AC105 - Week 2: 3 statements

questions 3 financial statements answer

cash movements
accumulated wealth
available economic resources

3 financial statements

cash flows, income statement (P/L), SOFP

which statement shows movement of cash

cash flow

which statement shows accumulated wealth over a period of time

income statement

which statement shows economic resources over time

SOFP

what are the 3 statements often referred to as

final accounts of an entity 

equity in accounting

owner's claim on assets (assets - liabilities) equity is the residual interest in the assets of the entity after deducting all its liabilities

assets

economic resources entity owns that provide future services or benefits

liabilities

present obligation to transfer economic resources from a past transaction

claims on assets of other parties apart from the owners

What characteristics must an asset have to qualify as an asset

It must be an economic resource

The economic resource must be under control of the business

The economic resource must be capable of measurement in monetary terms (faithful representation)

What is an economic resource

A resource that provides a right to potential economic benefits although these benefits must not be equally available to others

(A public good can therefore not be regarded as an asset for accounting purposes)

What are physical assets known as

Tangible Assets

What are non-physical asset known as

Intangible Assets

What is a claim

An obligation of the business to provide cash or some other form of benefit to an outside party

It will normally arise as a result of the outside party providing resources for use by the business

What is the accounting equation

Assets = Liabilities + Equity

What is the reporting period

the period over which businesses measure their financial results

What are 2 types of assets

Current assets

Non-current assets

What are current assets

Assets that are help for the short term

What conditions does an asset have to meet to be considered as a current asset

- They are held for sale or consumption during the business's normal operating cycle

-They are expected to be sold within a year after the date of the relevant statement of financial position

-They are held principally for trading

-They are cash or near cash such as easily marketable, short term investments

What re non-current assets (fixed assets)

Assets chatty do not meet the definition of current assets so they tend to be held for long term operations

What are 2 types of liabilities

Current liabilities and Non current liabilities

current liabilities

amounts due for settlement in the short term

conditions for a liability

settled within operating cycle

arise from trading

settled within a year after the date of the relevant SOFP

no right to defer settlement beyond 1 year after the date of the relevant statement of financial position

non-current liabilities

longer term liabilities
e.g. long-term bonds

4 ways SOFP help users

insights on how funds are deployed

basis for assessing the value of the business

measure of liquidity

tests for solvency

inventory

merchandise for sale

2 types of claims

equity + liability

SOFP layour

Assets (least to most liquid), Liabilities + Equity

What are the 5 aspects of a complete set of financial statements

1. Statement of financial position

2. Income Statement

3. Cash Flow Statement

4. Statement of changes in equity

5. Notes

retained earnings

accumulated Profits/Losses

trade receivables

money owed to a company by customers (received goods not paid)

SOFP

shows economic resources available at a given point in time

what are drawings

contra account in owners equity through withdrawal of funds for personal use

trade payables

liability that represents amounts owed to suppliers for goods and services purchased on credit

advance payments received by customers

A type of liability where customers pay in advance for goods to be provided in future

dividends payable

liability where dividends that have been declared by the board of directors but not yet paid to shareholders

bank loans vs interest 

interest is an expense not a liability