Lecture 2.1-2.3

Question 1

What are the 3 major financial statements?

Answer 1

Cash flow statement
Income statement
Statement of Financial position. ( Balance sheet)

Question 2

What is a cash flow statement?

Answer 2

Tells you the cash sources, how did the cash get used and how much cash is remaining.

Question 3

What is an income statement?

Answer 3

Tells you how much wealth was generated ( Profit and loss statement)

Question 4

What is the Statement of financial position?

Answer 4

shows the accumulated wealth at a particular point in time.

Question 5

What is a balance sheet known as compared to income statements and cash flow statements?

Answer 5

Balance sheets are known as snapshots and Income and cash flow are seen as flow statements.

Question 6

What are the Conventions connected to with Statement of financial position?

Answer 6

Business entity 
Historic cost convention 
Prudence convention 
Going concern convention 
Dual aspect

Question 7

What is Historic cost convention again?

Answer 7

You write down the asset at the historical cost you get it at or acquisition cost.

Question 8

What is the Prudenance convention?

Answer 8

Actual and anticipated losses are noted down immediately but not future gains.

Question 9

What is the going concern convention again?

Answer 9

Financial statements should be prepared on the assumption that a business will continue operations for the foreseeable future.

Question 10

What is Dual aspect convention?

Answer 10

Each transaction has two aspects, both of which affect company’s position.

Question 11

What is the accruals convention?

Answer 11

You don’t track cash, you track the transaction e.g. book example.

Question 12

What is the matching convention?

Answer 12

This is when you match the expense ( cost) to the revenue generated.

Question 13

What is an example of matching convention?

Answer 13

Lets say you have an ipad and you sell it for 1000, this counts as sales revenue, but it person b wants to return it and you give them £500, this counts as an expense to the business so you would put down £500

Question 14

When you started college you embarked on a small venture to make some money. You decided to sell printed T-shirts with your college emblem to your fellow students. A quick survey of students suggested
that you could sell 100 printed T-shirts at a price of around £ 10 which is what you decided to sell the T-shirts for. You were able to locate someone who was willing to sell you plain Tshirts for £5 apiece for immediate payment of cash. Printing would
entail a front-end, fixed fee of £100 for the screen and another £0.75 per printed T-shirt for the dye, labor, electricity and so on. You then invested £500 of your own money and £200 of borrowed money in the
venture, purchased 100 plain T-shirts and the screen, and got the Tshirts printed. By the end of your first week in business, all T-shirts were ready for sale.
During the first week, you sold 50 T-shirts. But, of the 50 T-shirts picked up, only 25 paid cash. For the other 25, you agree to accept payment next week.
At the end of the week, you were dismayed to find you had only £ 275 in cash remaining. Given that you had initially invested £ 700, this suggested that you had lost £ 425 during the first week.
• Show how your cash balance had dwindled to £ 275 at the end of
Week 1.

Answer 14

Cash in :
Borrowed £200
Injection : £500
Sales: 25*10 = £250

Total : £950

Cash out: 
100 printed T shirts x 5 = (500)
100 x 0.75 = (75) dye labour, electricity
Screen price = (100)
Total = 675 

£950 - £675 = £275 cash remaining.

Question 15

When you started college you embarked on a small venture to make some money. You decided to sell printed T-shirts with your college emblem to your fellow students. A quick survey of students suggested
that you could sell 100 printed T-shirts at a price of around £ 10 which is what you decided to sell the T-shirts for. You were able to locate someone who was willing to sell you plain Tshirts for £5 apiece for immediate payment of cash. Printing would
entail a front-end, fixed fee of £100 for the screen and another £0.75 per printed T-shirt for the dye, labor, electricity and so on. You then invested £500 of your own money and £200 of borrowed money in the
venture, purchased 100 plain T-shirts and the screen, and got the Tshirts printed. By the end of your first week in business, all T-shirts were ready for sale.
During the first week, you sold 50 T-shirts. But, of the 50 T-shirts picked up, only 25 paid cash. For the other 25, you agree to accept payment next week.
At the end of the week, you were dismayed to find you had only £ 275 in cash remaining. Given that you had initially invested £ 700, this suggested that you had lost £ 425 during the first week.
How much did you earn or lose from your business during Week 1?

Answer 15

Sales revenue = 25 X 10 = £250
Credit sales = 25 x 10 = £250
You follow accurals princple here you note down revenue earned, you don’t wait for cash to change hands)

You now use matching principle ( matching the expnese to the revenue generated, so the costs will be for 50 t shirts)
Plain t shirts 50 x 5 = (250)
Dye labour electricity = 50 x 0.75 = (37.5)
Screen 100 X 0.5 ( because you match every expense to revenue generated even though there is a fixed fee = (50)
= 500- 337.50
= 162.5 PROFIT.

