Week 1

Question 1

What are the three key statements?

Answer 1

1. Balance Sheet
2. Income Statement
3. Cashflow Statement

Question 2

What does the Balance Sheet show?

Answer 2

The financial position of the business - assets and liabilities

Question 3

What is another term for the income statement?

Answer 3

The profit and loss account

Question 4

What does the income statement show?

Answer 4

How much profit the company earned over a period of time

Question 5

What does the cashflow statement show?

Answer 5

The movement in the cash balance

Question 6

2 types of accounting standards and who assigns them

Answer 6

• GAAP: Generally Accepted Accounting Principles
• IFRS: International financial reporting standards
• IASB: International Accounting standards board
• FASB:Financial Accounting standards board

Question 7

Why might an investor want to look at a set of accounts?

Answer 7

• Performance- how well are you doing vs. expectations
• Valuation- how much is the company worth

Question 8

Why might a manager want to look at a set of accounts?

Answer 8

• Communication of performance
• Compensation

Question 9

Why might the government want to look at a set of accounts?

Answer 9

• Tax

Question 10

Why might competitors want to look at a set of accounts?

Answer 10

Segmental reporting

Question 11

Accounting Equation I:

Resources = ?

Answer 11

Funding

Question 12

What is money invested in the business by its owners?

Answer 12

Equity

Question 13

Accounting Equation:

Assets = ? + ?

Answer 13

Liabilities + Equity

Question 14

Equity = ? + ?

Answer 14

Share capital + Reserves

Question 15

What is the dual effect?

Answer 15

Every business transaction includes, at least, two effects on the financial statements of a company. The accounting equation must always hold:

Assets = liabilities + equity

Question 16

How is ‘good held for resale’ classified?

Answer 16

Current asset

Question 17

How is ‘liability for tax due next year’ classified?

Answer 17

Current liability

Question 18

How is ‘electricity bill due but not paid’ classified?

Answer 18

Current liability

Question 19

How is ‘subscriptions received in advance’ classified?

Answer 19

Current liability

Question 20

How is ‘credit sales balances due from customers’ classified?

Answer 20

Current asset (accounts receivable)

Question 21

How is ‘supplier balances outstanding’ classified?

Answer 21

Current liability (accounts payable)

Question 22

How is ‘land’ classified?

Answer 22

Non-current asset

Question 23

How is ‘staff photocopier (leased)’ classified? Assume less than 12 months

Answer 23

It goes nowhere

Question 24

How is ‘Bank Overdraft (aka revolver)’ classified?

Answer 24

Current Liability - its payable back any time the bank asks for it

Question 25

How is ‘historic profits retained in the business’ classified?

Answer 25

Equity

Question 26

How is ‘short term investments’ classified?

Answer 26

Current assets

Question 27

How is ‘term loan with 5 years outstanding’ classified?

Answer 27

Non-current liability

Question 28

What is the dual-effect when “Comapny raises £1m in debt capital”?

Answer 28

1. Increase debt
2. Increase cash

Question 29

What is the dual-effect when “The company decides to buy inventory for cash, £3,000”?

Answer 29

1. Increase inventory
2. Decrease cash

Question 30

What is the dual-effect when “The company buys a van for cash, £40,000”?

Answer 30

1. Decrease cash
2. Increase P,P&E (non-current asset)

Question 31

What is the dual-effect when “a key supplier is paid £5,000”?

Answer 31

1. Decrease cash (asset)
2. Decrease accounts payable (liability)

Question 32

What is the dual-effect when “A customer pays £4,000”?

Answer 32

1. Increase cash (assets)
2. Decrease accounts receivable (assets)

Question 33

What is the dual-effect when “Electricity bill of £1,000 is settled (assume no liability exists beforehand)”?

Answer 33

1. Decrease cash
2. Increase expenses