3.4: Statement of financial position (final accounts)

Question 1

What is a balance sheet?

Answer 1

Records a business finance position/financial status at a given moment in time
- e.g. as of today, as of next month
-“haha this month you good”

Question 2

Differentiate balance sheets and income statements

Answer 2

Income statements (DB)
- overall, longer period of time
-“moving”

Balance sheets
- at a particular point in time

Question 3

What are the papers you need to record the finance of business

Answer 3

2 balance sheets (old vs new) and an income statement

Question 4

Outline the accounting period framework

Answer 4

Balance sheet of year 1 -> income statement of year 2 -> balance sheet of year 2

Question 5

What are the basic elements of a balance sheet?

Answer 5

• Assets
• Liabilities
• Equity

Question 6

Define liabilities

Answer 6

money or amounts borrowed from other people

Question 7

Define owner’s equity

Answer 7

Money from owner’s pocket, stocks, etc.

Question 8

Define assets simply

Answer 8

things that one owns

Question 9

What happens if there’s an imbalance between assets and equity

Answer 9

the audit starts again

Question 10

What happens if assets and equity is unequal

Answer 10

The audit begins again

Question 11

Why are balance sheets important?

Answer 11

To determine where their assets come from
- for banks, they prefer to give loans to someone who has, e.g. 70% equity to 30% liability

Question 12

Define current assets

Answer 12

resources that can be converted to cash within one year/1 fiscal cycle

Question 13

Define liquidity

Answer 13

If you have a lot of cash/items that can be used as cash (cash equivalents)
- e.g. bonds, stocks

Question 14

Define marketable securities

Answer 14

• can be used to pay for credit — no need to convert to cash;
• liquid investments such as stocks or bonds;

Question 15

Describe accounts receivables [3]

Answer 15

credit sales/debts that have not yet been collected;
- fast turnover period = better;
- longer debts remained unpaid = the less chance to be repaid;

Question 16

Define inventory (stocks)

Answer 16

represents items that have been purchased or manufactured for resale to customers

Question 17

Define prepaid expenses

Answer 17

payments made by company for goods and services to be received in the future
- e.g. the ordering of a factory, ordering a book from shopee, advance salaries

Question 18

Define investments

Answer 18

assets acquired with the goal of generating income

Question 19

What to do to calculate the future value of money / too much money (?)

Answer 19

Convert to securities/convert into investment to get money

Question 20

If you have surplus money, what should you do?

Answer 20

Put it into a short term investment with interest to generate money to fight the loss in value

Question 21

Describe non-current assets

Answer 21

• low liquidity — can’t sell easily;
• usually capital (+ land);
• land never depreciates;

Question 22

Why is it better to invest in land rather than condos?

Answer 22

Condos only have a certain number years of ownership — for land, that’s yours

Question 23

Why does land not depreciate?

Answer 23

No obsolescence in land — land is permanent.still there — value of land goes ip
- can only depreciate if it e.g. goes to the sea

Question 24

Differentiate assessed value vs actual value

Answer 24

Actual value
- price at acquisition

Assessed value
- price estimated to be at a time not at acquisition

Question 25

Define depreciation

Answer 25

reduction of the reported value during a period

Question 26

Define book value

Answer 26

Value recorded (in the books)

Question 27

Outline the parts in the assets section of the balance sheet

Answer 27

*DEBTORS = ACCOUNTS RECEIVABLE *STOCKS = INVENTORY

Question 28

Define intangible assets

Answer 28

Assets not physically perceivable -e.g.: patent, copyrights and goodwill

Question 29

Define goodwill

Answer 29

denotes the economic value of an acquired firm in excess of the value of its identifiable net assets

Question 30

Outline the different parts of the income statement (describe also)

Answer 30

Trading account, profit and loss account and the appropriation account

Question 31

[INCOME STATEMENT] describe the section “trading account”

Answer 31

- **First part** - shows **gross profit** -> gross profit = sales rev - *cost of sales* -> cost of sales = opening stock + purchases - closing stock -

Question 32

Describe opening stock

Answer 32

- cost of stock aka raw materials + goods; - start of the trading period

Question 33

Define closing stock

Answer 33

- cost of stock at the end of trading period;

Question 34

define purchases

Answer 34

- cost of supply/delivery of goods;

Question 35

define “stocks”

Answer 35

- things to sell to customers;

