Week 1 Flashcards
What are the three key statements?
- Balance Sheet
- Income Statement
- Cashflow Statement
What does the Balance Sheet show?
The financial position of the business - assets and liabilities
What is another term for the income statement?
The profit and loss account
What does the income statement show?
How much profit the company earned over a period of time
What does the cashflow statement show?
The movement in the cash balance
2 types of accounting standards and who assigns them
- GAAP: Generally Accepted Accounting Principles
- IFRS: International financial reporting standards
- IASB: International Accounting standards board
- FASB:Financial Accounting standards board
Why might an investor want to look at a set of accounts?
- Performance- how well are you doing vs. expectations
- Valuation- how much is the company worth
Why might a manager want to look at a set of accounts?
- Communication of performance
- Compensation
Why might the government want to look at a set of accounts?
- Tax
Why might competitors want to look at a set of accounts?
Segmental reporting
Accounting Equation I:
Resources = ?
Funding
What is money invested in the business by its owners?
Equity
Accounting Equation:
Assets = ? + ?
Liabilities + Equity
Equity = ? + ?
Share capital + Reserves
What is the dual effect?
Every business transaction includes, at least, two effects on the financial statements of a company. The accounting equation must always hold:
Assets = liabilities + equity
How is ‘good held for resale’ classified?
Current asset
How is ‘liability for tax due next year’ classified?
Current liability
How is ‘electricity bill due but not paid’ classified?
Current liability
How is ‘subscriptions received in advance’ classified?
Current liability
How is ‘credit sales balances due from customers’ classified?
Current asset (accounts receivable)
How is ‘supplier balances outstanding’ classified?
Current liability (accounts payable)
How is ‘land’ classified?
Non-current asset
How is ‘staff photocopier (leased)’ classified? Assume less than 12 months
It goes nowhere
How is ‘Bank Overdraft (aka revolver)’ classified?
Current Liability - its payable back any time the bank asks for it
How is ‘historic profits retained in the business’ classified?
Equity
How is ‘short term investments’ classified?
Current assets
How is ‘term loan with 5 years outstanding’ classified?
Non-current liability
What is the dual-effect when “Comapny raises £1m in debt capital”?
- Increase debt
- Increase cash
What is the dual-effect when “The company decides to buy inventory for cash, £3,000”?
- Increase inventory
- Decrease cash
What is the dual-effect when “The company buys a van for cash, £40,000”?
- Decrease cash
- Increase P,P&E (non-current asset)
What is the dual-effect when “a key supplier is paid £5,000”?
- Decrease cash (asset)
- Decrease accounts payable (liability)
What is the dual-effect when “A customer pays £4,000”?
- Increase cash (assets)
- Decrease accounts receivable (assets)
What is the dual-effect when “Electricity bill of £1,000 is settled (assume no liability exists beforehand)”?
- Decrease cash
- Increase expenses
