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21 Cards in this Set
- Front
- Back
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What are the 3 financial statements? |
- Income statement - Statement of financial position - Cash flow statement |
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What is the statement of financial position? |
A statement of what a company OWES and OWNS on a particular date. TOP SECTION - Non-current assets - Current assets - TOTAL ASSETS BOTTOM SECTION - Share capital/Owners Equity - Retained profit - TOTAL EQUITY - Non-current liabilities - Current liabilities - TOTAL EQUITY AND LIABILITIES (TOTAL TOP & TOTAL BOTTOM MUST BALANCE) |
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What are the characteristics of an asset? |
- A profitable future benefit - Business has exclusive rights to control benefit - Benefit must arise from past transaction - Asset must be measurable in monetary terms |
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What are current and non-current assets? |
Current asset - An asset whose benefit will be used up in the current accounting period. Non-current asset - An asset that will bring the firm economic benefit for more than 1 accounting period. |
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What are current liabilities and non-current liabilities? |
Current liabilities - Debts owed by the organisation that will be paid back within a year. Non-current liabilities - Amounts due to thrid parties that are not liable for repayment within the year. |
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What is Equity? |
Equity is made up of share capital and retained profits. |
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What is Owners' Equity? |
- What the business owes the owner - Also know as 'capital' - Claim on the assets of the business - No fixed repayment date - The residual amount found by deducting all of the entity's liabilities fromall of the entity's assets - |
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What are the uses of the Statement of Financial Position (SOFP)? |
- Shows liquidity of the business - Shows the mix of assets held by the business - Shows financial structure of business |
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What is an Income statement? |
The purpose of the income statement is to measure and record profit. PROFIT = Revenue - Expenses |
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What is the format of an Income statement? |
(Sales Revenue) - (Cost of goods sold) = Gross profit (Gross profit) - (Distribution, administrative and other expenses) = Operating profit (Operating profit) - (Loan interest) = Profit before tax (Profit before tax) - (Taxation) = Profit after taxation (Profit after taxation) - (Proposed dividend) = Retained profit |
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What is the matching concept? |
It is applied when calculating profit (in income statement):
Sales of that period MUST BE MATCHED to the expenses of that period. (We may not have paid them yet but if they helped generate this period's sales revenue they MUST be included in same income statement) |
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Example: MATCHING CONCEPT. |
End of 2017 : £1000 wage bill still owing. In the income statement; - Record bill as expense in 2017, when it was incurred? - Or 2018 when the bill is paid? ANS : The company had the 'benefit' of the labour in 2017 - that labour helped generate 2017 sales revenue. . MATCH - Expenses to the sales revenue they helped to generate. Therefore record £1000 as an expebse in 2017 - regardless of non-payment. |
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What are the rules of the MATCHING CONEPT? |
In the income statement list of expenses: - Include expenses for which you have had 'benefit' but have not yet paid - ACCURALS. - Exclude payments that were made this year but for which the 'benefit' will come in a future period - PREPAYMENTS. - If you incur an expense this year and you are unsure whether it will bring future 'benefit', include expense in this year's income statement - PRUDENCE PRINCIPLE. |
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When should sales be recognised? |
Sales should only be recognised (recorded in the income statment) when they have been 'realised' - when the activities to generate the revenue are substancially complete. Apply the 'Realisation Convention' : - Customer requirements met as per order/contact - Customer formally accepts goods/services - Legal claim for payment established |
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What is depreciation? |
- The amount of the asset 'used up' in generating sales revenue. - Its an expense in the income statement. - Matching the cost of asset to revenues asset helps to generate each year. |
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What do you need to calculate depreciation? |
1 Cost of asset 2 The useful life of asset 3 Residual value 4 Choice of depreciation method |
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What are the 4 methods of depreciation? |
1 Straight Line (SL) 2 Reducing Balance (RB) 3 Sum of Digits (SoD) 4 Units of Service (UoS) |
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What is the Straight Line depreciation method? |
- Equal annual charge to Income statement - Easy to calculate and understand - Widely used - Especially used where asset depletion relates to the passage of time
Cost - Residual Value Life of asset (years) |
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What is Reducing Balance method of depreciation? |
- Produces the highest depreciation charge in the first year - Each subsequent year's depreciation gets less and less - Apply the RB rate (you will be given this) to the Net Book Value @ the start of the year |
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What is the Sum of Digits depreciation method? |
- Less common - Similar depreciation schedule to RB - Key "digit" is the number of years' of useful life Cost - Residual Value x Life at start of the year Sum of Digits |
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What is the Units of Service depreciation method? |
- Depreciation charged is directly related to the asset's use (i.e. hours used or units made by the asset) - The more you use the asset in a particular year, the higher the depreciation charge - Problem? Estimating the use in advance (Cost - scrap) x use in year Total use - - |
