Week 10 - Topic 10 - Accounting for Equity

Question 1

Define the term ‘Income’?

Answer 1

‘increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims’.

Question 2

What are the 2 components of Income?

Answer 2

1. Revenue - arises from ordinary activities, for example, sales, fees, interest, commissions, rent)
2. Gains - other income - realised and unrealised, for example from the disposal of a non-current asset, or an asset revaluation surplus

Question 3

Define the term ‘Expenses’?

Answer 3

‘decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims’.

Question 4

What are the 2 components of Expenses?

Answer 4

1. Expenses - Arise from ordinary activities, for example, cost of sales, wages, depreciation
2. Losses - Meet the expense definition but may or may not arise from ordinary activities, for example, from the disposal of a non-current asset

Question 5

Define ‘Sole proprietorship’?

Answer 5

Single owner with full control, funded by capital/loans, wealth changes with performance, allows owner withdrawals, and uses simple accounting.

Question 6

Define ‘Public company’?

Answer 6

Thousands of tradable shares, potential dividends, Board-run decisions, complex accounting and financial reporting, and standard corporate taxation.

Question 7

Define the term ‘Companies’?

Answer 7

Independent legal entity, limited liability, transferable shares, perpetual existence, share-based funding, divided ownership/management, and strict regulatory compliance.

Question 8

Define the term ‘Equity’? Also, what’s the formula for Equity?

Answer 8

‘the residual interest in the assets of the entity after deducting all its liabilities’. Equity = Assets - Liabilities.

Question 9

Define the term ‘Share Capital’?

Answer 9

The amount invested in the company by shareholders

Question 10

Define the term ‘Retained Earnings’?

Answer 10

Profits/losses retained in the business from this year and previous years that were not distributed to owners or transferred to reserves.

Question 11

Define the term ‘Reserves’?

Answer 11

Increases in equity from other sources, as well as transfers from retained earnings.

Question 12

What’s ‘company tax’? What is it’s significance?

Answer 12

Companies are taxed as separate legal entities at 30%, with tax expense shown before profit and final liability adjusted per tax rules.

Question 13

Define the term ‘Operating cycle’?

Answer 13

is the length of time it takes for a business to acquire goods, sell them to customers and collect cash from the sale.

Question 14

Define the term ‘pro rata’?

Answer 14

on a proportionate basis.

Question 15

Define the term ‘Cash dividend’?

Answer 15

a pro rata distribution of profit paid in cash to shareholders.

Question 16

Define the term ‘Share dividend’ (AKA Bonus Share Issue)?

Answer 16

is a pro rata distribution of the company’s shares to shareholders.