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Introduction To Accounting For Business > Week 2 - Reporting financial performance > Flashcards

Week 2 - Reporting financial performance Flashcards

1
Q

What does a statement of profit or loss / income statement (SPL) do?

A

Measures the financial performance of the business over period of time (revenues and expenses)

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2
Q

What are the three measures of profit in an SPL?

A
  • Gross profit
  • Operating profit
  • Net profit
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3
Q

Formula for Profit (or loss) for the period

A

Profit (or loss) = total revenue for the period - total expenses incurred in generating that revenue

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4
Q

What is the difference between cost of sales and operating costs?

A
  • Cost of sales are the costs that can be directly associated with the sale of a particular good
  • Operating costs are costs to the business that are not costs of sales, but still relate to the business operation
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5
Q

How does a statement of financial position and SPL link? (3)

A
  • If a firm was to make a profit or loss the accounts need to show that the owner’s wealth has increased/decreased to this
  • Equity section of a statement of financial position shows the ownership interest in a company
  • The net profit or loss is added to this section under retained earnings
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6
Q

Total equity equation

A

Total equity = share capital + retained earnings

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7
Q

Accounting equation

A

Assets = equity + sales revenue - expenses + liabilities

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8
Q

What is accrual accounting?

A

It occurs when the organisation records transactions that change a compnay’s financial statements in the period in which the transactions occur

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9
Q

How is net profit/profit for the period determined? (2)

A
  • Companies recognise revenues when they perform the services not when the cash is received
  • Recording expenses when they are incurred and not when paid
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10
Q

Characteristics of revenue (3)

A
  • Measure inflow of economic benefits arising from ordinary operations of the business
  • Result from business activities entered into for the purpose of earning income
  • Benefits will result in increase in assets or decrease in liabilities
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11
Q

Examples of revenue (4)

A
  • Sales
  • Fees for services
  • Interest received
  • Subscriptions
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12
Q

What is the prudence convention/concept? (2)

A
  • It focuses on being more conservative in the preparation of accounts
  • this may involve: understating profits/revenues/assets and overstating costs/liabilities
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13
Q

Impact of accounting issues (4)

A
  • Can lead to employees losing jobs
  • Massive losses in shareholder value
  • Losing of auditor accreditation
  • Pension holders could lose their pension funds
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14
Q

Revenue recognition principle

A

Revenue is recognised in the accounting period in which the performance obligation is satisfied

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15
Q

Revenue recognition criteria (3)

A
  • The amount of revenue must be able to be measured accurately reliably
  • It is probable that economic benefit will be received
  • Ownership and control of the items should pass to the buyer in the case of sale of goods
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16
Q

What are expenses? (3)

A
  • Is an outflow of economic benefits arising from the ordinary operations of the business
  • Loss of benefits will lead to decrease in assets or increase in liabilities
  • There are cash and non cash expenses
17
Q

Examples of expenses (9)

A
  • Cost of sales
  • Salaries expense
  • Rent
  • Heating & light
  • Insurance
  • Bad debts
  • Finance cost/interest
  • Depreciation
  • Printing & stationary
18
Q

General rule for expense recognition

A

All expenses of a particular accounting period must be matched with the relevant of that period irrespective of whether the expenses have been paid in cash

19
Q

What are inventories? (2)

A
  • Are assets held for sale in the normal course of business (I.e finished goods)
  • In the process of production for sale (I.e. work in progress), or in the form of materials to be consumed in production of goods for sale (I.e raw materials)
20
Q

What is cost of sales?

A

Includes the cost of inventory sold during the period

21
Q

What is the matching principle of depreciation?

A

Match the cost of using up of these assets to the revenues the business generates in each period

22
Q

What is depreciation?

A

Is a non cash expense which involves the spreading got the cost over the life of the asset

23
Q

Four factors that calculate depreciation charge for a period (4)

A
  • The cost (or fair value) of the asset
  • The useful life of the asset
  • Residual value (disposal value) - how much can we sell it for after its use?
  • Depreciation methods
24
Q

3 common depreciation methods

A
  • Straight-line
  • Reducing-balance
  • Units of production
25
Q

Features of straight-line depreciation (2)

A
  • Proprotion of the same amount of depreciation each year
  • Accumulated depreciation is the adding of the depreciation year by year
26
Q

Features of reducing balance depreciation (3)

A
  • Start on the carrying amount at the beginning of the year
  • Accumulated depreciating is also the adding of the appreciation year by year
  • Carrying amount at the end = carrying amount at the beginning - annual depreciation expense
27
Q

Annual depreciation equation

A

Units of production x depreciation cost per unit

28
Q

Carrying amount equation

A

Cost of asset - accumulated depreciation

29
Q

Impact of selling assets before the end of its useful life

A

This will have implications for income statement, statement of financial position and cash flow statement

30
Q

Formula for profit or loss on disposal

A

Sale price - carrying value

31
Q

Impact of the disposal of assets on financial statements (3)

A
  • Profit or loss will be reflected in the income statement and will either increase or decrease net profit
  • The carrying value of the asset will be removed from the SoFP
  • Cash received will be reflected in cash flow statement
32
Q

Impact of one of the receivables not paying (3)

A
  • Accounts have to be adjusted
  • Reduce receivables
  • Increase expenses - as we won’t receive value of the sale we have to take this hit to profits
33
Q

Ethical issues in accrual accounting (3)

A
  • Omittion of depreciation expense at the end of the year
  • Failing to record depreciation would overstate profit as calculated by mandated accrual principles and and disclose a more favourable picture of the businesses financial position actually existed
  • Some accounts are based on estimates, such as depreciation and revenue and these can be manipulated

Introduction To Accounting For Business (11 decks)

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