Lecture 2 Flashcards
Effect on accounting equation if business receives cash from the owner
Increase in asset (cash)
Increase in ownership interest (capital contributed)
Effect on accounting equation if vehicle is bought for cash
Assets increase (vehicles)
Asset decrease (cash)
Effect on accounting equation if bill is received for gas consumed
Increase in liability (trade payable)
Decrease in OI (expenses)
Effect on accounting equation if paying bill for gas in cash
Asset decrease (cash)
Liabilities decrease (trade payable)
Effect on accounting equation if buy materials on credit terms
Asset increase (inventory)
Liability increase (trade payable)
Effect on accounting equation if sell goods on credit terms
Asset increase (trade payable)
OI increase (revenue)
Effect on accounting equation if pay wages to employee
Assets decrease (cash)
OI decrease (expense)
Effect on accounting equation if rent paid in advance
Asset decrease (cash)
OI decrease (expense)
Effect on accounting equation if equipment has fallen in value (depreciation)
Asset decrease (equipment and furniture/non-current assets)
OI decrease (expenses)
What must be reported in a statement of financial position/balance sheet
Financial position
Last two rows
What must be reported in an income statement
Performance
Revenue & expenses
What must be reported in statement of cash flows
Financial adaptability
Cash column
What is the structure of a balance sheet?
- Non-current assets
- Current assets
- Current liabilities
- Non-current (long term) liabilities
- Net assets (total assets - total liabilities)
- Capital at the start of year
- Plus/minus capital contributed or withdrawn
- Profit of the period (revenue - expenses)
What is the structure of an income statement?
Revenue
minus
Expenses
equals
Profit
What is the structure of a statement of cash flows?
- Operating activities
Cash inflows
minus
Cash outflows
equals
Net outflow from operations
- Investing activities
E.g payment for equipment - Financing activities
E.g capital contributed/withdrawn - Change in cash (increase/decrease) (net outflow from operations + net outflow from investing + net outflow from financing)
What are investing activities?
Buying and selling non-current assets for long term purposes
What are financing activities?
Raising and repaying the long-term finance of the business
E.g
Loans
Getting funded from anyone
Capital contributed/withdrawn
What are operating activities?
Anything else that doesn’t fit into the category of investment or financial activities
E.g
Provision of services
Manufacturing, using and selling of goods for resale
What are the fundamental qualitative characteristics of financial statements?
Relevance
- predictive value
- confirmatory value
Faithful representation
- neutrality
- freedom from error
- completeness
What are the enhancing qualitative characteristics of financial statements?
Comparability
Verifiability
Timeliness
Understandability
What is the general quality characteristic of financial statements
Materiality
When does financial info have predictive value?
If it can be used to predict future outcomes
Doesn’t need to be a prediction but can be interpreted by users to allow them to make their own predictions
E.g. current year revenue info can be used to predict revenue in future years
What does confirmatory value mean?
The info provides feedback (confirms or changes) on previous evaluations
E.g current year revenue can be compared with revenue predictions made in previous years to correct/improve processes that were used to make the previous predictions.
What does completion mean under the terms of faithful representation?
Includes all info necessary for a user to understand what is being reported
