FA flashcards

* Management * Investors and potential investors * Employees * Lenders * Government agencies * Suppliers * Customers * Competitors * The public

The assets, liabilities and capital of the business – the financial position of the business at one point in time.

The revenues, expenses and profit or loss of the business – the financial performance of the business over a period of time.

An asset is an item owned by the business.

A liability is an item owed by the business.

The gross profit is the sales revenue less the cost of goods sold.

The business is treated as separate from its owners.

Capital is the amount due to the owner(s) of the business.

Drawings is anything taken from the business by a sole trader, whatever he/she chooses to call it.

Non-current liabilities are liabilities payable more than 12 months after the reporting date.

Current liabilities are liabilities payable within 12 months of the reporting date.

Current assets are assets which are expected to be realised in the normal course of trading.

Non-current assets are assets acquired on a long-term basis, not held for resale in the normal course of trading.

The increase in net assets = capital introduced + profit – drawings

Net assets = total assets – total liabilities

Drawings will be a debit entry in the drawings account.

Debit purchases Credit payables

Debit receivables Credit sales

An early settlement is a discount given if payment is made quickly.

A trial balance checks that for every debit entry made, there has been an equal credit entry.

Inventory is valued at the lower of ___ and ___?

Inventory is valued at the lower of cost and net realisable value (NRV).

Net realisable value is the expected selling price less any expected future costs there will be before sale.

Sales tax is a form of indirect taxation.

Input tax is the tax charged on purchases.

Is output sales tax the tax charged on purchases or the tax charged on sales?

Output tax is the tax charged on sales.

The gross selling price is the selling price including sales tax.

The net selling price is the selling price excluding sales tax.

A prepaid expense occurs when some of the next years expense has been paid in the current year.

Accrued income is income for this year that has not been received by the year end.

Prepaid income is income for the next year that has been received in the current year.

An irrecoverable debt is an amount owing to the business that will not be received.

The allowance for receivables is made to recognise the possibility that some of the receivables might not be received (because they are doubtful).

An aged receivables analysis is a list showing how much each customer owes and how old their debts are.

To help keep track of outstanding debts and follow up on any that are overdue.

A credit limit is the maximum amount of credit that the business is prepared to allow to the customer.

Capital expenditure refers to the purchase of non-current assets and expenditure that enhances the asset (will appear on the Statement of Financial Position).

Revenue expenditure refers to expenses of running the business (will appear on the Income Statement).

Tangible assets can be touched (have a physical substance) e.g. machines, buildings, motor vehicles. Intangible assets cannot be touched (do not have a physical substance) e.g. goodwill, development expenditure.

The non-current asset register is a record of the non-current assets held by the business. It is for internal control purposes and is not part of the double entry bookkeeping.

Depreciation is used to reflect the cost of using a non-current asset. It matches the cost of using the assets to the revenues generated by the asset over its useful life.

Buildings will be depreciated because they have a limited useful life. Land will not normally be depreciated because it has an unlimited life.

The depreciation charge is the same each year – the cost is spread over the expected useful life.

A reducing amount of depreciation is charged each year (a fixed percentage of the net book value).

A delivery note is provided by the supplier and lists the quantity and description of the goods being supplied.

A goods received note is prepared by the company receiving the goods, and lists the quantity and description of the goods being received.

Both are prepared by the supplier of the goods or services and detail the amount of payment being requested. The supplier calls it a sales invoice, the customer calls it a purchase invoice.

A statement is prepared by the supplier and summarises the amount owing by the customer.

A credit note is a ‚negative invoice‘ and is prepared by the supplier to cancel a previous invoice (or part of an invoice) because of goods having been returned or because of an overcharge on the invoice.

A refund is a repayment of cash previously paid. It can occur for various reasons – e.g. the customer overpaid by mistake; the customer returned goods for which they had already paid.

The general ledger contains all the accounts necessary to produce the financial statements. The double entry is made between these accounts.

The bank reconciliation is done to check the accuracy of the entries in the cash book (and the accuracy of the bank statement).

An outstanding cheque is one that has been entered in the cash book but has not yet appeared on the bank statement.

An uncleared lodgement is a receipt that has been entered in the cash book but has not yet appeared on the bank statement.

If a bank statement is showing a debit balance for a company, does it mean that the company has money at the bank or that the company is overdrawn?

A debit balance on a bank statement means that the company is overdrawn.

An overdraft is a negative balance at the bank (i.e. the company owes money to the bank).

An error of omission is a transaction that has not been recorded in the books of the company.

An error of commission is when an entry has been posted to the wrong account.

An error of principle is when an entry that should have been recorded in an asset account has been recorded in an expense account (or vice versa).

Compensating errors are two or more errors when the net effect is zero.

An error of original entry is when the correct double entry has been made, but where the amount is wrong.

A mark-up is the gross profit expressed as a percentage of the cost of sales.

The gross margin is the gross profit expressed as a percentage of the sales.

The Statement of Changes in Equity shows the reasons for the changes in share capital and reserves during the accounting period.

Ordinary shares have voting rights – preference shares usually do not. The dividend on ordinary shares is recommended by the directors – preference shares carry a fixed dividend. The ordinary dividend is paid out of profits left after the preference dividend has been paid.

A rights issue is an offer of new shares to existing shareholders in proportion to their existing shareholdings.

A bonus issue of shares is an issue of new shares to existing shareholders in proportion to their existing shareholdings, free of charge. No cash is received.

The share premium account records the excess of the amount of cash received from the issue of shares over the nominal (par) value of the shares.

Capital reserves are the share premium account and the revaluation reserve. They represent amounts owing to shareholders, but this amount cannot be paid out as dividend.

Revenue reserves are profits that have been earned (and retained) by the company – retained earnings and general reserve. They represent amounts owing to shareholders that can be paid out as dividend.

In the context of IAS 10 – Events after the reporting period – what is the treatment of an adjusting event?

The financial statements are amended to reflect the event.

In the context of IAS 10 – Events after the reporting period – what is the treatment of a non-adjusting event?

The financial statements are not amended to reflect the event, but it is disclosed by way of a note if material.

A provision is a liability of uncertain timing or amount.

A contingent liability is a possible liability that may arise due to past events.

A contingent asset is a possible asset that may appear due to past events.

Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities

It will not appear because there is no cash received – the shares are issued free.

It will not appear because there has been no cash received.

It will appear under the heading Cash Flows from Financing Activities.

A subsidiary is an entity that it is controlled by another entity (usually with a shareholding of more than 50%).

It is the difference between the fair value of the subsidiary and the fair value of the net assets of the subsidiary.

An associate is an entity over which the investor has significant influence but which is not a subsidiary (usually due to a shareholding of 20% to 50%).