Analysing Financial Statements

Question 1

What are the 3 core statements by international standards?

Answer 1

-Statement of financial position
-Statement of cash flows
-Income statement

Question 2

What are the 3 core statemetns by UK standards?

Answer 2

-Balance sheet
-Statement of cash flows
-Profit and loss statement

Question 3

What does the statement of cashflows show?

Answer 3

The inflows and outflows of cash to the business. It looks at what happens between the points in time that the statement of financial position shows.

Question 4

What does the income statement show?

Answer 4

The revenues and costs. It looks at what happens between the points in time that the statement of financial position shows.

Question 5

What does the statement of financial position show?

Answer 5

It looks at the assets and liabilities. It looks at the business at a point in time.

Question 6

What is the accounting equation?

Answer 6

Assets = Liability + Net Worth

Question 7

What is a current asset?

Answer 7

An asset held for sale or consumption during the businesses normal operating cycle, will be or is cash within a year, held principally for trading. For example, cash, stock, receivables.

Question 8

What is a non-current asset?

Answer 8

A non-current asset is one that does not meet the definition of current assets. For example, Equipment and Infrastructure.

Question 9

What is a current liability?

Answer 9

A liability that is expected to be settled within the businesses normal operating cycle (One year)/ Held principally for trading purposes, no right to defer settlement beyond a year after the statement of financial position date. For example, an overdraft, payables (International description), crawls.

Question 10

What is a non-current liability?

Answer 10

Creditors amounts falling due after more than one year. Does not meet the definition pf current liabilities e.g. Bank loans.

Question 11

For the statement of financial position there are 5 influences. What are these?

Answer 11

1 - Business entity convention - reflects the idea that for a typical company/partnership the organisation is separate to the directors
2 - Historic cost convention - proven information recorded from things already purchased and sold
3 - Prudence convention - Conservative approach to creating the accounts, not being aggressive with revenue projection etc.
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Question 11

For the statement of financial position there are 5 influences. What are these?

Answer 11

1 - Business entity convention - reflects the idea that for a typical company/partnership the organisation is separate to the directors
2 - Historic cost convention - proven information recorded from things already purchased and sold
3 - Prudence convention - Conservative approach to creating the accounts, not being aggressive with revenue projection etc.
4 - Going concern with convention - When accounts are produce and signed off by auditors, the assumption is the business is a going concern
5 - Dual aspect convention - recording things in two places, e.g., a bank statement of costs and the activity associated with it

Question 12

What are the uses of the statement of financial position?

Answer 12

-It shows how the business is financed and how funds are deployed
-Can provide a basis for assessing the value of the business
-Relationships between assets and claims can be assessed
-Performance can be better assessed