Week 2 - Statement of Financial Position

Question 1

How many main financial statements are there?

Answer 1

4

Question 2

What are the main financial statements?

Answer 2

1) Statement of financial position (balance sheet)
2) Income statement (profit and loss account)
3) Statement of cash flow
4) Statement of changes in equity

Question 3

What is the statement of financial position also known as?

Answer 3

Balance sheet

Question 4

What is the income statement also known as?

Answer 4

Profit and loss account

Question 5

Briefly state what the statement of financial position includes?

Answer 5

Accumulated wealth of business

Question 6

Briefly state what the income statement includes?

Answer 6

The amount of wealth generated

Question 7

Briefly state what the statement of cash flow includes?

Answer 7

The cash movements that took place

Question 8

Briefly state what the statement of changes in equity includes?

Answer 8

The changes in capital (assets)
Remember equity is the net money that is yours
(Equity = Assets - Liabilities)

Question 9

What is the basic accounting equation?

Answer 9

Assets = Liabilities + Equity

Question 10

Provide more detail about the statement of financial position?

Answer 10

• Statement lists the assets, liabilities and equity of an organisation as of the report date
• Provides snapshot of financial condition of business at a specific date

Question 11

What are assets?

Answer 11

• resources a business owns or controls
• they provide future services or benefits (e.g. rent, appreciating value etc)
• assets split into: cash, inventory, equipment, trade receivables etc

Question 12

What are liabilities?

Answer 12

• claims against assets (e.g. debts and obligation)
• claim made by creditors (party to whom money is owed e.g. banks etc)
• split into: trade payables, wages payable, salaries etc

Question 13

What is equity?

Answer 13

• the amount you own within the asset (residual equity)- amount which is yours- simply put it is the net-worth of a business or an individual’s net-worth (net assets as assets minus what you owe (liabilities))
• split into share capital and retained earnings etc

Question 14

What increases equity?

Answer 14

• Increase in share capital (increase in investments made by shareholders to purchase shares with the intention of earning a return)
• increase in revenues (business activities for the purpose of earning income) e.g. sales, rent, company fees, company services etc

Question 15

What decreases equity?

Answer 15

• increase in dividends paid to shareholders (distribution of cash or other assets to shareholders- proportion of profit paid to shareholders based on their share holding in the company)- remember profit must be made in order to pay dividends to shareholders- dividends reduce retained earnings and … reduce equity
• increase in expenses (cost of assets consumed or services used in the process of earning revenue) e.g. salaries, rent, utilities etc

Question 16

How do you calculate profit and how does it affect equity?

Answer 16

Revenue - Expenses = Profit for the Year
If profit for the year made then equity increases
If loss for the year made then equity decreases

Question 17

Describe the layout when recording transactions

Answer 17

1) Have Assets = Liabilities + Equity at the top
2) Then below it break down Assets into: Cash + Accounts Receivable + Supplies + Equipment (can break it down into more than this or less than this- varies on type of transactions)
3) Make all that equal to Accounts Payable (liability) and potentially wages payable etc (but again depends on transactions stated in the question)
4) Plus Share Capital + Retained Earnings (both equity)
5) Break Retained Earnings further into Revenue - Expense - Dividends
6) Then below begin to list transactions- remember each transaction will have 2 entries

Question 18

What are 3 key things to remember when recording transactions using the accounting equation?

Answer 18

1) Each transaction has dual effect on accounting equation- … a transaction will always have an effect on assets and always have an effect on either liabilities or equity- should either added to both sides or taken away from both sides- BUT NOTE that both effects can occur on the same side and if so one will be positive and the other negative
2) Dividends can only be paid if retained earnings are positive (I.e profit needs to be made in order
to pay shareholder dividends)
3) The 2 sides (either side of the equals sign) of the accounting equation must be equal … way to check your work- assets MUST be equal to liabilities + equity

Question 19

How many assumptions are made every time there is an event or transaction within the business?

Answer 19

2 assumptions are made

Question 20

What are the 2 assumptions that are made every time there is an event or transaction within the business?

Answer 20

1) Only transaction data which can be expressed in terms of money should be included in the accounting records
2) Activities of the entity (company/organisation) must be kept separate and distinct from activities of owner and all other entities (company/organisation)

Question 21

What is the connection between the accounting equation and double entry bookkeeping?

Answer 21

Double entry bookkeeping is based on the same idea as the accounting equation:
Each transaction has a dual effect on the accounting equation so that equality of the equation is preserved

Question 22

What is a good way to remember whether something will debit or credit the account?

Answer 22

Remember a table: first shows an increase and second shows a decrease

Assets- debit (increase in assets), credit (decrease in assets)
Expenses- debit (increase in expense), credit (decrease in expense)
Liability- credit (increase in liability), debit (decrease in liability)
Income- credit (increase income), debit (decrease in income)
Equity- credit (increase in equity), debit (decrease in equity)

Question 23

What does the statement of financial position consist of and what does it look like?

Answer 23

1) Asset subheading and then assets listed and totalled
2) Equity and liabilities subheading and these are added and totalled
3) Both totals should be the same if no errors made when recording the transactions