W8: Preparing Financial Statements

Question 1

Who are the users of financial information?

Answer 1

Internal users (management)
* CFO
* Department managers
* Is the business making profit?
* Does it need to increase sales?
* Does it need new capital
* Is there enough cash to pay off debts?

Externall users:
* Shareholders (existing and potential)
* Lenders
* Goverment bodies
* Suppliers
* Customers
* Should I invest? What returns do I expect?
* Is the business finacially sound and stable

Question 2

What information do stakeholders need?

Answer 2

1. Financial performance: How well an entity utilises its assets (effective and efficiency)
2. Financial position: Information about an entity financial structure and resources, e.g. total liabilities relative to assets
3. Cash Movements: An entity to generate cash flow and manage it, e.g. cash inflows vs cash outflow

Question 3

What is an Income Statement?

Answer 3

• Also known as Statement of Profit and Loss or Statement of Financial Performance
• Reports financial performance for a specific time-period
• Shows income and expenses (IE)
• Income > Expense = Profit
• Income < Expense = Loss

Question 4

What’s a balance sheet?

Answer 4

• Also known as Statement of Financial Position
• Reports financil positions at a specific point in time
• Shows assets, liabilities, equity
• 2 presentation format:
  1. Narrative format (vertical)
  2. Account format (horizontal)

Question 5

Assets classifications

Answer 5

Current assets:
* Expected to be sold, converted to cash or consumed** within 12 months **
* E.g cash, accounts receivables, inventory

Non-current assets:
* Expected to last **longer than 12 months **
* e.g Land, building, equipment

Question 6

Liabilities classifications

Answer 6

Current liabilities:
* Expected to be settled **within 12 months **
* e.g. land, building, equipment

Non-current liabilities:
* Expected to settle in longer than 12 months
* E.g. mortgage, payable, bank loan

Question 7

What’s the Statement of changes in equity?

Answer 7

Reports the changes that took place in equity during the period
* Shows the opening balance, the movmenet, and the ending balance of equity
* Opening balance = Closing balance

Opening balance + Cash inflows - Cash outflows = Closing balance