(Week 4) - Financial Statements

Questions and Answers

Which equation represents the relationship between assets, liabilities, and owner's equity?

Assets = Owner's Equity - Liabilities

Owner's Equity = Assets + Liabilities

Assets = Liabilities + Owner's Equity (correct)

Assets = Liabilities - Owner's Equity

Current liabilities are expected to be settled after 12 months.

False

What is the purpose of the statement of profit and loss?

To provide a summary of an entity's revenues and expenses over a specific period.

The statement of financial position lists an entity's assets, liabilities, and __________.

owner’s equity Signup and view all the answers

Match the following terms with their definitions:

Assets = Resources owned by the entity Liabilities = Obligations owed by the entity Owner's Equity = The owner's residual interest in the assets of the entity Current Assets = Assets expected to be realized within the next 12 months Signup and view all the answers

Which of the following is an example of a non-current asset?

Property, Plant, and Equipment Signup and view all the answers

The distinction between current and non-current assets or liabilities is based on their liquidity.

True Signup and view all the answers

What does depreciation refer to in accounting?

The allocation of the cost of an asset over its useful life. Signup and view all the answers

In accounting, the term __________ means recognizing revenue and expenses when they are incurred regardless of cash movement.

accrual accounting Signup and view all the answers

What is the relationship between the statement of profit and loss and the statement of financial position?

The profit or loss from the statement of profit and loss affects owner's equity in the statement of financial position. Signup and view all the answers

Which of the following is classified as a Non-Current Asset?

Goodwill Signup and view all the answers

The statement of profit or loss shows all changes to owner’s equity for a specified period.

False Signup and view all the answers

What is the formula for calculating profit?

Profit = Income - Expenses Signup and view all the answers

The systematic allocation of the cost of a tangible asset over its useful life is called ________.

depreciation Signup and view all the answers

Which accounting method records revenues and expenses at the time cash changes hands?

Cash Accounting Signup and view all the answers

Match the following asset classes with their descriptions:

Cash and cash equivalents = Liquid assets that are readily available Inventories = Goods available for sale Intangible assets = Non-physical assets like patents Property, plant and equipment = Tangible fixed assets used in production Signup and view all the answers

Unearned Revenue is considered a liability on the balance sheet.

True Signup and view all the answers

Explain what gross profit measures.

Gross profit measures the revenue remaining after deducting the cost of sales. Signup and view all the answers

A ________ account is typically found in sole proprietorships to track profits and losses.

profit/loss Signup and view all the answers

Which of the following is NOT a common method of depreciation?

Units of Measurement Signup and view all the answers

What is the annual depreciation expense if the cost of the asset is $40,000, the expected residual value is $8,000, and the expected useful life is 4 years?

$8,000 Signup and view all the answers

Accumulated depreciation increases the asset's carrying amount on the balance sheet.

False Signup and view all the answers

What does accumulated depreciation reflect?

The amount of depreciation recorded over the life of the asset to date. Signup and view all the answers

The carrying amount of an asset is also known as its ______.

book value Signup and view all the answers

Match the following depreciation methods with their characteristics:

Reducing Balance Method = Allocates a decreasing amount each period based on a set percentage Units-of-production Method = Calculates depreciation based on actual units of activity Straight-Line Method = Allocates an equal amount of depreciation over the asset's useful life Sum-of-the-years'-digits Method = Accelerates depreciation by using the sum of the years to determine depreciation per year Signup and view all the answers

Which of the following reflects how the reducing balance method works?

Depreciation reduces each year based on the carrying amount. Signup and view all the answers

The profit (loss) for the reporting period affects retained earnings at the end of the period.

True Signup and view all the answers

How is depreciation calculated under the units-of-production method?

Cost – Residual Value x Actual units of activity for the period / Estimated number of units of activity over the life of the asset. Signup and view all the answers

In the balance sheet, accumulated depreciation is deducted from the ______ of the asset.

cost Signup and view all the answers

Which financial statement includes retained earnings as an equity item?

Balance Sheet Signup and view all the answers

Study Notes

Learning Outcomes

Understand the nature, purpose, format, and presentation of key financial statements: statement of financial position, statement of profit and loss, and statement of changes in equity.
Recognize the reporting period concept and differentiate between accrual accounting and cash accounting.
Comprehend and apply the depreciation accounting concept.
Explain the relationship between the statement of profit and loss and the statement of financial position.
Prepare accounting worksheets and financial statements.

