Term
| Why would a Bank want to see the Statement of Financial Position and Income Statement |
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Definition
SOFP - To assess whether the businesses assets are sufficient for security for a loan or to see if the business is over committed with debt already
IS - To look at the profit of the business to assess if it has the ability to cover the loan repayments and interest |
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Term
| Why would the government be interested in a businesses financial documents |
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Definition
To see if the business is paying enough tax
They can use tax to assess this |
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Term
| Why would suppliers be interested in a businesses Statement of Financial Position and Income Statement |
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Definition
To see whether the business can afford to purchase goods from that supplier
SOFP - To assess whether the business is already over committed with liabilities
IS - To see whether the businesses profit is sufficient enough to cover the invoice |
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Term
| Why would the employees be interested in the businesses finances? |
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Definition
To see if their job is secure
To see if they should ask for a pay rise
They can see this by looking at trends in profit |
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Term
| Why would the owner be interested in the businesses finances? What information would the owner be most interested in? |
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Definition
| Owner would look at profit and return on equity measure to assess the businesses financial performance and to see what return on investment the owner is receiving |
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Term
| What is the purpose of the income statement |
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Definition
| To assess the financial performance of the business by showing Income, Expenses and Profit for a period of time |
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Term
| What is the purpose of the statement of Financial Position |
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Definition
| To assess the financial position of the business by showing Assets, Liabilities and Owners Equity at a point in time |
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Term
| What is the purpose of the cash flow statement |
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Definition
| To assess the cash flow the business by showing Cash Received, Cash Payments and the change in Bank Balance at a point in time |
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Term
| What is the purpose of the statement of accounting policies |
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Definition
| To show the rules, measurement bases and any changes in policies used in preparing financial statements |
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Term
| What are the two main limitations of financial statements? |
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Definition
Use of Estimates
No non-financial information reported
Tip - It is a good idea to always use estimates if given the option |
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Term
What are examples of use of estimates in the income statement?
(3) |
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Definition
Depreciation Expense
Doubtful Debts Expense
Cost of Goods Sold |
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Term
What are examples of use of estimates in the Statement of Financial Position?
(2) |
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Definition
Accumulated Depreciation
Allowance for Doubtful Debts |
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Term
| What is the limitation of the Cash Flow Statement |
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Definition
| No non credit transactions such as credit transactions |
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Term
| What makes information relevant? |
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Definition
| If the information is capable of making a difference in the decisions made by users |
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Term
| What are the three components of Relevance |
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Definition
Predictive Value
Confirmatory Value
Materiality |
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Term
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Definition
| Information that can be used to predict the future eg information used to produce a budget or forecast of next years results |
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Term
| What is confirmatory value |
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Definition
| Information that can be used to confirm or change a past evaluation; the information has feedback value |
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Term
| How can information faithfully represent the item/event that it purports |
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Definition
It must be complete neutral and free from error
One example of faithful representation is that it can be traced back to a source document |
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Term
| How can information be neutral |
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Definition
| The information must not be biased - it does not present a favourable or unfavourable slant to influence users |
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Term
| How can information be free from error |
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Definition
| If there is no errors or omissions from the description of the information |
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Term
| How can information be complete |
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Definition
| It must have all the necessary descriptions and explanations of the item/event |
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Term
| What are the four enhancing qualitative characteristics |
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Definition
Comparability
Verifiability
Timeliness
Understandability |
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Term
| Why does Comparability make information more useful |
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Definition
| Information is more useful if it can be compared with similar information over time within the same entity and between entities |
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Term
| How does Timeliness make information more useful |
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Definition
| Information is more useful if it is received in time. Information provision should not be delayed if the delay would influence decisions |
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Term
| How does Understandability make information more useful |
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Definition
Information must be understood by the decision makers in order for them to be able to make informed decisions
Classifying and presenting information clearly helps |
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Term
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Definition
| Information is verifiable when independent experts would reach agreement or consensus on the information presented |
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Term
| What is needed for an item to meet the asset definition |
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Definition
Past event - Normally a transaction
Present Control by the entity
Has future economic Benefit |
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Term
| What are the recognition criteria's for an asset |
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Definition
Probable future economic benefit - It must be likely that cash will flow to the entity from the use of the asset
Reliable Measure - The asset must have an amount which can be measured reliably |
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Term
| What is needed for an item to meet the Liability definition |
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Definition
Past Event - Normally a Transaction
Present obligation of the entity
Future outflow of resources embodying future economic benefit (assets, often cash) |
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Term
| What are the recognition criteria's for a liability |
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Definition
Probable future outflow of resources - it must be likely that there will be an outflow of resources embodying economic benefits - money or other assets - to satisfy the obligation
Reliable Measure - The liability must have an amount which can be measured reliably |
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Term
| What is needed for something to be classified as Income |
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Definition
Increase in asset or decrease in liability
Increase in profit which leads to a increase in equity
Not owners contribution |
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Term
| What are the recognition criteria's for income |
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Definition
Probable Inflow - In cash sale the inflow has occurred and the business has a legal right to this money. In credit sale it is probable this will be received as the business has a legal right
Reliable Measure - The invoice or receipt faithfully represents the amount received for the delivery as it is a market transaction that is complete, neutral and free from error |
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Term
| What is needed for something to be classified as a expense |
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Definition
Increase in liabilities or decrease in assets
Decreases Profit which decreases equity
Not owners drawings |
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Term
| What are the recognition criteria's for expenses |
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Definition
Probable outflow - In cash the money has paid and the asset of bank has decreased. In credit you will have to pay money to satisfy the liability and maintain good credit rating and the accounts payable liability has increased
Reliable Measure - Receipt/Invoice provides a reliable account of the cost of the expense as it provides an account of a market transaction that is Complete, Neutral and free from error |
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Term
| What is the entity concept |
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Definition
| The financial affairs of the owner are kept separate from the financial affairs of the business |
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Term
| What is the period reporting concept |
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Definition
The businesses continuing life is divided into equal time periods, one year, in order to measure financial performance and position on a regular basis
This helps to ensure comparatability |
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Term
| What is monetary measurement |
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Definition
| All transaction are recorded and reported in terms of New Zealand Dollars |
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Term
| What is the going concern assumption |
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Definition
| It is assumed the business will continue to operate into the foreseeable future |
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Term
| What is the accrual basis |
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Definition
All transactions are reported in the period they relate
DO NOT USE RECORDED OR RECOGNISED |
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Term
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Definition
| All assets are recorded at their original purchase price |
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Term
| What is capital expenditure |
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Definition
any expenditure to do with the purchase of a non-current asset and any costs to do with getting that asset to the business and getting it ready for use
It is where the future economic benefit will last longer than a year
It does not effect owners equity |
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Term
| What is revenue expenditure |
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Definition
Any expenditure to do with day to day running of the business
Decreases Owners Equity
It is where the future economic benefit has been used up within the current year |
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