Financial Statements of a Business

These flashcards cover the fundamental concepts of financial statements, including definitions, formulas for profit calculation, the accounting equation, and the categorization of assets, equity, and liabilities.

What is the objective of any business as stated in the text?

To earn profits from their business activities.

What are the two main financial statements prepared for a sole proprietor or sole trader?

1. Profit or Loss Statement, 02. Statement of Financial Position

What is meant by the term "Accounting Period"?

A specified period of time for which financial statements are prepared, generally considered as a twelve months period of time.

How is Sales revenue defined in the context of the Profit or Loss Statement?

The total of cash sales and credit sales done during a particular accounting period.

What is the formula for calculating Gross profit?

$$Gross\,profit = Sales\,revenue - Cost\,of\,sales$$

How is the cost of sales calculated when a closing stock exists?

By deducting the value of the closing stock from the cost of the goods that were presented for sales.

What elements are taken into consideration when calculating the cost of the goods sold?

Opening stock, the total cost of the stock (including cash and credit purchases), and closing stock.

Define Income as it relates to business equity.

Increase in equity other than the introduction of capital by owners.

What are three examples of "other income"?

Interest income, rent income, and dividend income.

How are Expenses defined in the text?

The decreases in equity other than the drawings of the owner.

What are the four categories of expenses classified in the profit and loss account?

1. Distribution expenses, 02. Administration expenses, 03. Other expenses, 04. Financial expenses.

What is the definition of Distribution expenses?

Expenses incurred for selling and distribution of a trading business, such as promotional expenses, carriage outwards, and sales commission.

What are Financial expenses?

Expenses incurred for borrowing of funds and in maintaining bank accounts, such as interest for bank loans and bank charges.

What information does the Statement of Financial Position reflect?

The financial position of the business as at a particular date, reflected through assets, equity, and liabilities.

State the basic accounting equation.

$$Assets = Equity + Liabilities$$

What is an Asset?

A resource controlled by the business as a result of a past transaction and from which future economic benefits are expected to flow to the business.

What is liquidity in the context of financial statements?

The ability to convert an asset to cash with minimum losses in a short period of time.

In what order are assets presented in the Statement of Financial Position?

In the order of liquidity, where assets with the less liquidity are shown first.

How is Equity defined and how does it relate to assets?

The part of asset that belongs to owners of the business; it is the residual once assets are used to settle external liabilities.

What is the formula to calculate closing Equity at the end of an accounting period?

$$Equity = Capital\,as\,at\,the\,start + Net\,Profit - Withdrawals$$

What are Liabilities?

Obligations of a business that had arose as a result of past transactions or events.

How are liabilities categorized in a Statement of Financial Position?

Non-current liabilities and current liabilities.