Statement of Financial Position

A financial statement showing assets, liabilities, and owner’s equity at a specific point in time.
Fundamental equation: Assets = Liabilities + Owner's Equity.
Owner’s equity can be calculated as: Owner’s Equity = Assets – Liabilities.
Liabilities can be calculated as: Liabilities = Assets – Owner’s Equity.
Current vs. non-current classification based on the time of realization: current if within 12 months, non-current if beyond.
Asset classifications reflect liquidity, timing of future benefits, marketability, and purpose.
Assets include: Cash, accounts receivable, inventories, property, motor vehicles, intangible assets, and goodwill.
Liabilities may include accounts payable, loans, unearned revenue, tax liabilities, and provisions. Their classifications are influenced by liquidity, timing, and conditions.
Equity presentation varies by entity type; sole proprietorships and partnerships have a capital and drawings account, whereas companies feature capital, retained earnings, and reserves.

Statement of Profit or Loss

Reflects an entity's financial performance over a specified period.
Profit or loss is determined by the equation: Profit (Loss) = Income – Expenses.
Income includes revenue from goods/services, investments, and other contributions.
Gross profit is calculated after deducting cost of sales from revenue.
Profit = Gross Profit + Other Income – Operating Expenses.
Common expenses include Cost of Sales (COGS), wages, depreciation, rent, and marketing costs.

Statement of Comprehensive Income

Under Australian standards, can be presented as a single Statement of Comprehensive Income or as two statements: Income Statement and Statement of Other Comprehensive Income.

Statement of Changes in Owner’s Equity

Shows all changes to owner’s equity during the reporting period, including capital contributions, profits/losses, and drawings/dividends.

Accounting Principles for Financial Reporting

Reporting period refers to the timeframe for which financial statements are prepared, typically on a yearly basis.
Cash accounting records transactions based on cash received or paid, regardless of when they occurred, causing potential mismatches in reporting.
Accrual accounting records revenues and expenses when they occur, reflecting a more accurate financial position, including non-cash expenses.

Depreciation

Defined as the systematic allocation of a tangible asset's cost over its useful life; amortization similarly applies to intangible assets.
Depreciation does not reflect market value loss and doesn’t impact cash flow.
Expense is recorded for the period while accumulated depreciation shows total depreciation over an asset's life.
Common methods include:
- Straight-line: allocation of equal depreciation each period.
- Reducing Balance: percentage-based depreciation reflecting more usage initially.
- Units of Production: dependent on actual usage relative to expected lifetime production.

Relationship Between Statements

Profits or losses from the reporting period adjust retained earnings at the start of the period.
Retained earnings are reported as equity in the statement of financial position and can be adjusted through distributions and transfers.

Work Sheet

Preparation of a profit and loss statement and balance sheet is essential in financial reporting.

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Description

This quiz aims to assess your understanding of essential accounting concepts such as financial statements, the reporting period, and depreciation. By exploring the statement of financial position, profit and loss, and changes in equity, you'll deepen your grasp of accrual versus cash accounting. Test your knowledge to ensure you're fully prepared for your accounting journey.

(Week 4) - Financial Statements

Questions and Answers

Which equation represents the relationship between assets, liabilities, and owner's equity?

Current liabilities are expected to be settled after 12 months.

What is the purpose of the statement of profit and loss?

The statement of financial position lists an entity's assets, liabilities, and __________.

Match the following terms with their definitions:

Which of the following is an example of a non-current asset?

The distinction between current and non-current assets or liabilities is based on their liquidity.

What does depreciation refer to in accounting?

In accounting, the term __________ means recognizing revenue and expenses when they are incurred regardless of cash movement.

What is the relationship between the statement of profit and loss and the statement of financial position?

Which of the following is classified as a Non-Current Asset?

The statement of profit or loss shows all changes to owner’s equity for a specified period.

What is the formula for calculating profit?

The systematic allocation of the cost of a tangible asset over its useful life is called ________.

Which accounting method records revenues and expenses at the time cash changes hands?

Match the following asset classes with their descriptions:

Unearned Revenue is considered a liability on the balance sheet.

Explain what gross profit measures.

A ________ account is typically found in sole proprietorships to track profits and losses.

Which of the following is NOT a common method of depreciation?

What is the annual depreciation expense if the cost of the asset is $40,000, the expected residual value is $8,000, and the expected useful life is 4 years?

Accumulated depreciation increases the asset's carrying amount on the balance sheet.

What does accumulated depreciation reflect?

The carrying amount of an asset is also known as its ______.

Match the following depreciation methods with their characteristics:

Which of the following reflects how the reducing balance method works?

The profit (loss) for the reporting period affects retained earnings at the end of the period.

How is depreciation calculated under the units-of-production method?

In the balance sheet, accumulated depreciation is deducted from the ______ of the asset.

Which financial statement includes retained earnings as an equity item?

Study Notes

Learning Outcomes

Statement of Financial Position

Statement of Profit or Loss

Statement of Comprehensive Income

Statement of Changes in Owner’s Equity

Accounting Principles for Financial Reporting

Depreciation

Relationship Between Statements

Work Sheet

Studying That Suits You

Description

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