Question 36

[INCOME STATEMENT] Describe profit statement

Answer 36

- aka lost statement if not going well; - *second part of the income statement*; -**shows NET PROFIT**; -> gross profit - expenses

Question 37

Define expenses

Answer 37

- Indirect/fixed costs of production; - controlled by organization — taxes and interest do not count;

Question 38

[INCOME STATEMENT] Describe appropriation account

Answer 38

- *last part of the profit and loss account*; - shows **dividends** (portion of net profit after interest and tax that is *distributed among shareholders); - shows **retained profits** (net profit - dividends);

Question 39

Differentiate the income statement of a for-profit corporation vs one of a non-profit organization

Answer 39

Non-profits refer to their “profits as *surplus*.

Question 40

Define purchase cost

Answer 40

cost of the asset at the time when it was bought.

Question 41

Define lifespan

Answer 41

how long an asset can be used

Question 42

Define residual/scrap value

Answer 42

how much an asset is worth at the end of its lifespan

Question 43

define book value

Answer 43

value of an asset in a balance sheet

Question 44

Define market value

Answer 44

estimated price of an asset if to be sold

Question 45

List the two methods to calculate depreciation

Answer 45

- Straight line method - Units of production method

Question 46

Describe the straight line method

Answer 46

- Residual value = 0: Annual depreciation = purchase cost / lifespan - Residual value > 0: Annual depreciation = (Purchase cost – Residual value) ÷ Lifespan

Question 47

Define equity

Answer 47

The amount of money to return to business’ account after liquidation

Question 48

Describe the equity section of balance sheets (DB) [4]

Answer 48

- Last part; - Two sub-parts: dividends (the money to give to shareholders) and the retained profit; - dividends: Profit before tax - tax; - Retained profit = profit after dividends = Profit after tax (?);

Question 49

why is equity = net assets

Answer 49

*net* assets -> w/o libailities? - bec.. it is the money that will go back to the company and not to the investors, creditors, etc. so not libailities

Question 50

Outline the two reasons why assets depreciate

Answer 50

Wear and tear and obsolescence

Question 51

Define wear and tear

Answer 51

The repeated use of fixed assets like cars and machines causing them to the worsening of condition, and higher maintenance costs and lower value.

Question 52

Define obsolescence

Answer 52

Existing fixed assets fall in value due to new and improved versions (e.g. cellphones)

Question 53

Give the advantages of straight line depreciation

Answer 53

- simple to calculate because the expense is predictable - mostly suitable for less expensive items, such as furniture.

Question 54

Give the disadvantages for straight line method

Answer 54

- doesn’t account for poss of efficiency and obsolescence, etc. so not suitable for expensive assets; - inflates the value of some assets which great,y lost value in their first or second year like motor vehicles;

Question 55

Give the formula for the reducing-balance method

Answer 55

Net book value in Year 1 = Cost of original asset - (cost of orig ass. x rate of depreciation)

Question 56

Define notes payable

Answer 56

the interest of accounts payable

Question 57

Define deferred revenue

Answer 57

Advance payments to be paid

Question 58

Give the margin of safety formula

Answer 58

Actual sales - BEP units

Question 59

Give the net profit formula

Answer 59

Total Revenue - Total cost

Question 60

Differentiate capital and revenue expenditures

Answer 60

Capital more long term more than a year; Revenue expenditure only for a year;

Question 61

Differentiate leasing and renting

Answer 61

Leasing for commercial buildings (e.g. SM malls)

Question 62

Briefly outline the income statement

Answer 62

Question 63

Why are taxes deducted after the interest (INCOME STATEMENT)

Answer 63

Because taxes are only imposed on what you have after paying off everyone else - the money you pay for the loan to continue it

Question 64

Define dividends

Answer 64

The profit after all deductions that will be distributed to shareholders

Question 65

Differentiate income statements vs balance sheets

Answer 65

Balance sheet - financial status in a specific point in time Income statement - recording of all transactions

Question 66

Assets are ordered in the order of..?

Answer 66

fluidity (liquidity)

Question 67

What could make an asset current?

Answer 67

If they can be converted to cash within 1 year (aka short-term)

Question 68

Why are promissory notes marketable securities

Answer 68

Factoring — -> promissory notes: a written agreement that one party will pay back at one time -> marketable securities: assets that can easily be converted to cash

Question 69

Why are liabilities constantly moving?

Answer 69

Longer term debts become eventually shorter term (current) as they are paid off