Week Two (Measuring and Reporting Financial Position)

Question 1

What is the nature and purpose of a financial position?

Answer 1

1. To present the financial position of a business at a particular point in time as a summary of information provided in the accounts
2. Listing of the balances of all the accounts
3. Assets of the business against the claims

Question 2

What are the four criteria for a business asset

Answer 2

1. Probable future economic benefit
2. Controlling right over the benefit
3. Benefit arises from past transaction
4. Measurement in monetary terms

After it is acquired, it will be accounted as an asset until it is depreciates, benefits realised.

Question 3

List examples of tangible assets

Answer 3

Physical items such as

1. Land
2. Plant
3. Equipment
4. Inventory

Question 4

List of examples of intangible assets

Answer 4

Rights with benefits such as

1. Copyright
2. Patent
3. Franchise
4. Goodwill

Question 5

What are the three criteria for a liability

Answer 5

1. Probable that an outflow of resources will occur
2. Capable of reliable measurement in monetary terms
3. Arising from a past transaction event

Question 6

List examples of a liability

Answer 6

1. Accounts payable
2. Staff entitlements
3. employee bonuses
4. Subscriptions received in advance

Question 7

Define ‘Owner’s Equity’

Answer 7

1. Claims of the owners against the business

2. Residual interest in the assets of the entity after deducting all of its liabilities

Question 8

What are examples of owner’s equity

Answer 8

1. Retained earnings
2. Share capital
3. Reserves

Question 9

What is the accounting equation?

Answer 9

Assets = Liabilities + Equity

Question 10

What are two important characteristics of the accounting equation?

Answer 10

1. The accounting equation is always in balance

2. Cost of assets always equals cost of funds raised to acquire assets (liabilities and equity)

Question 11

How does the accounting equation change to take into account the effect of trading operations?

Answer 11

Assets = Liabilities + Equity at the beginning of the period + Profit (- loss) +/- other changes in equity

Question 12

What is a current asset?

Answer 12

Current assets are held for a short term and include cash and other assets that are consumed or converted to cash within 12 months, or within the operating cycle

Question 13

What is a non-current asset?

Answer 13

Assets that are held for longer than 12 months for generating wealth

Question 14

List the criteria required to classify as asset as ‘Current’

Answer 14

1. they are held for sale or consumption during the businesses normal operating cycle
2. expected to be sold within the next year
3. help principally for trading purposes
4. cash, or near cash

All other assets are classified as non-current.

Question 15

Define the ‘Operating Cycle’

Answer 15

the time period from inventory purchase until the receipt of cash.

Question 16

Define the Cash Cycle

Answer 16

the time period from when cash is paid out to when cash is received

Question 17

Define ‘Current Liabilities’

Answer 17

Amounts due for repayment to outside parties within 12 months of the statement of financial position date, or within the operating cycle

Question 18

List examples ‘Current liabilities’

Answer 18

1. Accounts payable
2. Bank overdraft
3. Bank loan repayable within 12 months

Question 19

Define ‘non-current liabilities’

Answer 19

Amounts due to repayment after the 12 months of the statement of financial position.

Question 20

Examples of ‘non-current’ liabilities

Answer 20

1. Mortgage loan

2. long-term loan

Question 21

List the four criteria to classify a liability as current

Answer 21

1. expected to be settled within the businesses operating cycle
2. help principally for trading purposes
3. due to be settled within a year after the date of the relevant statement of financial position
4. no right to defer settlement beyond a year after the date of the relevant statement of financial position

Question 22

How do you categorise owner’s equity

Answer 22

Contributed - initial funds and any increases

Question 23

How do you categorize retained profit

Answer 23

Retained earnings - profits made less any amounts withdrawn by the owners of the business

Question 24

How do you categorise other reserves

Answer 24

Profits that result from other events - e.g., an asset value revaluation

Question 25

What are the two most significant factors influencing the form and content of the financial reports?

Answer 25

1. Traditional accounting conventions and doctrines

2. Continued development of professional and statutory accounting standards

Question 26

In conventional accounting, how is business entity treated?

Answer 26

The business and its owner(s) are treated as separate and distinct

Question 27

In conventional accounting, how are ‘historic cost’ convention treated?

Answer 27

Assets should be recorded at their historic (acquisition) cost or its equivalent

Question 28

In conventional accounting, what is prudence convention?

Answer 28

Caution is to be exercised when making accounting judgements. Losses recorded at once in full (applicable to both actual and expected losses), profits recognised only when they actually arise.

Question 29

In conventional accounting, what is continuity convention?

Answer 29

Assumption that the business will continue operations for the foreseeable future

Question 30

In conventional accounting, what is dual aspect convention?

Answer 30

Each transaction has two aspects and each aspect must be recorded in the financial statements, double-entry book-keeping

Question 31

In conventional accounting, what is money measurement convention?

Answer 31

accounting should only deal with those items which are capable of being expressed in monetary terms

Question 32

In conventional accounting, what is stable monetary unit convention?

Answer 32

Money, which is the unit of measurement accounting, will not change in value of time.

Question 33

Recall the two ways in which current values (of assets) might be defined

Answer 33

Current replacement cost - an amount to be paid to buy an asset of a similar type and condition

Current realisable value - an amount obtainable on the market where the business would sell as an asset

Question 34

How are non-current assets valued?

Answer 34

They are initially recorded with the historical cost by the historic cost convention

Question 35

What are non-current assets with finite lives?

Answer 35

Assets that will be used over time as a result of market change, wear and tear. Their cost is recognised as an expense in each period with depreciation/amortisation.

Question 36

How do you calculate non-current assets with finite lives?

Answer 36

Cost of asset - total depreciation = net book value/carrying amount

Question 37

What are non-current assets with indefinite lives?

Answer 37

Assets that are not used over time, and are not subject to routine annual depreciation over time.

Question 38

What is fair value?

Answer 38

An alternative method for recording non-current assets, provided fair value can be measured reliably. It refers to the current market value. Revaluations can be used only where there is an active market, thereby permitting fair values to be properly determined.

Question 39

What is an impairment of assets?

Answer 39

The amount of loss that must be written off for an asset in the situation where the carrying amount of the asset exceeds its recoverable amount. Can also apply to current assets such as inventories.

Question 40

List the reasons why a Statement of Financial Position is useful?

Answer 40

1. Informs how the business is financed
2. Indication of liquidity of business
3. Provides a basis for assessing the value of the business
4. Provides an overview of the structure of assets held by the business
5. Performance can be assessed against the amount of investment