Reporting Financial Performance Statement of Profit or Loss Keywords and Questions

Question 1

Income statement

Answer 1

Measures the financial performance of the business over a period of time

Question 2

Accrual accounting

Answer 2

The organisation records transactions that change a company’s financial statements in the period in which the transactions occur

Question 3

Incurred

Answer 3

Refers to when the business owes money as a result of the transaction

Question 4

Prepaid expense

Answer 4

Paid in advance

Question 5

Depreciation

Answer 5

Spreading the cost over the useful life of the asset

Question 6

Revenue

Answer 6

Represents an increase in the value of a company’s a result of its normal trading activities

Question 7

Asset

Answer 7

A resource controlled by the organisation

Question 8

Non-current asset

Answer 8

Cash and other assets that are expected to be converted to cash in longer than a year

Question 9

Intangible asset

Answer 9

Have no physical substance

Question 10

Tangible asset

Answer 10

Have physical substance

Question 11

Accrual principle of accounting

Answer 11

Recognising the effect of a transaction on the business

Question 12

The matching principle

Answer 12

Cost is matched to revenues asset generates over its life

Question 13

Liability

Answer 13

Financial obligation that a business has to pay

Question 14

Non-current liability

Answer 14

A liability that a business has to pay back over a long period of time usually over a year

Question 15

Current liability

Answer 15

A liability that has to be paid back in less than a year

Question 16

Current asset

Answer 16

Cash and other assets that are expected to be converted to cash within a year

Question 17

What is the expense recognition principle?

Answer 17

Matching the expenses with revenues in the period when the company makes efforts to generate those revenues

Question 18

What is the general rule of the expense recognition principle?

Answer 18

All expenses of a particular accounting period must be matched with the relevant revenue of that period irrespective of whether the expenses have been paid in cash

Question 19

What happens to a business if bad debt occurs?

Answer 19

Reduced receivables and increased expenses

Question 20

What are the ethical issues in accrual accounting?

Answer 20

1) Estimates aren’t always going to be right
2) A dishonest businessperson could omit depreciation expense at the end of the year
3) Failing to record depreciation would overstate profit as calculated by mandated accrual principles and disclose a more favourable picture of the business’ financial position than existed
4) Some accruals are based on estimates, such as depreciation and revenue, and these can be manipulated

Question 21

What does initial costs include?

Answer 21

Costs that are directly attributable to brining the asset to the location and condition necessary for it to operate as management intended

Question 22

What does cost of assets include and what are some examples?

Answer 22

Costs that can’t be avoided by purchasing assets
Purchase price
Construction
Delivery and handling costs
Installation
Dismantling, removal and site restoration

Question 23

What happens if a business sells an assets before it reaches the end of its useful life?

Answer 23

Implications for - Income statement, statement of financial position and cash flow statement