Week 2 Flashcards
What is the difference between cash and profits in a business?
Cash is money that a business has on hand, while profit is the money left over after expenses are deducted from revenue.
What is a trial balance?
The trial balance lists every account from the general ledger and their balances at a specific point in time.
What is the purpose of a trial balance?
It’s used to check the accuracy of the ledger by ensuring total debits equal total credits.
Can a trial balance provide a full view of a company’s financial position?
No, the trial balance doesn’t provide a full view of the company’s financial position—it’s just a preliminary step.
What is the first step in preparing financial statements from a trial balance?
Adjust the Trial Balance (if necessary).
What types of adjustments might need to be made to a trial balance?
Adjustments for accrued revenues, prepaid expenses, depreciation, etc.
What does the Income Statement show?
The business’s performance over a period, reflecting revenues and expenses to calculate net income (or loss).
How is net income calculated in the Income Statement?
Net Income is calculated by subtracting expenses from revenues.
What does the Balance Sheet represent?
The company’s financial position at a specific moment, outlining what the business owns (assets) and what it owes (liabilities), along with the owner’s equity.
What is the basic equation of the Balance Sheet?
Assets = Liabilities + Owner’s Equity.
What is the purpose of the Cash Flow Statement?
It shows how changes in the balance sheet and income statement affect cash in a given period.
What are the three categories of cash flows in the Cash Flow Statement?
Operating, investing, and financing activities.
What is revenue expenditure?
Costs incurred as part of day-to-day operations to maintain current activities, e.g., rent, salaries.
How is revenue expenditure shown in financial statements?
Shown as expenses on the statement of profit or loss.
What is capital expenditure?
Costs incurred to acquire or improve long-term assets, such as property, equipment, or machinery.
What is the significance of capital expenditure?
Considered an investment in the business’s future, providing economic benefit over several accounting periods.
List examples of capital expenditure.
- Purchasing machinery
- Vehicles
- Buildings
What type of costs does revenue expenditure include?
Short-term, recurring costs necessary for daily operations.
What is the impact of revenue expenditure on profit?
It directly impacts profit in the current period.
How does capital expenditure affect financial statements?
It affects the balance sheet and is gradually expensed through depreciation/amortization.
Mark-up definition
refers to the amount added to the cost price of a product or service to determine its selling price
Mark-up calculation
SellingPrice−CostPrice
Mark-up percentage calculation
(CostPrice / Markup) x 100
Accrual principle
Transactions are accounted for in the period they occur instead of when cash is received or payed
