Review questions External 1.1 Flashcards
(33 cards)
what are the characteristics of an asset?
It MUST be the: -result of a past transaction -the asset must be under the business’s current control. -Will provide the business with future economic benefit.
What is profit?
profit is a businesses -> “Revenue - Expenses.
What is a liability?
A liability is what you owe e.g borrowed money
What are the characteristics of a liability?
-a liability is the result of a past transaction -There is a present obligation (e.g need to pay for the borrowed money -There is/will be a future economic sacrafice (e.g when you finally pay for the borrowed money etc)
How is a bank loan a liabilty? (include characteristics of a liability)
You borrowed the money from the bank previously (previous transaction). There is a current obligation to pay back the money that you borrowed. There will be a future economic sacrafice when you pay back the bank for the money you borrowed.
Why is the oven used at a bakery an asset? (include characteristics of an asset)
The bakery purchased the oven in the past. The bakery decides when and how it will be used (e.g to serve customers) which means it is under the bakery’s present control.
What are the characteristics of income?
There will be an increase in economic benefit. E.g either through an increase in an asset or a decrease in a liability. Which means an increase in profit, which means an increase in equity (income is not a contribution from the owner)
What are the characteristics of an expense?
Expenses are just the opposite of income
- There will be a decrease in economic benefit
- In the form of a decrease in an asset or an increase in a liability.
- Which leads to a decrease in profit
- Which results in a decrease in equity
- An expense is NOT drawings from the owner
What is equity?
Asset - Liability = Owners equity
E.g
Asset - Liability = Equity
150,000 - 50,000 = 100,000
What is capital expenditure?
Capital expenditure is a one-off purchase, that will provide economic benefit for more than the current year.
What is revenure expenditure?
Revenue expenditure is a day-to-day purchase, e.g rent and/or wages, that will only benefit the business for the current year.
What are examples of Current Assets?
- Accounts reveivable
- Bank
- Inventory/stock
- Pre-Payments
- Accrued revenue
What are examples of Non-Current Assets?
- Land
- Buildings
- shop fittings
- Delivery vehicles
- Office equipment
What are examples of Current Liabilities?
- Accounts payable
- GST payable
- Accrued expenses
- Revenue received in advance
What are examples of Non-Current Liabilities?
- Mortgage
- Loan
Features written as opposites will only receive credit for one expenditure.
E.g
—–>Ans
DON’T SAY!
Vehicle is a one-off purchase. Insurance is not a one-off purchase.
SAY!
Vehicle is a one-off purchase. Insurance is a day to day purchase
What is the difference between Capital Expenditure and Revenue Expenditure?
- Capital Expenditure is a one-off purchase which will give economic benefit for more then the current year.
- Revenue expenditues is a day to day purchase which gives economic benefit for less then the current year
E.g: how is an electricity invoice classified as an expense?
The invoice will provide the business with a decrease in economic benefit. This is through a decrease in their asset bank when the business pays for the invoice with cash. This decreases the businesses profit which decreases equity. An expense is not drawings from the owner.
What are the characteristics of an expense?
There will be a decrease in economic benefit either through an increase in a liability or a decrease in an asset. This will decrease profit which decreases owner’s equity. An expense is NOT drawings from the owner of a business
- Remember to mention what asset is decreasing or what liability is increasing.
What is the Going Concern concept?
explain what evidence is there of it in the financial statement.
Going Concern is a concept that applies to businesses that will continue to operate into the foreseeable future. If said business is using this concept, there will be evidence of business assets being greater than the expense of the business, and that non-current assets/liabilities are reported in the financial statements.
Describe the concept of “Monetary Measurement”
- All transactions, assets, liabilities, incomes, expenses and equity are recorded and reported using the same currency (e.g New Zealand Dollars (NZD))
- This is done so that businesses can total up the value of their assets in a common unit
Define the concept of “Historical Costs”
Prices recorded in the statement of financial position are reported at the original acquisition cost (what the business originally paid for the asset etc.)
Define the “Accounting Entity” concept
This means to keep the owner’s financial affairs e.g assets and liabilities, seperate from the business financial affairs when preparing the Statement of Financial Position and the Income Statement.
A lawnmowing business has
- A ride on mower worth $10000
- Buildings (historical cost) worth $80000
- Garden tools worth $6000
The capital (owners equity) of this business is $60,000
Calculate the liabilities of the business and show working.
Total assets = $96,000
Equity = $60,000
Assets - Equity = Liabilities
96,000 - 60,000 = 36,000
The liabilities of the business are $36,000 total.
