Chapter 1 Summary - Financial Statements and Business Types

Flashcards covering the key concepts of financial statements, types of businesses, and important definitions from Chapter 1.

What does the statement of profit or loss record?

It records all income or revenue and expenditure for a given period of time.

What is the purpose of the statement of financial position?

It shows the position of the business at a specific point in time, often referred to as a snapshot.

How does profit and loss differ from the statement of financial position?

Profit and loss is over a period of time, while the statement of financial position is a snapshot at a point in time.

Define an asset.

An asset is a present economic resource controlled by the entity as a result of a past event, with the potential to generate economic benefits.

What is a liability?

A liability is an obligation to transfer an economic resource as a result of a past event.

What is equity in the context of financial statements?

Equity is the residual interest in the assets of the entity after deducting all its liabilities.

Name the three types of businesses mentioned.

1. Sole trader 2. Partnership 3. Limited liability company.

What distinguishes a limited liability company from a sole trader?

A limited liability company is a separate entity with limited liability for owners, while a sole trader is fully responsible for all business debts.

Who are the users of financial statements?

Management, government, the general public, lenders, analysts and advisers, employees, and shareholders.

What is corporate governance?

Corporate governance is a system for directing and controlling companies and entities.