Week 1-6

Question 1

Accounting equation

Answer 1

Liabilities + Equity = Assets

Question 2

Accounting equating also presented as

Answer 2

Assets - liabilities = equity

Question 3

What is equity made up of

Answer 3

Share capital
Retained Earnings

Question 4

Retain Earnings equation

Answer 4

Revenues - Expenses - Dividends

Question 5

How to decide if events should be recorded

Answer 5

Criterion, is the financial position of the company changed?

Question 6

Double entry book keeping

Answer 6

Each transaction has a dual effect on the accounting equation so the equality of assets and liability is preserved (two side of equation must always be equal)

Question 7

How to analyse Statement of Financial position

Answer 7

Strong = high equity
Weak = low equity

Question 8

Income statement def

Answer 8

Reports the profitability of the company’s operation over a specific period of time.

Question 9

Statement of profit or loss def

Answer 9

A record of income and expenditure over a given period of time
- provides a basis for predicting future performance
- helps assess the risk and uncertainty of achieving future cash flow

Question 10

The accrual concept

Answer 10

Accountants divide the economic life of a business into artificial time periods

Question 11

Accrual Basis Accounting

Answer 11

Revenue and costs must be recognised as they are earned or incurred, not as money is received or paid
- revenue recognised when earned rather than when cash is received
- expenses are recognised when incurred, rather than when paid.

Question 12

Cash - basis accounting

Answer 12

Revenue are recognised when cash is received

Expenses are recognised when cash is paid

• cash basis accounting is not in accordance with international financial reporting standards (IFRS)

Question 13

Depreciation

Answer 13

depreciation represents the loss in value of this asset over time

Methods of depreciation:

• Straight line
• Reducing balance

Question 14

Straight line depreciation

Answer 14

the loss of value will be spread equally over the useful life of an asset. So the depreciation amount is the same each year.

Question 15

Reducing balance method

Answer 15

For each year you work out the depreciation charge as a percentage of the accounting value brought forward.

Question 16

Bad debts

Answer 16

A lot of businesses offer their goods and services on credit but will be given a set number of days to settle the debt
However, they might go bankrupt

If the debtors could not settle the debt, the amount that cannot be recovered is known as bad debt.

Considered an expense to the business.

Question 17

Investing activities

Question 18

Financing activities

Answer 18

Changes in non current liabilities and equity

Question 19

Investing activities

Answer 19

Changes in investments and non current assets

Question 20

Operating activities

Answer 20

Income statement items, revenue and expenses from main activities of the business.

Question 21

Ordinary share capital

Answer 21

• capital invested in a company by its owners
• Treated as equity in the SoFP
• Ordinary shares comes with voting rights at general meetings and AGMs
• The larger your ordinary shareholding, the more control you have over the company
• Owning >50% of OS makes you the majority shareholder

Question 22

Share premium account

Answer 22

• treated as equity in SoFP
• All ordinary shares have the same nominal value, determined by the company constitution e.g. 1, 50p, £2 etc.
• But a company can sell issued shares for a higher price than the nominal value
• Any amounts received in addition to the nominal value of the shares goes into the share premium account

Question 23

Retained earnings

Answer 23

-The amount of a business’s net income that is kept within its accounts, rather than paid out to shareholders

-This account can be used to pay dividends to shareholders

-Retained earnings can be negative if the company made a loss

Question 24

General capital reserves

Answer 24

• company can choose to move their retained earnings (revenue reserves) into a separate capital reserve account
• This means that these reserves are no longer available to pay dividends to shareholders
• Capital reserves could be used for further investments, or to save as a ‘buffer-zone’ for future years

Question 25

Types of ratio analysis

Answer 25

• profitability rations
• Liquidity ratios
• Efficiency ratios
• Gearing ratios

Question 26

Limitations of ratio analysis

Answer 26

• lack of standard ratio definitions
• Closing balance in the statement of financial position may be unrepresentative of the average position throughout the year
• Accounting policies may differ resulting in misinterpretation
• Corroboration and more granular further information will needed to make well informed decisions