2- Statement of Financial Position

Question 1

Accounting equation

Answer 1

Assets= liabilities + equity

Question 2

Statement of financial position summary

Answer 2

• Details a company’s assets, liabilities and equity
• A statement of an entity’s financial condition at a moment in time.
• Usually published at the end of a company’s financial year.

Question 3

Assets definition

Answer 3

An asset is a present economic resource controlled by the entity as a result of past events.

Question 4

Asset recognition requirement

Answer 4

• Controlled by a firm
• Measurable- must have a value or cost

Question 5

Examples of assets

Answer 5

• Items owned by a company- cash, inventory, property, land and equipment, intangible assets, financial investments
• Amounts owed to the company- from the sale of goods on credit to customers, from loans made
• Goods owed to the company- from goods that the firm has paid for in advance.

Question 6

Current assets

Answer 6

Current assets (CAs) are assets that the company expects to sell or use up in the next 12 months.

Question 7

Examples of current assets

Answer 7

• Cash
• Inventory
• Trade receivables
• Prepaid expenses and prepayments

Question 8

Non-current assets

Answer 8

Non-current assets (NCAs) are assets which the firm does not expect to sell, use up or dispose of in the next 12 months.

Question 9

Examples of non-current assets

Answer 9

• Property, plant and equipment (PP+E)
• Intangible assets
• Net pension assets
• Associates, joint ventures and other long-term financial assets.
• Goodwill

Question 10

Assets excluded from SoFP

Answer 10

• Human resources- companies don’t own people
• Lots of intangible assets- most can only be recognised if purchased.

Question 11

Inventory

Answer 11

Comprises raw materials, work-in-progress, and finished goods.

Question 12

Intangible assets

Answer 12

Intellectual property rights, patents, royalties, and licencies, software.

Question 13

Trade receivables

Answer 13

Amounts owed to the firms by its customers

Question 14

Prepaid expenses and prepayments

Answer 14

Assets created when a firm pays for goods or services in advance.

Question 15

Net pension assets

Answer 15

Any surplus between the value of a company’s defined benefit pension obligations and that of the plan’s assets.

Question 16

Goodwill

Answer 16

An accounting artefact that arises from the accounting treatment of a firm’s past acquisitions of other companies.

Question 17

Liabilities definition- IFRS

Answer 17

A present obligation of the entity to transfer an economic resource as a result of past events.

Question 18

Examples of liabilities

Answer 18

• Amounts owed to trade creditors from the purchase of goods on credit
• Taxes owed on firm’s profit
• Amounts owed to employees for services to firm
• Loans
• Bonds issued by the firms
• Goods and services owed that customers have paid for in advance.

Question 19

Current Liabilities

Answer 19

Current liabilities are short-term in nature, obligations that are due to be paid within the next 12 months.

Question 20

Examples of current liabilities

Answer 20

• Trade payables and accrued expenses
• Unearned income
• Short term borrowings
• Tax payable

Question 21

Non-current liabilities

Answer 21

Firm’s long-term obligations: amounts that are not due to be paid for more than 12 months after the date of record of the statement of financial position.

Question 22

Examples of non-current liabilities

Answer 22

• Loans- medium terms from banks
• Bonds- issued to financial institutions
• Net pension liabilities
• Deferred tax liabilities not due for payment in next 12 months.

Question 23

Equity IFRS definition

Answer 23

Equity is the residual interest in the assets of the entity after deducting all its liabilities.

Question 24

What is equity?

Answer 24

• Equity represents the value of the owners’ interests
• Investments made by owners (share capital) into the firm plus retained earnings
• Shows how much the value of the owners’ interests are “worth” in accounting terms - sometimes referred to as “book value” of firm

Question 25

Things equity has no direct relationship with

Answer 25

• The market value of the firm if listed
• The amount that would be left over if the firm was liquidated, all the assets were sold off and all creditors were paid off.

Question 26

The Entity concept

Answer 26

• A business is a separate legal person from its owners and they are treated as two separate parties.
• Business transactions for the firm, its assets and its liabilities are separate from those of its owners.
• The financial statements represent the affairs of the firm and not of its owners.

Question 27

Examples of owners’ equity

Answer 27

• Share capital and premium
• Retained earnings
• Other comprehensive income

Question 28

Net pension liabilities

Answer 28

Any shortfall between the value of the company’s defined benefit pension obligations and that of the plan’s assets.

Question 29

Trade payables and accrued expenses

Answer 29

Amounts that a firm owes to its suppliers and service providers for goods it has purchased and services it has used paid in arrears.

Question 30

Unearned income

Answer 30

Liability created when a supplier accepts payment in advance from customers for goods and services the supplier has committed to deliver at a future time

Question 31

Deferred tax liability

Answer 31

Taxes that the firm owes but are not due for payment in the next 12 months.

Question 32

Historic cost of an asset IFRS definition

Answer 32

The value of the costs incurred in acquiring or creating the asset, comprising the consideration paid to acquire or create the asset plus transaction costs.

Question 33

What the rearranging of the accounting equation means for equity?

Answer 33

• Assets – Liabilities = Equity
• It is also the residual claims of the owners after all the creditors’ claims have been met.

Question 34

Rule for double entry book-keeping

Answer 34

• Balance sheet is double-sided.
• Every transaction recorded in the accounts affects two sections of the balance sheet.
• Every transaction affects at least two accounts, so the same amount must be recorded at least twice

Question 35

Notes to the Accounts

Answer 35

• Accounting policies, standards and estimates
• Qualitative disclosures
• Greater granularity breakdown of line items.

Question 36

Notes to the accounts- Accounting policies, standards and estimates?

Answer 36

Used to explain what accounting policies the firm has applied in drawing up the financial statements. May also disclose values for any accounting estimates that it has made.

Question 37

Notes to the accounts- Qualitative disclosures

Answer 37

May include some explanation for what an item comprises, for example the types of properties held or the major sources of ‘other income’. They may also explain some of the reasons behind changes from one year to the next.