Lessson 2

Question 1

What is the purpose of the Statement of Financial Position?

Answer 1

To show a snapshot of assets, liabilities, and equity on the reporting date.

Question 2

What equation underlies the SOFP?

Answer 2

Assets = Liabilities + Equity.

Question 3

What defines an asset under IASB?

Answer 3

An asset is 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 4

What defines a liability?

Answer 4

A liability is a present obligation of the entity to transfer an
economic resource as a result of past events. An obligation is a
duty or responsibility that the entity has no practical ability to
avoid

Question 5

What defines equity?

Answer 5

Equity is the residual interest in the assets of the entity after
deducting all its liabilities

Question 6

What qualifies an asset as current?

Answer 6

• Expected to be realised within 12 months or in the operating cycle.
• realised, sold or consumed in course
  of operating cycle, cash or cash equivalents (IAS 7)

-held for trading purposes

Question 7

What are examples of current assets

Answer 7

Inventory, trade receivables, cash.

Question 8

What are examples of non-current assets?

Answer 8

Property, equipment, intangible assets, long-term investments

Question 9

What qualifies a liability as current?

Answer 9

-the entity does not have the right to
defer settlement for at least 12 months
after the reporting period.

Settled within 12 months or the operating cycle, or no right to defer.

Question 10

What is the purpose of the Statement of Profit or Loss and OCI?

Answer 10

to show profit performance over a period.

is to show the financial
performance (profitability) of the entity over the
accounting period (usually 1 year)

Question 11

what is the statement of profit or loss /oci based on ?

Answer 11

It is based on accrual accounting and the equation:
Income - Expenses = Profit or Loss

Question 12

What is profit or loss?

Answer 12

Income minus expenses, excluding OCI.

Question 13

What is other comprehensive income (OCI)?

Answer 13

Other Comprehensive Income (OCI) is made up of gains and losses that don’t go into the regular profit and loss section of the income statement.

These are things like:

An increase in value of an asset (e.g. your building is now worth more)
Currency gains or losses from foreign branches
Pension plan changes
They still affect the company’s overall value, but they’re not part of everyday business profit, so they go into a separate section called OCI.

Question 14

What is total comprehensive income?

Answer 14

All changes in equity except transactions with owners.

Question 15

What does the Statement of Changes in Equity show?

Answer 15

How each component of equity changed during the period.

Question 16

What items are included in SOCIE?

Answer 16

Profit, OCI, dividends, share issues, changes in accounting policies.

Question 17

What is the purpose of the Statement of Cash Flows?

Answer 17

The purpose of the statement of cash flows is to provide
historical information about changes in cash and cash
equivalents resulting from the inflows and outflows of cash

Question 18

What is difference between the inflows and outflows of cash

Answer 18

is known as the net cash flow

Question 19

What are cash inflows ?

Answer 19

are cash receipts

Question 20

what are cash outflows ?

Answer 20

are the cash payments made by the business.

Question 21

Which IAS governs the cash flow statement?

Answer 21

IAS 7.

Question 22

What are the three types of cash flows?

Answer 22

Operating, investing, financing

Question 23

What financial info is needed to prepare a cash flow statement?

Answer 23

Beginning and ending SOFP, SOCI, and notes.

Question 24

What is the role of the notes to financial statements?

Answer 24

To explain, support, and disclose detailed information behind the numbers.

Question 25

What might notes include?

Answer 25

Breakdown of inventory, asset classes, auditor fees, accounting policies.

Question 26

What is an example of note disclosure?

Answer 26

Inventory = Raw materials £11m, WIP £1m, Finished goods £13m

Question 27

How are interim dividends recorded?

Answer 27

Dr Dividends, Cr Dividends Payable when declared; Cr Bank when paid.

Question 28

Should final dividends declared after the reporting period be recognized?

Answer 28

No. They are disclosed in notes only.

Question 29

What is the difference between nature and function presentation of expenses?

Answer 29

Nature = by type (e.g., depreciation); Function = by purpose (e.g., admin costs).

Question 30

What disclosures are required with function-based expense classification?

Answer 30

Nature-based disclosures like staff costs and depreciation.

Question 31

What’s the definition of income under IASB?

Answer 31

Increases in assets or decreases in liabilities that increase equity

Question 32

What’s the definition of expenses?

Answer 32

Decreases in assets or increases in liabilities that reduce equity.

Question 33

How do you treat a lawsuit expected to result in a probable £25k loss?

Answer 33

Recognize as a liability and an expense.

Question 34

Should development costs always be capitalized?

Answer 34

Only if future economic benefits are probable and costs measurable. - remember the cosmetic example kalil (£200,000)

Question 35

Can you recognize a new product development cost as an asset immediately?

Answer 35

No, not unless it passes the recognition criteria.

Question 36

What’s an example of fair value change going into OCI?

Answer 36

Unrealized gains on financial assets at FVOCI.

Question 37

How are discontinued operations disclosed?

Answer 37

Separately in the income statement, per IFRS 5.

Question 38

What is the link between cash flow statement and other financials?

Answer 38

It connects beginning/ending balances and performance from SOCI.

Question 39

Should final dividends declared after the reporting period be recognized?

Answer 39

No. They are only shown in the notes. - A final dividend is when a company decides to give some of its profits to shareholders, usually after the financial year has ended. But according to the rules in IAS 1: If the dividend was not declared before the year-end date, it means there was no legal obligation at that time. So, the company can’t show it as a liability in the financial statements yet. Instead, it just mentions it in the notes, so readers are aware it happened later.