Financial Statement
What are the elements of Income Statement?
Income, Expenses, Profit or Loss
Define Income
Increase in Assets or Decrease in Liabilities;
which increases the equity
AND are not a contribution by the owner.
Define Period Reporting
The life of a business is divided into time periods of equal length for reporting purposes.
Free Points!
Free Points!
What is the purpose of Income Statement
To calculate the profit/ loss for the period
Define Liabilities
Present obligations of the business with past transactions and which will bring future outflow of resources
Define Historical Cost
Assets and liabilities are recorded at the amount of cash or cash equivalent paid at the time of acquisition
Define Materiality
Information is material if its omission or misstatement could influence the economic decisions
Information is material if leaving it out or getting it wrong could affect the financial decisions
What is the purpose of Statement of Accounting Policies
The purpose of a Statement of Accounting Policies is to inform users about the rules and guidelines that are used to prepare the financial statements
Explain how "Electricity Bill paid" is an expense, using its definition
Decrease in assets of cash(bank), which will decrease the profit of this year, and is not a distribution to the owner.
Explain WHY the financial statements must be prepared with the concept of Period Reporting
It is easier to compare the financial performance of a business entity
Materiality of information can be determined by...
By its nature and size/value
Identify TWO differences between Revenue Expenditure and Capital Expenditure
Revenue Expenditure
Regular payments (daily, weekly, monthly)
Ongoing decision
Only affects the profit for this financial year
Relatively involves a smaller amount of spending
Capital Expenditure
Irregular payments
One-off decision
Can affect the profit for upcoming financial years
Relatively involves a larger amount of spending
Explain how "Mortgage" is a liability using its definition.
The business has a present obligation of making repayments that arose from past transactions of signing the contract and the resource cash(bank) will be outflown in the future
Define Accrual Basis concept
Transactions are recognised when they occur and reported in the relevant financial statements of the accounting period to which they relate.
Record income when it’s earned rather than when it’s received;
expense recorded when it’s incurred, rather than when it’s paid
Faithful Representation: For the information to be ‘faithfully represented’ it must be...
Complete; Neutral and Free from Error
What are some limitations of Cash Flows statement?
➡︎ Does not show credit transactions
➡︎ Does not include non-cash items
➡︎Based on past cash transactions and this does not show current cash obligations
Fully explain how Shop Fittings (worth $5,000) are assets for a business. (Use its definitions AND recognition criteria)
Past: Purchasing Shop fittings from the supplier
Present: Has exclusive rights to use it
Future: Economic benefits will inflow by using it to generate profits
More than a 50% probability that it will help the business generate income
The value of $5,000 can be measured by its receipt/ invoice
Fully explain why “Electricity paid, $1,000” is an expense for an entity, and justify the expense being reported in the Income Statement.
Decrease in Assets of cash by $1,000
Will Decrease the profit of a business
Is not a distribution to the owner
The decrease in assets has happened.
The value measured reliably by its receipt
Fully explain the concept of Understandability
Information is understandable when it is classified, characterised and presented clearly and concisely
Someone (user) with reasonable business knowledge and willingness to study information with reasonable diligence