Week 2 - The financial statements

Question 1

What are the five types of accounts?

Explain them briefly

Answer 1

1. Assets: things the business owns.
2. Liabilities: debts the business owes.
3. Income: the revenue generated from the sale of goods or services.
4. Expenses: the costs incurred in producing the goods and services
5. Equity (or capital): the investment made by shareholders into the business.

Profit = income – expenses

Equity = assets - liabilities

Question 2

What are the steps in the transaction recording process?

Additionally, what is important to remember about the transactions? And what is the term for that?

Answer 2

Steps:

1. Identify what type of account is affected (assets, liability, income, expense or equity); and
2. Determine whether the transaction increases or decreases that account.

Remember:

• Every transaction affects at least two accounts: **double entry bookkeeping **

Question 3

When goods are bought, they become an asset (inventory/stock). When the same goods are sold, there are two transactions.. Which?

Answer 3

1. The sale, either by cash (asset) or credit (liability); and
2. The transfer of the cost of those goods, now sold, from inventory to an expense, called cost of sales, or cost of goods sold.

Question 4

Fill in the last two columns

Answer 4

Question 5

What are the three types of financial statements?

Answer 5

Statement of Comprehensive Income

Statement of Financial Position

Statement of Cash Flows

Question 6

What is the Statement of Comprehensive Income?

Answer 6

the profit (or loss) of a business for a financial year, using the accruals method

Question 7

What is the Statement of the Financial Position?

Answer 7

the assets, liabilities and equity on the last day of the financial year

Question 8

What is the Statement of Cash Flows?

Answer 8

the movements in and out of the company’s bank account (or cash equivalents) during a financial year.

Question 9

What statement is this?

Answer 9

Statement of Comprehensive Income

Question 10

What statement is this (simple version)?

Answer 10

Statement of Financial Position (simple version)

Question 11

What statement is this?

Answer 11

Statement of Financial Position

Question 12

What statement is this?

Answer 12

Statement of Comprehensive Income

Question 13

What statement is this?

Answer 13

Statement of Changes in Equity

Question 14

What statement is this?

Answer 14

Statement of Financial Position -

Question 15

What statement is this?

Answer 15

Statement of Cash Flows (Indirect method)

Question 16

What is the accruals (mathching) method?

Answer 16

Everything that happens one year need to be accounted for in same year. E.g.: Schoolexpenses need to be accounted for in that schoolyear

Question 17

What is another term for total assets?

Answer 17

Capital employed

Question 18

What is the Fundamental Accounting Equation?

Answer 18

• Net Assets = Total assets – Total Liabilities = Equity
• Total Assets (or capital employed) = Total Liabilities + Equity

Question 19

Explain prepayments and accruals

Answer 19

Question 20

What is Provisions?

Answer 20

• Estimates of possible liabilities that may arise, but where there is uncertainty as to timing or the amount of money.
• Some are shown as liabilities (e.g. warranty claims), others are shown as deductions from assets:
• Doubtful debts • Inventory
• Depreciation

Question 21

What information is needed to calculate the depreciation of an asset?

Answer 21

Asset cost

Periods (life)

Resale value

Question 22

Regarding depreciation,

• What is the Accounting of Transaction?
• What happens to the statement of comprehensive income
• What happens to the statement of financial position?

Answer 22

Question 23

When is “Goodwill” relevant?

And what is it?

What type of account?

Answer 23

1) Only at the time of aqutition
2) Means product is worth more. It is the difference between price of company and assets, when company bought. You need to make a test of impairment every year
3) Intangible Assets

Question 24

When accounting for Goodwill, what happens to the statement of comprehensive income and statement of financial position in this example:

Answer 24

Question 25

What are the three elements of cash flows? (meaning, where do cash flows come from)

Answer 25

1. Cash flows from operations (profit adjusted by non-cash expenses and movements in working capital);
2. Cash flows from investing (purchase and sale of non-current assets);
3. Cash flows from financing (borrowings and repayment of debt; new share issues and purchase of a company’s own shares);

Question 26

Do cash flow from operations differ from the operating profit?

Why/why not?

Answer 26

Yes

• depreciation, which as a non-cash expense is added back to profit (since operating profit is the result after depreciation is deducted);
• increases (or decreases) in working capital (e.g. changes in Receivables, Inventory, Prepayments, Payables and Accruals), which reduce (or increase) available cash.