2. Financial statements

Question 1

sole proprietorship

(also known as…)

Answer 1

sole trader

A business owned by one person.

Question 2

partnership

Answer 2

A business that is formed when two or more proprietors join together to own a business.

Question 3

company

(also known as…)

Answer 3

corporation

A separate legal entity that is established by registering with ASIC.

Question 4

ASIC

Answer 4

Australian Securities and Investments Commission

The agency charged with protecting investors and maintaining the integrity of securities markets.

Question 5

proprietary company

Answer 5

A private company often indicated by the ‘Pty’ at the end of the company name.

Question 6

public company

Answer 6

A separate legal entity in which ownership is available to the general public.

Question 7

GAAP

Answer 7

Generally Accepted Accounting Principles

The accounting:

• standards
• rules
• principles
• procedures

that make up authoritative practice for financial accounting.

Question 8

AASB

Answer 8

Australian Accounting Standards Board

The standard-setting body whose mission is to:

• – develop* and
• – maintain*

high-quality financial reporting standards.

Question 9

IFRS

Answer 9

International Financial Reporting Standards

Standards issued by the
International Accounting Standards Board.

Question 10

IASB

Answer 10

International Accounting Standards Board

A board, similar to the AASB, whose mission is

to develop a single set of high-quality standards requiring:

• transparent and
• comparable

information.

Question 11

consolidated balance sheet

Answer 11

A type of balance sheet that groups together the parent company and its subsidiaries as one reporting entity.

Question 12

current asset

Answer 12

Any asset that is reasonably expected to be converted to cash or consumed within one year of the balance sheet date.

Question 13

non-current asset

Answer 13

A resource that is used in a company’s operations for more than one year and is not intended for resale.

Question 14

Key Formula

assets

Answer 14

Current Assets

+ Non-current Assets

= Total Assets

Question 15

intangible asset

Answer 15

A resource that is used in operation for more than one year, is not intended for resale and has no physical substance.

Question 16

current liability

Answer 16

An obligation that is reasonably expected to be satisfied within one year.

Question 17

non-current liability

Answer 17

An obligation that is not expected to be satisfied within one year.

Question 18

contributed equity

(of a company)

Answer 18

The amount of equity a company generates through the sale of shares to investors (shareholders).

Question 19

multi-step income statement

Answer 19

Calculates income by grouping certain revenues and expenses together and calculating several subtotals of income.

Question 20

other comprehensive income

Answer 20

Includes gains and losses not included in traditional revenue and expense items.

Question 21

sales revenue

Answer 21

The resources that a company generates during a period from selling its inventory.

Question 22

cost of sales

Answer 22

The cost of the inventory sold during a period.

Question 23

gross profit

(also known as…)

Answer 23

gross margin

The profit that a company generates when considering only the sale price and the cost of the product sold, its ‘mark-up’.

Question 24

operating expenses

Answer 24

Recurring expenses that a company incurs during normal operations.

Question 25

**operating profits** =

Answer 25

Gross profit – Operating expenses

Question 26

**net finance costs** =

Answer 26

finance **costs** – finance **income**

Question 27

**profits before income tax expense** | (also known as...)

Answer 27

'**earnings before income taxes**' The **profit** that a company generates when considering *both* the: – **cost** of the **inventory** and – the **normal expenses** incurred to *operate* the business.

Question 28

**income tax expense**

Answer 28

The amount of income tax expense for a *given* **period**.

Question 29

**horizontal analysis**

Answer 29

A method of analysing a company’s account balances **over time** by calculating **absolute** and **percentage** *changes* in each account.

Question 30

*Key Formula* **horizontal analysis**

Answer 30

**Dollar** *Change* in Account Balance = Current Year Balance – Prior Year Balance ––––––––––––––––––––––––––––––––– **Percentage** *Change* in Account Balance = Dollar Change / Prior Year Balance

Question 31

**vertical analysis**

Answer 31

A method of *comparing* a company’s account balances within **one** year by *dividing* each account balance by a **base amount** to yield a percentage.

Question 32

*Key Formula* **vertical analysis**

Answer 32

**For the balance sheet** % Account Balance / Total Assets **For the income statement** % Account Balance / Net Sales or Revenue

Question 33

**common-size financial statement**

Answer 33

The product of a **vertical analysis**; A statement in which all accounts have been **standardised** by the *overall* **size** of the company.

Question 34

**notes to the financial statements**

Answer 34

The *additional* **textual** and **numerical** information immediately following the financial statements.

Question 35

**independent auditor’s report**

Answer 35

A report, prepared by a *registered* company auditor for the **shareholders**, stating an **opinion** on whether the financial statements present *fairly*, in *conformity* with Australian Accounting Standards, the company’s financial condition and results of operations and cash flows.

Question 36

**directors’ report**

Answer 36

Forms *part of* the **financial report** and covers matters which are the **Board of Directors’** responsibility.