Week 6

Question 1

when are financial statements more useful to users

Answer 1

when the elements are classified into significant subgroups

Question 2

what do classifications in the statement of financial posistion help users determine

Answer 2

1: availability of assets to meet debts
2: claims of short and long term creditors on total assets

Question 3

how will an entity present assets and liabilities in the statement of financial posistion

Answer 3

in current and non current classifications

Question 4

what is a current asset

Answer 4

cash and other resources that are reasonably expected to be realised in cash or sold or consumed in the business within 1 year

Question 5

what are the 4 types of current asset

Answer 5

1: cash
2: short term investments
3: receivables
4: prepaid expenses

Question 6

how are current assets listed

Answer 6

in order of liquidity

Question 7

what are current financial assets

Answer 7

cash and accounts recievable are current financial assets

Question 8

how are current financial assets shown on the statement of financial posistion

Answer 8

as seperate line items

Question 9

what are non current assets

Answer 9

long term assets such as property and equipment and intangible assets like trademarks

Question 10

what are current liabilities

Answer 10

liabilities expected to be settled within the next 12 months

Question 11

what are examples of current liabilities

Answer 11

debts related to operating cycle like wages and short term debts like tax payable

Question 12

why do users of financial statements look closely at the relationship between assets and current liabilities

Answer 12

to evaluate liquidity (the ability to pay obligations due in 1 year) when short term liabilites exceed assets = trouble

Question 13

what is a non current liability

Answer 13

obligations expected to be paid after 1 year

Question 14

what are examples of non current liabilities

Answer 14

mortages payable

bonds payable

Question 15

how is owners equity listed in the statement of financial posistion

Answer 15

it varies with the form of business entity
sole trader one capital account
partnership capital account for each owner
company 3 accounts

Question 16

what are the 3 equity accounts for a company

Answer 16

1: share capital
2: reserves
3: retained earnings

Question 17

what is share capital

Answer 17

investments of assets into the company by shareholders

Question 18

what is reserves

Answer 18

increases in equity from sources other than contributed capital from owners and retained earnings

Question 19

what is retained earnings

Answer 19

income retained for use in the company

Question 20

why is the classified income statement called so

Answer 20

it shows the main steps in determining profit or loss

Question 21

what are the main steps in determining profit or loss

Answer 21

1: cost of sales subtracted from net sales to determine gross profit
2: other expenses are deducted from net sales to determine profit

Question 22

how is sales presented in the income statement

Answer 22

contra revenue account sales returns and allowances is deducted from sales to arrive at net sales

Question 23

how is gross profit presented in income statement

Answer 23

cost of sales deducted from sales revenue given either in number form or as a % (gross profit/net sales)

Question 24

is the % or number amount of gross profit more useful

Answer 24

the % amount because it tells how many cents of each sales dollar goes to the business

Question 25

what profit does gross profit measure

Answer 25

inventory profit

Question 26

how are other expenses subdivided

Answer 26

1: selling expenses
2: administrative expeneses
3: finance expenses

Question 27

what are selling expenses

Answer 27

expenses associated with making sales

Question 28

what are administrative expenses

Answer 28

expenses associated with general operation of business

Question 29

what are finance expenses

Answer 29

expenses associated with financing business operation and debt collecting

Question 30

what is the bottom line of an income statement

Answer 30

the profit or loss

Question 31

what is the statement of cash flows

Answer 31

the statement of cash flows summaries information about cash inflows and outflows

Question 32

is the statement of cash flows important

Answer 32

yes the ability of an entity to manage the flow of cash in and out of the business is critical for sucess

Question 33

how does the statement of cash flows classify cash reciepts and payments

Answer 33

3 categories

1: operating activites
2: investing activities
3: financing activites

Question 34

what are operating activites

Answer 34

cash flows relating to normal activities of entity like revenue and expenses
sales of goods (inflow)
paying suppliers (outflow)

Question 35

what are investing activites

Answer 35

cash flows relating to the acquistion and disposal of non current assets
selling property (inflow)
buying property (outflow)

Question 36

is the cash flow of investing of activites ususally positive or negative

Answer 36

usually negative for intention of growing business in future

Question 37

what are financing activities

Answer 37

cash flows associated with changes in non current liabliites and equity
issuing share (inflow)
dividends (outflow)

Question 38

what is the most important category

Answer 38

the category of operating activities because it is the best measure of being able to generate cash in future

Question 39

can a business be profitable and fail due to poor cash management

Answer 39

yes it can

Question 40

what do people look for when assesing statement of cash flows

Answer 40

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