Financial Statements

Vocabulary-style flashcards covering key terms related to corporate form, financial statements, and notes.

Corporate form of business

A legal entity separate from its owners with advantages like limited liability, unlimited life, separation of ownership and management, easy ownership transfer, and easier capital raising.

Separate legal entity

A distinct legal person that can own assets, incur liabilities, and enter contracts apart from its owners.

Limited liability

Owners are financially responsible only up to the amount invested in the company.

Unlimited life

The company continues to exist beyond the life of its shareholders or management.

Separation of ownership and management

Owners delegate daily running of the business to managers while retaining ownership.

Transfer of ownership

Shares can be bought/sold, allowing easy transfer of ownership.

Easier to raise capital

Corporations can attract funds from a wide range of investors, including equity and debt.

Constitution (charter/articles)

The legal documents establishing a company's structure, rules, and purpose.

Taxation of company profits

Corporate tax on earnings, which may differ from taxes on individuals.

Agency relationship

A principal hires an agent (e.g., managers) to act on the principal’s behalf.

Agency problem

Conflict of interest between principals and agents due to misaligned goals.

Information asymmetry

A situation where one party has more or better information than another.

Balance Sheet (Statement of Financial Position)

A snapshot of assets, liabilities, and equity at a specific date.

Assets

Resources controlled by the entity expected to yield future economic benefits.

Tangible assets

Physical assets with substance (e.g., land, buildings, equipment).

Intangible assets

Non-physical assets (e.g., trademarks, patents, goodwill).

Current assets

Assets expected to be converted to cash or used within one year or operating cycle.

Non-current assets

Long-term assets used for more than one year.

Liabilities

Present obligations to transfer resources due to past events.

Current liabilities

Obligations expected to be settled within one year.

Non-current liabilities

Obligations due beyond one year.

Equity

Owner(s)’ claims against the business; the residual interest after liabilities.

Capital / Share capital

Funds contributed by owners in the form of shares.

Retained earnings

Profits kept in the business after distributing dividends.

Ordinary shares

Common shares that grant voting rights and a right to a share of profits and assets.

Dividends

Distribution of profits to owners, in cash or non-cash form.

Income Statement (Statement of Profit or Loss)

Shows the company’s financial performance over a period (revenues minus expenses = net profit or loss).

Revenues

Increases in economic benefits from ordinary activities (e.g., sales, service revenue).

Expenses

Outflows or depletions of assets to generate revenues (e.g., salaries, utilities).

Accrual basis of accounting

Revenues are recognized when earned and expenses when incurred, regardless of cash flow.

Recognition of revenues

Revenues are recorded when earned, when goods/services are delivered and benefits are probable and measurable.

Recognition of expenses

Expenses are recorded when incurred, when benefits are used, regardless of cash.

Single-step income statement

An income statement format that subtracts total expenses from total revenues in one step.

Multi-step income statement

An income statement format with subtotals (e.g., gross profit, operating income) for clearer analysis.

Statement of Changes in Equity

Shows changes in equity accounts (capital, retained earnings) over a period.

Cash Flows Statement

Reports cash inflows and outflows categorized into operating, investing, and financing activities.

Operating activities

Cash flows from the core business operations (revenues and expenses).

Investing activities

Cash flows from the acquisition and disposal of long-term assets and investments.

Financing activities

Cash flows related to long-term liabilities and equity (issuance/repayment of debt, equity).

Notes to Financial Statements

Supplementary information detailing accounting policies, balances, and explanations not shown elsewhere.

Auditor’s Report

Independent auditor’s opinion on whether the financial statements present fairly, in accordance with standards.

Management’s Discussion and Analysis

Narrative section discussing results, liquidity, obligations, and future plans.