Week 6 Flashcards
when are financial statements more useful to users
when the elements are classified into significant subgroups
what do classifications in the statement of financial posistion help users determine
1: availability of assets to meet debts
2: claims of short and long term creditors on total assets
how will an entity present assets and liabilities in the statement of financial posistion
in current and non current classifications
what is a current asset
cash and other resources that are reasonably expected to be realised in cash or sold or consumed in the business within 1 year
what are the 4 types of current asset
1: cash
2: short term investments
3: receivables
4: prepaid expenses
how are current assets listed
in order of liquidity
what are current financial assets
cash and accounts recievable are current financial assets
how are current financial assets shown on the statement of financial posistion
as seperate line items
what are non current assets
long term assets such as property and equipment and intangible assets like trademarks
what are current liabilities
liabilities expected to be settled within the next 12 months
what are examples of current liabilities
debts related to operating cycle like wages and short term debts like tax payable
why do users of financial statements look closely at the relationship between assets and current liabilities
to evaluate liquidity (the ability to pay obligations due in 1 year) when short term liabilites exceed assets = trouble
what is a non current liability
obligations expected to be paid after 1 year
what are examples of non current liabilities
mortages payable
bonds payable
how is owners equity listed in the statement of financial posistion
it varies with the form of business entity
sole trader one capital account
partnership capital account for each owner
company 3 accounts
what are the 3 equity accounts for a company
1: share capital
2: reserves
3: retained earnings
what is share capital
investments of assets into the company by shareholders
what is reserves
increases in equity from sources other than contributed capital from owners and retained earnings
what is retained earnings
income retained for use in the company
why is the classified income statement called so
it shows the main steps in determining profit or loss
what are the main steps in determining profit or loss
1: cost of sales subtracted from net sales to determine gross profit
2: other expenses are deducted from net sales to determine profit
how is sales presented in the income statement
contra revenue account sales returns and allowances is deducted from sales to arrive at net sales
how is gross profit presented in income statement
cost of sales deducted from sales revenue given either in number form or as a % (gross profit/net sales)
is the % or number amount of gross profit more useful
the % amount because it tells how many cents of each sales dollar goes to the business
what profit does gross profit measure
inventory profit
how are other expenses subdivided
1: selling expenses
2: administrative expeneses
3: finance expenses
what are selling expenses
expenses associated with making sales
what are administrative expenses
expenses associated with general operation of business
what are finance expenses
expenses associated with financing business operation and debt collecting
what is the bottom line of an income statement
the profit or loss
what is the statement of cash flows
the statement of cash flows summaries information about cash inflows and outflows
is the statement of cash flows important
yes the ability of an entity to manage the flow of cash in and out of the business is critical for sucess
how does the statement of cash flows classify cash reciepts and payments
3 categories
1: operating activites
2: investing activities
3: financing activites
what are operating activites
cash flows relating to normal activities of entity like revenue and expenses
sales of goods (inflow)
paying suppliers (outflow)
what are investing activites
cash flows relating to the acquistion and disposal of non current assets selling property (inflow) buying property (outflow)
is the cash flow of investing of activites ususally positive or negative
usually negative for intention of growing business in future
what are financing activities
cash flows associated with changes in non current liabliites and equity issuing share (inflow) dividends (outflow)
what is the most important category
the category of operating activities because it is the best measure of being able to generate cash in future
can a business be profitable and fail due to poor cash management
yes it can
what do people look for when assesing statement of cash flows
1: ability to generate future cash flows
2: ability to pay dividends and meet future obligations
3: reasons for difference between profit and net cash used by operating activities
4: cash used in investing and financing transactions during period
