Lecture 2- Accounting and Finance Fundamentals

List the limitations of the statement of financial position

1. Limited usefulness - as it reflects the financial position of the company at a certain point in time

2. Balance sheet figures are at a historical price - not adjustment for inflation, market prices of investment

3. Real value of business depends on i

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Explain in detail business entity concept

This means a business has a separate identify from its owner (s)

This concept states that financial statements are prepared for the business rather than for the owner (s)

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Explain in detail monetary measurement

1. Refers to items that can be expressed in pounds and can be accounted for

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Explain in detail prudence or conservatism

1. This refers to the recording of all losses in full

2. Prudence means that the profits should only be recognised when they are certain (sale is made)

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Explain in detail going concern contravention

1. This assumes a business entity has a long life

2. Financial statements are prepared on the assumption that the company will continue in business for the foreseeable future

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List the advantages and disadvantages of historic cost convention

Advantage: Historical costs is relatively easy to determine and can be verified

Disadvantage: subsequent to the date of acquisition, the continued reporting of historical cost based value does not reflect any changes in market value

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Explain in detail historic cost convention

Refers to assets being on the balance sheet at the cost of purchase at the date of acquisition (original cost) instead of current

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List the accounting conventions that can influence the statement of financial ratio

1. Historic cost convention

2. Going concern convention

3.Prudence or conservatism

4. Monetary measurement

5. Business entity concept

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Explain in detail non-current liabilities and give examples

1. Amounts that are not due within a year

Examples include: long-term borrowings, mortgages and bonds

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Explain in detail owners' equity

1. Amount invested by the owner (s) in the firm

2. Owner's equity is essentially the net worth of the company, the value of the firm after paying off all of the limitations that the company owes

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Explain in detail liabilities, how many classifications are there for this and what are they called

1. These are obligations on the part of the business to outside parties, apart from the owner (s)

2. Into 2 classifications called: current liabilities and non-current liabilities

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List examples of current liabilities

1. Trade payables - money payed to suppliers

2. Accruals - services received but not paid for

3. Bank overdrafts

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Explain in detail claims, how many types there are and what are these called?

1. This refers to obligations on part of the business to provide cash, or some benefit to outside parties

2. Two types of claims: liabilities and equity capital

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Give examples of non-current assets

1. Motor Vehicles
2. Fixtures and fittings
3. Property, plant and equipment
4. Tangible fixed assets
5. Intangible assets i.e. brand names, patents
6. Financial investments

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Explain assets in detail and give examples

1. This is everything that the company owns

Examples include: cash inventories, land, their buildings and equipment

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Explain in detail statement of financial position

1. Provides the user with a picture of the businesses financial position at a particular time

2. Sets out the assets of the business and the claims against the business

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What does income statement show?

Shows how much profit or loss has been generated over a particular period

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What does statement of cash flow show?

Shows the cash movements over a particular period

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What does statement of financial position show?

Gives the user a snapchat of accumulated 'worth' of the firm at a particular point of time

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How many financial statements are there and what are these called?

1. 3 Financial statements

2. These are called: statement of financial position , income statement and statement of cash flows

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Explain in detail non-current assets

1. These are assets that are held for use within the business for long-term operations

2. These are assets which are used for more than one year

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Give examples of current assets

1. Cash/bank deposits
2.Inventories
3.Trade receivables - money owned by customers for goods or services supplied on credit
4. Prepayments

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Explain in detail current assets

1. These are assets that held for short-term

2. These represent assets that are capable of generating benefits for the company within a year

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How many groups can assets be classified into and what are these called?

1. 2 groups

2. These are called current assets and non-current assets

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Lecture 2- Accounting and Finance Fundamentals

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