Theory
What does the term "liability" mean in accounting?
A present obligation of the business to pay money or provide goods or services in the future.
What is the purpose of balance day adjustments?
to ensure income and expenses are recorded in the correct accounting period
Which report include revenue and expenses?
SOPL
Why do we compare financial ratios to industry benchmarks?
To evaluate competitiveness and identify areas for improvement
True or false: Your exam is 2 hours long + 15 mins perusal
True
What is profit determination?
Profit determination is the process of calculating a business’s net profit by subtracting total expenses from total revenues for a specific period.
Name the four BDAs
Accrued Revenue, Prepaid Expenses, Accrued Expenses, Unearned Revenue
What accounts are included in the SOFP?
Assets, Liabilities, and Owner's Equity
Which profitability ratio measures the percentage of revenue that is profit?
Net Profit Ratio (NPR)
How do you write the title for any report?
What is the purpose of a Bank Rec Statement?
The purpose of a bank reconciliation statement is to match the business’s cash records with the bank statement to identify and correct any discrepancies.
If wages are paid 10 days after June 16, what BDA is affected?
None. Payment is made within June (current reporting period).
What section of the Statement of Cash Flows would a loan repayment appear in, and how does it affect the business’s cash position?
A loan repayment appears in the financing activities section and it decreases the business’s cash balance.
They may struggle to meet short-term obligations.
What is the accounting equation?
Assets = Liabilities + Owner’s Equity
What is the accounting period concept?
The accounting period concept states that a business’s financial activities should be recorded and reported over specific, consistent time periods to allow for meaningful comparison and analysis.
What are the 4 BDAs natures?
Prepaid expenses (asset), Accrued Expense (liability), Unearned revenue (liability), Accrued Revenue (asset)
Why is it necessary to include Balance Day Adjustments before preparing final financial statements, and what could be the consequence of omitting them?
Balance Day Adjustments ensure that revenues and expenses are recorded in the correct accounting period according to the accrual basis; omitting them can lead to misstated profit, assets, or liabilities, resulting in inaccurate financial reports and poor decision-making.
Explain how a decrease in Accounts Receivable and an increase in Advertising Expense could both contribute to a decline in Net Profit, even if cash at bank has increased.
A decrease in Accounts Receivable means more customers paid their debts, boosting cash at bank, but this is not new revenue—just collection of past sales. An increase in Advertising Expense is a new cost that reduces profit, and if revenue doesn't increase enough to offset it, Net Profit will decline despite a higher cash balance.
What is the difference between cash and accrual accounting?
Cash accounting records when cash is received/paid, accrual records when earned/incurred
How can the application of the accrual accounting and going concern principles conflict when a business is facing financial difficulties?
The accrual principle requires recognising income and expenses when earned or incurred, assuming operations will continue, but if a business is unlikely to survive (going concern is doubtful), financial reports may need to reflect liquidation values instead—creating a conflict between accurate accrual reporting and the business’s uncertain future.
If $1,200 rent is paid for 3 months in advance, what is the prepaid expense at the end of month one?
$800
Why is depreciation considered a non-cash expense, and how does its inclusion in the Income Statement still impact the financial position of a business?
Depreciation is a non-cash expense because it does not involve an actual outflow of cash, but it spreads the cost of an asset over its useful life; including it in the Income Statement reduces profit, which in turn lowers owner's equity on the Balance Sheet, affecting the business's reported financial performance and position.
If a business’s Net Profit Ratio has decreased significantly from 20% to 10% while its Return on Owner’s Equity (ROE) has increased from 8% to 12%, what could be the potential underlying cause, and how would this affect the business's financial strategy?
The decrease in the Net Profit Ratio suggests that the business is earning less profit from its revenue, possibly due to rising costs or declining sales, while the increase in ROE indicates that the business is generating more return on the owner’s investment, likely due to higher leverage or better use of equity. This could suggest a shift towards using debt to finance operations, and the business might need to focus on improving profitability to ensure long-term sustainability while managing its increased financial risk.
Name one internal and one external user of accounting reports.
Internal: Manager; External: Investor (teacher discretion allowed)