Week 14: Measuring and Reporting Financial Position

Question 1

What are the three major financial statements?

Answer 1

The statement of financial position, the income statement, and the statement of cash flows

Question 2

What does the statement of financial position show?

Answer 2

It shows a business’s assets, liabilities, and equity at a specific point in time

Question 3

How does the statement of financial position differ from the income statement?

Answer 3

The statement of financial position captures a moment in time, while the income statement reflects performance over a period

Question 4

What is the fundamental accounting equation?

Answer 4

Assets = Equity + Liabilities

Question 5

What does “capturing a moment in time” mean in financial reporting?

Answer 5

It means the financial position reflects a company’s status at a particular date, not over time

Question 6

How are assets classified?

Answer 6

As current (short-term) or non-current (long-term)

Question 7

What is a current asset? Give examples

Answer 7

An asset expected to be used or converted into cash within a year, e.g., cash, inventories, trade receivables.

Question 8

What is a non-current asset?

Answer 8

An asset held for long-term use, such as property, equipment, and patents

Question 9

How are liabilities classified?

Answer 9

As current liabilities (due within a year) or non-current liabilities (due beyond a year)

Question 10

Give an example of a current liability and a non-current liability.

Answer 10

Current liability: Trade payables.
Non-current liability: Long-term loans

Question 11

What are accounting conventions?

Answer 11

Generally accepted rules developed to deal with practical issues in financial reporting

Question 12

What is the business entity convention?

Answer 12

It states that a business is treated as separate from its owner(s) for accounting purposes

Question 13

What is the historic cost convention?

Answer 13

Assets should be recorded at their original purchase cost

Question 14

What is the prudence convention?

Answer 14

It states that losses should be recorded as soon as they are foreseeable, while gains should only be recognized when realized

Question 15

What is the going concern convention?

Answer 15

It assumes a business will continue operating in the foreseeable future

Question 16

Why is money measurement important in accounting?

Answer 16

Only items measurable in monetary terms can be included in financial statements

Question 17

What is goodwill, and why is it difficult to measure?

Answer 17

It represents intangible business value (e.g., brand reputation) and is hard to quantify unless bought in a transaction

Question 18

What is depreciation?

Answer 18

The allocation of a non-current asset’s cost over its useful life

Question 19

What is impairment loss?

Answer 19

A reduction in an asset’s value due to a decline in its ability to generate benefits

Question 20

Why do companies use impairment tests?

Answer 20

To assess whether an asset’s carrying value exceeds its recoverable amount

Question 21

What insights does a statement of financial position provide?

Answer 21

It helps assess liquidity, solvency, and financial stability

Question 22

Why do banks look at a company’s statement of financial position before lending?

Answer 22

To evaluate whether the company has sufficient assets and financial strength to repay loans

Question 23

What happens if assets exceed liabilities in the statement of financial position?

Answer 23

The company has positive net equity, indicating financial stability

Question 24

What is the effect of revaluing a property on the statement of financial position?

Answer 24

It increases asset value and equity but does not impact cash flow

Question 25

How do businesses use financial statements for decision-making?

Answer 25

They analyze profitability, solvency, and asset management to plan future strategies

Question 26

What are claims in a financial statement?

Answer 26

Claims refer to the obligations of a business to provide cash or other benefits to outside parties

Question 27

What is a trade receivable?

Answer 27

It is an amount owed to a business by customers who have purchased goods or services on credit

Question 28

How does a trade payable differ from a trade receivable?

Answer 28

A trade payable is money the business owes to suppliers, while a trade receivable is money owed to the business

Question 29

What are final accounts?

Answer 29

The financial statements (income statement, statement of financial position, and statement of cash flows) that summarize a business’s performance

Question 30

What does equity represent in the statement of financial position?

Answer 30

It represents the owners' residual interest in the business after liabilities are deducted from assets

Question 31

What distinguishes a tangible asset from an intangible asset?

Answer 31

A tangible asset has a physical presence (e.g., machinery), while an intangible asset does not (e.g., patents)

Question 32

How are non-current assets different from current assets?

Answer 32

Non-current assets are held for long-term use, while current assets are expected to be used or converted into cash within a year

Question 33

What is fair value in accounting?

Answer 33

It is an asset’s estimated market value at a given time

Question 34

How does impairment loss affect financial statements?

Answer 34

It reduces the recorded value of an asset if its recoverable amount is lower than its carrying amount

Question 35

What is the difference between depreciation and amortization?

Answer 35

Depreciation applies to tangible assets, while amortization applies to intangible assets

Question 36

What is the written-down value of an asset?

Answer 36

It is the asset’s cost minus accumulated depreciation or impairment losses

Question 37

Why is LIFO not allowed under IFRS?

Answer 37

* It does not reflect actual physical inventory flow in most businesses * It also can lead to outdated inventory values on the balance sheet.