?

Answer 17

Payment for an expense in advance and therefore the expense have not been incurred

Question 18

Depreciation?

Answer 18

The process of losing value of an equipment

Question 19

Accumulated Depreciation?

Answer 19

The accumulation of all the depreciation expenses incurred year on year. The book value of the asset is the value of the asset minus the accumulated depreciation (contra assets)