Chapter three Flashcards
(24 cards)
What is the purpose of a business ?
to generate wealth.
What does an income statement tell us ?
It measures and reports how much profit a business has generated over a period
What is revenue ?
A measure of the inflow of economic benefits arising from the ordinary operations of a business
What is the definition of expenses?
it is a measure of the outflow of economic benefits for a financial period
What are operating expenses also known as ?
overheads
What is the matching convention ?
This convention states that expenses should be matched to the revenue that they helped to generate
What is materiality convention ?
This means that the amounts involved are trivial, we should consider only what is expedient. This means treating an item as an expense in the period in which it is first recorded
What is the accruals convention ?
This asserts that profit is the excess of revenue over expenses for a period, not the excess of cash receipts over cash payments
What does finite lives mean in terms of products / assets ?
This means that non-current assets have limited lives because they are eventually used up in the process of generating wealth for the business
What are the two lives that a non-current asset has ?
- a physical life - the wear and tear of the asset
2. an economic life - the expected useful life of an asset for depreciation purposes.
What is the residual value ?
This is the payment received for disposal of a non-current asset which still has some value
What is the straight line depreciation method ?
This method simply allocated the amount to be depreciated evenly over the useful life of the asset. Therefore, there is an equal amount of depreciation each year
What is the reducing-balance method?
This method applies a fixed rate of depreciation to the carrying amount of the asset each year. This means high depreciation expenses in the early years and lower in the late years
What are the three common assumptions ?
- first in, first out (FIFO)
- last in, first out (LIFO)
- weighted average cost (AVCO)
What is the FIFO assumption?:
inventories are costed as if the earliest acquired inventories held are the first to be used
What is the LIFO assumption?
inventories are costed as if the latest acquired inventories held are the first to be used
What is the AVCO assumption?
inventories are costed as if inventories acquired lose their separate identity and go into a pool.
What is the consistency convention?
This convention means that once a particular method of accounting is selected, it should be applied consistently over time
What is a bad debt ?
This is a trade receivable that the business is reasonably certain, the customer won’t pay
What is a residual value ?
a residual value is when a business disposes of a non-current asset that may still be of value to others, the payment received is called a residual value.
What is the process for income statement profits ?
SR - COS = GP
GP - Operating expenses = Operating profit
Operating profit - non operating expenses + non operating income = profit for the period
How to work out the cos ?
opening balance + purchases - closing inventory )
What costs are classed as cost of sales ?
salaries and wages rent motor running expenses insurance printing and stationary heat and light telephone and postage
How to work out the profit / loss for the period?
Total revenue - total expenses
