Assets & Liabilities
A present economic resource that is expected to be sold, consumed or converted into cash within 12 months after the end of the reporting period.
What is a current asset?
These costs change directly with changes in production volume.
What are variable costs?
Useful information is provided when the financial reports of a business can be compared over time and with similar information from other businesses.
What is comparability?
This accounting assumption states that the records of assets, liabilities and business activities of the entity are kept separate from those of the owner and other entities.
What is the entity assumption?
Name two aspects of ethical employment that a socially responsible business should ensure.
What are providing safe working conditions and paying employees a fair wage?
Obligations expected to be settled within 12 months are called these liabilities.
Current liabilities
Give two examples of variable costs.
What are direct materials and direct labour?
This qualitative characteristic helps to assure users that financial information faithfully represents what it claims because different knowledgeable and independent observers can reach the same conclusion.
What is verifiability?
This accounting assumption requires that revenues are recognised when earned and expenses when incurred, so profit is determined by matching revenues and expenses in the same reporting period instead of when cash is received or paid.
What is the accrual basis assumption?
Why is property considered a relatively illiquid investment compared to shares?
What is because property cannot be quickly converted to cash and must be sold as a whole, often taking months and incurring significant transaction costs?
Explain how a non‑current asset differs from a current asset.
Non‑current assets are resources expected to be used by the business for years and not held for resale, whereas current assets are expected to be sold, consumed or converted into cash within 12 months.
These costs do not change with production volume. Name two examples.
What are fixed costs such as rent and advertising?
Financial information should be made available to decision-makers in time to influence their decisions.
What is timeliness?
This accounting assumption presumes that a business will continue operating into the foreseeable future and will not be forced to liquidate, allowing assets and liabilities to be reported at cost rather than liquidation value.
What is the going concern assumption?
What are franking credits and why are they valuable to Australian investors?
What are tax credits attached to franked dividends that recognise company tax already paid, allowing investors to offset their own tax or receive a refund so dividends aren’t taxed twice?
This equation shows how assets, liabilities and owner’s equity are related.
Assets = Liabilities + Owner’s Equity (the accounting equation)
What does cost‑volume‑profit (CVP) analysis help businesses determine?
The number of units a business must sell to break even or achieve a desired profit
Financial information should be comprehensible to users with a reasonable understanding of business and economic activities, so it must be presented clearly and concisely.
What is understandability?
This accounting assumption requires that financial reports are prepared for a specific period, such as a month or year, dividing the life of a business into arbitrary periods so profits can be determined and comparisons made over time.
What is the period assumption?
Give one benefit of diversification when investing in shares.
What is spreading risk across different sectors and geographies so that consistent dividend income can offset losses from more volatile investments, creating a more resilient portfolio?
Describe the difference between internal and external finance, giving an example of each.
Internal finance is generated within the business, such as capital contributions from the owner; external finance comes from outside sources, such as a bank overdraft
In cost-volume-profit analysis, when the desired profit is zero, the quantity of items that must be sold to cover total fixed and variable costs is called the ______.
What is the break‑even point?
This qualitative characteristic requires that financial information be complete, neutral and free from error.
What is faithful representation?
Name two reasons why many new businesses fail.
What are too little financing and a poor location or lack of social media presence?
Explain why dividend income from shares can be appealing to investors compared to rental income from property.
What is because share portfolios often provide higher yields, dividends can be reinvested to accelerate capital growth, and investing in shares requires less maintenance than managing physical property?