Week 6 - Preparation of Financial Statements Flashcards
What is an Income Statement?
o Highlights how much profits/losses a business has made over a certain period
o A financial statement that reports a business’s financial performance over a specific accounting period.
What is the income statement equation?
o PROFIT/LOSS (NET INCOME) = REVENUES – EXPENSES
What is the income statement format
o Columns do not refer to debits and credits but instead are only present for looks
What is the formula for gross profit?
o SALES REVENUE – COST OF GOODS SOLD (COGS) = GROSS PROFIT
What is net income
o Net income is the calculation that reflects the profitability of a business after all expenses are; “matched” with revenue for the period.
What is the equation for net income/profit
o GROSS PROFIT – ALL EXPENSES = NET PROFIT
Explain the classification for an income statement expenses: Selling
o Selling Expenses: directly related to the sale of the good
Explain the classification for an income statement expenses: Admininstrative
o Administrative Expenses: business has to pay; but not directly related to the sale e.g office supplies
Explain the classification for an income statement expenses: Finance
Purely is going to relate to interest
What is a statement of fianncial position also known as
Balance sheet
What is a balance sheet?
o A balance sheet is a financial statement that summarises a business’s financial position at a specific point in time
o Provides a snapshot as to the company’s assets on balance day.
Explain current assets
o Resources the business expects to convert into cash, sell or use up within one year
o Future benefits of current assets provide the resources (usually cash) for the business to maintain operations
What are examples of current assets?
cash, inventory, accounts receivable
What are non-current assets
o Non- current assets are resources that the business expects will have a useful life greater than one year.
o They are sometimes referred to as fixed assets
o Are “depreciated” (converted to expenses) over their “useful life”
o Are listed at their book values
Is depreciation a current or non- current asset?
Non- current asset
What are examples of non-current assets?
o E.g van, shop fittings
What are current liabillities
hose liabilities that are due within the next twelve months
o Obligations or debts that are reasonably expected to be paid from existing current assets; or through the creation of other current liabilities.
What are examples of current liabilties
o E.g accounts payable, accrued expenses, PAYG, GST collected
What are non-current liabilites
o Obligations are expected to be paid after one year
What are examples of non-current liabilties
o E.g bank loan, mortgages payable
Explain a statement of cash flows
o Measures the flows of cash, has the ability to generate cash from operations and liquidity. Summarises information about cash inflows (receipts) and cash outflows (payments) for a specific period of time
Statement of Cash Flow Activities: Operating Actiivties
Cash flows from conducting the daily operations of the business, typically cash flows related to revenue and expenses and cash flows related to current assets and current liabilities.
Statement of Cash Flow Activities: Investing Actiivties
o Investing Activities: Cash flows from purchasing or selling revenue generating assets, typically cash flow related to non- current assets
Statement of Cash Flow Activities: Financing Activties
Cash flows related to raising or servicing sources of finance, typically cash flows related to non-current liabilities and cash flows related to owner’s equity
Statement of Changes in Equity
o Separate report that summarises the transactions that affected owner’s equity during the accounting period
What causes an increase in the changes in equity
o Increase: Capital contributions, net profit
What causes a decrease in the changes in equity
o Decrease: Withdrawls (drawings), net loss
