Week Two (Measuring and Reporting Financial Position) Flashcards
What is the nature and purpose of a financial position?
- To present the financial position of a business at a particular point in time as a summary of information provided in the accounts
- Listing of the balances of all the accounts
- Assets of the business against the claims
What are the four criteria for a business asset
- Probable future economic benefit
- Controlling right over the benefit
- Benefit arises from past transaction
- Measurement in monetary terms
After it is acquired, it will be accounted as an asset until it is depreciates, benefits realised.
List examples of tangible assets
Physical items such as
- Land
- Plant
- Equipment
- Inventory
List of examples of intangible assets
Rights with benefits such as
- Copyright
- Patent
- Franchise
- Goodwill
What are the three criteria for a liability
- Probable that an outflow of resources will occur
- Capable of reliable measurement in monetary terms
- Arising from a past transaction event
List examples of a liability
- Accounts payable
- Staff entitlements
- employee bonuses
- Subscriptions received in advance
Define ‘Owner’s Equity’
- Claims of the owners against the business
2. Residual interest in the assets of the entity after deducting all of its liabilities
What are examples of owner’s equity
- Retained earnings
- Share capital
- Reserves
What is the accounting equation?
Assets = Liabilities + Equity
What are two important characteristics of the accounting equation?
- The accounting equation is always in balance
2. Cost of assets always equals cost of funds raised to acquire assets (liabilities and equity)
How does the accounting equation change to take into account the effect of trading operations?
Assets = Liabilities + Equity at the beginning of the period + Profit (- loss) +/- other changes in equity
What is a current asset?
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
What is a non-current asset?
Assets that are held for longer than 12 months for generating wealth
List the criteria required to classify as asset as ‘Current’
- they are held for sale or consumption during the businesses normal operating cycle
- expected to be sold within the next year
- help principally for trading purposes
- cash, or near cash
All other assets are classified as non-current.
Define the ‘Operating Cycle’
the time period from inventory purchase until the receipt of cash.
Define the Cash Cycle
the time period from when cash is paid out to when cash is received
Define ‘Current Liabilities’
Amounts due for repayment to outside parties within 12 months of the statement of financial position date, or within the operating cycle
List examples ‘Current liabilities’
- Accounts payable
- Bank overdraft
- Bank loan repayable within 12 months
Define ‘non-current liabilities’
Amounts due to repayment after the 12 months of the statement of financial position.
Examples of ‘non-current’ liabilities
- Mortgage loan
2. long-term loan
List the four criteria to classify a liability as current
- expected to be settled within the businesses operating cycle
- help principally for trading purposes
- due to be settled within a year after the date of the relevant statement of financial position
- no right to defer settlement beyond a year after the date of the relevant statement of financial position
How do you categorise owner’s equity
Contributed - initial funds and any increases
How do you categorize retained profit
Retained earnings - profits made less any amounts withdrawn by the owners of the business
How do you categorise other reserves
Profits that result from other events - e.g., an asset value revaluation
What are the two most significant factors influencing the form and content of the financial reports?
- Traditional accounting conventions and doctrines
2. Continued development of professional and statutory accounting standards
In conventional accounting, how is business entity treated?
The business and its owner(s) are treated as separate and distinct
In conventional accounting, how are ‘historic cost’ convention treated?
Assets should be recorded at their historic (acquisition) cost or its equivalent
In conventional accounting, what is prudence convention?
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.
In conventional accounting, what is continuity convention?
Assumption that the business will continue operations for the foreseeable future
In conventional accounting, what is dual aspect convention?
Each transaction has two aspects and each aspect must be recorded in the financial statements, double-entry book-keeping
In conventional accounting, what is money measurement convention?
accounting should only deal with those items which are capable of being expressed in monetary terms
In conventional accounting, what is stable monetary unit convention?
Money, which is the unit of measurement accounting, will not change in value of time.
Recall the two ways in which current values (of assets) might be defined
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
How are non-current assets valued?
They are initially recorded with the historical cost by the historic cost convention
What are non-current assets with finite lives?
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.
How do you calculate non-current assets with finite lives?
Cost of asset - total depreciation = net book value/carrying amount
What are non-current assets with indefinite lives?
Assets that are not used over time, and are not subject to routine annual depreciation over time.
What is fair value?
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.
What is an impairment of assets?
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.
List the reasons why a Statement of Financial Position is useful?
- Informs how the business is financed
- Indication of liquidity of business
- Provides a basis for assessing the value of the business
- Provides an overview of the structure of assets held by the business
- Performance can be assessed against the amount of investment