Question 16

When you started college you embarked on a small venture to make some money. You decided to sell printed T-shirts with your college emblem to your fellow students. A quick survey of students suggested
that you could sell 100 printed T-shirts at a price of around £ 10 which is what you decided to sell the T-shirts for. You were able to locate someone who was willing to sell you plain Tshirts for £5 apiece for immediate payment of cash. Printing would
entail a front-end, fixed fee of £100 for the screen and another £0.75 per printed T-shirt for the dye, labor, electricity and so on. You then invested £500 of your own money and £200 of borrowed money in the
venture, purchased 100 plain T-shirts and the screen, and got the Tshirts printed. By the end of your first week in business, all T-shirts were ready for sale.
During the first week, you sold 50 T-shirts. But, of the 50 T-shirts picked up, only 25 paid cash. For the other 25, you agree to accept payment next week.
At the end of the week, you were dismayed to find you had only £ 275 in cash remaining. Given that you had initially invested £ 700, this suggested that you had lost £ 425 during the first week.
What was your financial position at the end of Week 1?

Answer 16

Statement of financial position @ end of week 1

Assets 
Cash  275 ( from cash flow statement)
Inventory : 337.50 ( from income statement costs)
Accounts receivable : 25 X 10
Total assets = 862.5 
Liabilities 
Borrowed 200 
Investment 500 
 Profit for owners ( retained earnings) = 162.50

= 862.5-

Question 17

What is an inventory?

Answer 17

everything used to prepare for sale, so if a SOTP was at beginning inventory will be 0.

Question 18

What is Accounts receivable?

Answer 18

money owed to a company by its debtors.

Question 19

Do we account for interest of borrowings?

Answer 19

Tba

Question 20

When you have a loss how should you express values?

Answer 20

You should put values in brackets.

Question 21

What happens if you have returns?

Answer 21

You will have a place on the income statement that says returns.

Question 22

To find whether a company has made a profit or a loss, which financial statement should I refer?

Answer 22

Income statement

Question 23

What financial statement should I refer to if i want to know how much bank loans a company has?

Answer 23

SoFP

Question 24

In an Income statement what conventions must we use?

Answer 24

Accruals and Matching convention

Question 25

Firm ABC sold goods worth £50 for cash and goods worth £75 credit. What is the sales revenue in the income statement?

Answer 25

125 - accruals principle, we dont track cash, we track the transcation

Question 26

Firm ABC sold goods worth £50 for cash and goods worth £75 for credit. What is the cash inflow in statement of cash flow?

Answer 26

50 we track cash not transaction.

Question 27

What is an important thing to remember about Cash flow statements?

Answer 27

You track cash not transaction.

Question 28

What is the purpose of a balance sheet?

Answer 28

1) Sets out the financial positioning of an entity at a given time. 2) It is a status report rather than flow report 3) It is always dated

Question 29

What is the basic accounting equation for the statement of financial position?

Answer 29

Assets = liabilities + Owners equity

Question 30

Suppose that you have £300,000 and want to start a small business (a sole proprietorship). Let’s assume that the new business requires building, plant, property, equipment, land and motor van costing £ 500,000. Since you have only £300,000, your business needs another source of financing in addition to your capital. Simply, you need £200,000 more and the only other source will be to take some debts.

Answer 30

``` Assets = liabilities + Owners equity 500000 = 200000 + 300000 ```

Question 31

What is another interchangeable word for Owners equity?

Answer 31

Capital

Question 32

What are assets and liabilities known as well?

Answer 32

1) Assets ( resources of entity) | 2) Liabilities ( claims against the resource)

Question 33

What are assets ?4 bullet points

Answer 33

- Things that have a probable future benefit | - The business has an exclusive right to control the benefit.

Question 34

What are Examples of Assets?

Answer 34

``` Buildings PPE Patents and trademarks ( intangible asset which you can sell) Inventories Cash Trade and other receivables. ```

Question 35

Why is investment also an asset?

Answer 35

If a company has a lot of cash , it will not let it sit, but will invest it. ( this is when companies invest in another company or in real estate.

Question 36

What is trade/ Accounts payable?

Answer 36

Accounts payable is money owed by a business to its suppliers shown as a liability on a company's balance sheet.

Question 37

What is Accounts/ trade receivables?

Answer 37

Credit, someone owes the company money

Question 38

Name the Asset and its value ABC sells £1000 goods to a customer who promises to pay next month?

Answer 38

Accounts receivable worth £5000

Question 39

Name the Asset and its value ABC buys a building for £500,000 and a new machine for £3000?

Answer 39

PPE - 503000

Question 40

Name the Asset and its value ABC hires a marketing director who is expected to increase profitability by £100000?

