LUBS1235 2. Structure of Financial Statements

What are the three main financial statements

Statement of Financial Position, Income Statement, and Cash Flow Statement

What does the Statement of Financial Position show

Assets, liabilities, and equity at the end of a period

What does the Income Statement show

Revenues and expenses to determine profit or loss

What does the Cash Flow Statement show

Sources and uses of cash (operating, investing, financing)

How are the three statements interrelated

Profit from the Income Statement feeds into equity in the SFP; Cash Flow explains changes in cash balances; Balance Sheet links beginning and ending positions

Define an asset

A present economic resource controlled by the business, expected to provide future benefits

What is the difference between current and non-current assets

Current assets are short-term (inventory, receivables, cash); non-current assets are long-term (land, machinery, patents)

Define a liability

A present obligation to outsiders that the business cannot avoid

What is equity

Owners’ claim on the business (capital invested + retained profits)

Define revenue

Inflows of assets or reductions in liabilities from trading activities

Define expenses

Outflows of assets or increases in liabilities incurred to generate revenue

How is profit calculated

Profit = Revenue – Expenses

What is the business entity convention

Business and owner(s) are treated as separate entities

What is the historical cost convention

Assets recorded at acquisition cost

What is the prudence convention

Financial statements should err on the side of caution

What is the going concern convention

Assume the business will continue operating for the foreseeable future

What is the dual aspect convention

Every transaction has two aspects (debit and credit)

What is the matching convention

Expenses matched to revenues they helped generate in the same period

What is the accruals convention

Profit is revenue – expenses, not cash inflows – outflows

Which statements use accruals vs cash accounting

SFP & IS use accruals; SCF uses cash accounting

State the basic accounting equation

Assets = Capital + Liabilities

How does profit affect the accounting equation

Profits increase owner’s capital/investment

Give an extended form of the accounting equation

Assets = Capital + (Income – Expenses) – Drawings + Liabilities

What do the mnemonics DEAD and CLIC stand for

DEAD = Debits: Expenses, Assets, Drawings.
CLIC = Credits: Liabilities, Income, Capital

What are the two common layouts for the SFP

Standard layout (Assets → Liabilities → Equity) and Alternative layout (Assets → Equity + Liabilities)

Classify: Coffee machine

Non-current asset

Classify: Bank loan

Non-current liability

Classify: Bank balance

Current asset

Classify: Coffee beans (inventory)

Current asset

Classify: Supplier debt (trade payable)

Current liability

In a worked example, if total assets = £10,600, liabilities = £1,300, what is capital

£9,300 (to balance)