Financial Statements

Question 1

Primary Statements

Answer 1

Statement of Profit or Loss
Statement of Financial Position
Statement of changes in equity
Statement of cash flows

Question 2

Statement of Profit or Loss

Answer 2

Profit and loss account, also known as Income Statement
Shows financial performance of entity

Question 3

Statement of Financial Position

Answer 3

Also known as Balance Sheet
Shows financial position of an entity at a particular date

Question 4

Statement of changes in equity

Answer 4

Reconciles owners interest from start to end of period

Question 5

Statement of Cash Flows

Answer 5

Presents cash movements in and out of the entity

Question 6

What are financial statements used for?

Answer 6

To provide information about an entity that is useful in making economic decisions

Question 7

Relevance

Answer 7

Will make a difference to the decisions users make. Relevant financial information may have a predictive value, or a confirmatory value

Question 8

Confirmatory value

Answer 8

Confirms how accurate previous predictions have been

Question 9

Predictive value

Answer 9

It may provide information that helps users make predictions about future performance.

Question 10

Faithful representation

Answer 10

Representing transactions of a business as accurately as possible. It is approximately equivalent to ‘true and fair’ which is used in UK company law. There are three aspects : completeness, neutrality, and freedom from error

Question 11

Completeness

Answer 11

No information is missing

Question 12

Neutrality

Answer 12

Freedom from bias

Question 13

Freedom from error

Answer 13

Accuracy of the information

Question 14

4 enhancing (secondary) characteristics

Answer 14

Comparability
Understandability
Verifiability
Timeliness

Question 15

Comparability

Answer 15

Comparability is about a level of standardisation that allows users to make comparisons between different entities and also from year to year

Question 16

Verifiability

Answer 16

Whether there is evidence to support the information, and therefore whether it can be checked.

Question 17

Understandability

Answer 17

Presenting the information in a concise and clear way, so that users with a reasonable level of knowledge can make sense of it.

Question 18

Timeliness

Answer 18

Receiving information soon enough to be useful since information is of no use if it is only available so long after the event that any decisions have already been made

Question 19

Why cant all four enhancing characteristics be fully achieved?

Answer 19

Some figures may have to be based on assumptions, if waiting for actual figures, the information might come too late to be used in decision making. Applying the enhancing characteristics does not negatively affect the fundamental characteristics. Some transactions are inherently complicated - simplifying accounting treatment on basis of understandability might compromise faithful representation

Question 20

Revenue
(Income, Expense, Asset, Liability, Equity??)

Answer 20

Income

Question 21

Electricity
(Income, Expense, Asset, Liability, Equity??)

Answer 21

Expense

Question 22

Interest
(Income, Expense, Asset, Liability, Equity??)

Answer 22

Expense
Unpaid interest would be a liabilty

Question 23

Inventory
(Income, Expense, Asset, Liability, Equity??)

Answer 23

Asset

Question 24

Bank loan
(Income, Expense, Asset, Liability, Equity??)

Answer 24

Liability

Question 25

Ordinary share capital (Income, Expense, Asset, Liability, Equity??)

Answer 25

Equity

Question 26

Profit on sale of a factory building (Income, Expense, Asset, Liability, Equity??)

Answer 26

Income

Question 27

Corporation tax (Income, Expense, Asset, Liability, Equity??)

Answer 27

Expense Tax owed to HMRC is a liability

Question 28

Types of expense

Answer 28

Cost of sales (clothes, homewares) Distribution costs (postage, packaging) Administrative expenses (insurance, wages/salaries, cleaning services, advertising, maintenance, business rates) Finance costs (bank interest) Tax expense (corporation tax)

Question 29

Asset - definition

Answer 29

A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.

Question 30

Assets: examples

Answer 30

Cash PPE Inventory Trade receivables Prepayments Motor vehicles Fixtures and fittings

Question 31

Controlled assets

Answer 31

PPE Inventory Cash Trade receivables Prepayments

Question 32

Not controlled assets

Answer 32

Customers Employees Market share

Question 33

Assets : Future economic benefit

Answer 33

Cash inflows - trade receivables Use in the business - cash, PPE Future services - prepayments

Question 34

spend money

Answer 34

debit assets (if meets def of assest, if not recognise as expense)

Question 35

Receive money

Answer 35

credit liabilities (if meets def of liability, if meets def of income - recognise income, if not equity)

Question 36

recording depreciation in books

Answer 36

debit: depreciation expenses credit: accumulated depreciation

Question 37

dividend paid before year end

Answer 37

dr: retained earnings cr: cash

Question 38

dividend paid after year end

Answer 38

dr: retained earnings: cr: dividend payable

Question 39

net realisable value (nrv)

Answer 39

selling price - costs to complete - costs to sell

Question 40

revaluation gains

Answer 40

recognised in other comprehensive income increase revaluation reserve unless reverses previous loss in SoPL then: recognise as gain in SoPL, increase retained earnings

Question 41

revaluation losses

Answer 41

recognised as expense in SoPL decrease retained earnings Unless reverses a previous gain, then: recognise in other comprehensive income, decrease revaluation reserve