Answer 40

Not an asset, as it cannot be measured in monetary terms.

Question 41

What does Prepaid expense mean?

Answer 41

Represents the value of product and services that have been paid for but not received or used yet by the company.

Question 42

Name the Asset and its value. ABC paid annual rent of £12,000 in advance. It has already occupied the office for 1 month, and occupy for 11 more months

Answer 42

Remember asset gives you future benefits | Prepaid rent - 11000

Question 43

Name the Asset and its value ABC buys £9000 of raw materials?

Answer 43

It will be an inventory

Question 44

What's the difference between PPE and Investments?

Answer 44

If you brought a building purely for investment e.g. to let out, and solely for investment purposes ( its an investment) If you brought a building for your operations it goes into your PPE.

Question 45

What are liabilities?

Answer 45

Money owed to someone else.

Question 46

Name the liability and its value ABC receives £7500 of raw materials and promises to pay its supplier in two months?

Answer 46

Account/trade payable of £7500

Question 47

Name the liability and its value ABC borrows £60,000 from a bank on a one-year note ( short term loan).

Answer 47

loans payable - £60,000

Question 48

ABC has not yet paid salaries of employees who | earned £90,000 during the recent pay period

Answer 48

Salaries payable - 90,000

Question 49

What does Equity mean?

Answer 49

Represents the shareholders stake in the company ( total company assets - total liabilities(after liabilities have been paid )

Question 50

There are 2 distinct parts of the Equity section?

Answer 50

Capital and Retained earnings

Question 51

What is capital?

Answer 51

The money that the owner invested

Question 52

What is Retained earnings?

Answer 52

Accumulated profit or losses.

Question 53

How do you work out Retained earnings?

Answer 53

Retained earnings ( BEG) + Revenue ( current year profits or loss) - Drawings ( equivalent to dividends)

Question 54

What are 2 ways retained earnings can decrease?

Answer 54

1) It can decrease if you gave drawings or dividends | 2) If you had a loss instead of a profit.

Question 55

``` If Jerry & Co. purchased equipment by paying £ 5,000 cash which accounts will change? A. Cash B. Equipment C. Inventory D. None of the above ```

Answer 55

A and B. Cash will decrease and Equipment will increase

Question 56

``` If Jerry & Co. sells inventory at cost price of £ 2000, what will be the change in retained earnings? A. £2000 B. Insufficient information C. 0 D. None of the above ```

Answer 56

C. 0 as you sold it at cost price so there is no profit or loss, so no change in retained earnings.

Question 57

``` If Jerry & Co. sells inventory at £ 5000, and its cost price was 4000, what will be the change in retained earnings? A. £4,000 B. £1,000 C. 0 D. £5,000 ```

Answer 57

b. £1000

Question 58

What is a further classification of Assets and Liabilities

Answer 58

Current and Non current assets | Current and Non- current liabilities

Question 59

What is a current asset and liabilities?

Answer 59

Current Asset - These are cash and other assets that are excepted to be converted into cash within a year.. e.g. Inventory, trade receivables, cash Current liability - Cash payments due to be paid to creditors within twelve months e.g. money owed to suppliers. e.g. trade payables or Banks loans due within a month.

Question 60

What are non- current asset and liabilities?

Answer 60

Non - current assets - Are longer term investments that cannot be converted into cash quickly. e.g. PPE . Non- current liability- Are amounts owed that are to be paid after the period of a year. e,g, Long term borrowing

Question 61

What is an intangible asset?

Answer 61

Cannot touch or feel such as Patents and Trademarks.

Question 62

Statement of financial position example again Jerry and Co. deposits £20,000 in a bank account on 1 March in order to commence business. Let us assume that the cash is supplied by the owner (£6,000) and by a lender (£14,000) and paid into the business bank account. The raising of the funds in this way will give rise to a claim on the business by both the owner (equity) and the lender(liability). Consider the following transactions for Jerry and Co: 2 March Purchased a motor van for £5,000, paying by cheque 3 March Purchased stock on one month’s credit for £3,000 4 March Repaid £2,000 of the loan from the lender 6 March Owner introduced another £4,000 into the business bank account 7 march he business managed to sell all of the stock for £5,000 and received a cheque immediately from the customer for this amount. Make the statement of financial position for march 7th.

Answer 62

Assets Cash - £20,000-5000-2000+ 4000 + 5000 Van - £5000 Inventory - 3000-3000 Total = 27000 Claims/liabilities Bank loan - 14,000-2000 Trade payable - 3000 Capital - 6000+4000 Retained earnings 5000- 3000 = 2000 profit Total = 27000

Question 63

Inventory on a SOFP should always be valued at what?

Answer 63

inventory should always be recorded either at cost or at net realisable value if it is lesser than cost.