Week 3

Question 1

Explain the financial implications of the following terms and how they affect balance sheets.

• Revenues
• Purchases
• Expenses

Answer 1

Revenues:

• Sales made on credit = ‘debtors/receivables’
• Cash sales + credit sales = ‘Revenue’

Purchases:

• Purchases we make on credit = creditors/payables
• Cash purchases + purchases on credit = ‘Purchases’

Expenses:

• Expenses paid in advance give rise to ‘pre-payments’
• Expenses owing give rise to ‘accruals’
• Depreciation charges

Question 2

What are Accrues Expenses

Answer 2

This is an expense that is ‘incurred’ but not paid for until sometime later
‘Incurred’ means the entity has had the benefit of the goods or service

Question 3

What are Prepayments

Answer 3

This occurs where an entity has paid for goods or services but not yet received all the economic benefits
They are the opposite to Accruals

Question 4

Explain how Accruals are calculated within the balance sheet.

Answer 4

The accrual will be included in the amount charged to the income statement/statement of comprehensive income as part of the cost of the service provided
The formula is:
[Amounts paid during year + closing accruals] – opening accruals
Note also that the closing accrual will be shown on the balance sheet/statement of financial position as part of current liabilities

Question 5

Explain how Prepayments are calculated within the balance sheet.

Answer 5

Prepayments made during the year will be deducted from the amount charged to the income statement/statement of comprehensive income
The formula is:
[amount paid during the year + opening prepayments] – closing prepayments
Note also that closing prepayments will be shown in the balance sheet/statement of financial position as part of current assets

Question 6

What factors have to be considered when calculating depreciation.

Answer 6

Factors to be considered:
- Cost
- Useful life
- Residual value
- Depreciation method:
       Straight line method
       Reducing balance method

Question 7

What is the Cost of Sales calculation

Answer 7

Opening Inventory
\+ Purchases
- Purchases Returns
- Closing inventory
= Cost of Sales

Question 8

What is Gross Profit and how is to calculated for Balance sheets.

Answer 8

Revenue – Cost of Sales = Gross Profit

The profit made on trading before trading expenses have been deducted

Question 9

How is Net Profit calculated for balance sheets.

Answer 9

Gross Profit + Other Income – Expenses = Net Profit/Loss

Represents profit achieved for the year made from main activities of the entity.

Question 10

What are the three main ways in which an entity may grow?

Answer 10

• Raise more capital
• Borrow more
• Make and retain its profits