Week 1 Tutorial Questions
DQ1.2 Distinguish between financial performance and financial position.
The financial position of a company is measured by the performance it takes in company
financial statements: a positive and growing cash flow statement; growing profits in the
profit and loss statement; and a balance of assets, liabilities, and owner's equity in the
balance sheet. Financial performance is a subjective measure of how well a firm can use
assets from its primary mode of business and generate revenues. The term is also used as a
general measure of a firm's overall financial health over a given period
DQ1.6 List four important users of financial accounting and describe the use that each
user would make of the information.
- Suppliers - Vendors or suppliers may ask for financial statements as part of their
credit application process. Suppliers may require credit history or evidence of
profitability before issuing credit or increasing credit to a requested amount.
- Banks - Lenders and other similar financial institutions will almost always require
financial statements as part of the business loan process. Lenders will need to see
verifiable proof via financial accounting that a company is in good operational health
prior to issue a loan (or as part of determining what the cost, covenants, or interest
rate of the loan will be).
- Investors - Before investing in a company, investors often seek financial reports
prepared using financial accounting guidance to understand how the company has
been doing and to set expectations about the future of the company.
- Regulatory Agencies - Public companies are required to submit financial statements
to governing bodies such as the Securities and Exchange Commission. These financial
statements must be prepared in accordance with financial accounting rules, and
companies face fines or exchange delisting if they do not comply with reporting
requirements.
DQ1.11 Describe what is meant by accrual accounting. How does it differ from cash
accounting?
Accrual accounting - You record expenses and sales when they take place, instead of when
cash changes hands. This way of accounting shows the amounts you owe to people and the
amounts owing to you. Cash accounting does not record payables and receivables, while
accrual accounting does.
Revenue $60000
Less: Expense
Interest ($40000 x 0.05) = $2000
Wages ($12000/$2400) = $14400
Depreciation ($8000/4) = $2000
Other = $10000
Profit = $31600
1. Total revenue accured = $60 000 (work performed for customers)
2. Total Expense incurred = $2000 (Interest of loan) + $14400 (wages) + $2000
(Depreciation of equiptment) + $10000 (other expenses) = $28400
3. Profit = $60 000 - $28 400 = $31 600
P1.11 Match each item with the financial statement that it would appear in by ticking
the appropriate column.
Item
Asset
Inventory
Yes
Cleaning expenses
Cash at Bank
Marketing expenses
Buildings
yes
Income taxes payable
Loans from banks
Accounts payable
Retained profits
Accounts receivable
yes
Income tax expense
Costs of goods sold
Sales Revenue
Liability
Shareholders’ Revenue
Equity
Expense
Yes
yes
yes
yes
yes
Yes
yes
yes
yes
yes