Financial accounting: chapter 4

1.
Current assets = Cash + Cash Equivalents + Inventory + Accounts Receivables + Prepayments

Non-current assets = (Equipment – Accumulated Depreciation Equipment) +

(Motor vehicle – Accumulated Depreciation motor vehicle) + Intangible assets + Long-term
interest-free loan

2.
Materiality depends on the size and nature of the item judged in the circumstances of its
omission. In deciding whether an item or an aggregate of items is material, the nature and
size of the item could be the determining factor.

3.
Trade payable:
Trade payables are classified as current liabilities if payment is due within one year or less. If
not, they are presented as non-current liabilities.

Note payable:
Note payables are classified as current liabilities when the amounts are due within a year.

Interest accrued for note payable:

Interest accrued for note payable is recorded as a current liability if payable within one year.

Provisions for unbilled expenses:

Provisions for unbilled expenses or accrued expenses are classified as current liabilities,
meaning they must be paid within a 12-month period.

Provisions for employee benefit:

Provisions made in respect of employee benefits are classified as a current liability if payable
within one year.

Interest-free loan from shareholder:

A shareholder loan account is a balance sheet account. It can be either an asset or a liability.
It may also be shown as either a current or long-term account, depending on the situation.

Current liabilities (in order):

Provisions for unbilled expenses
Trade payable
Interest accrued for note payable (number * 4, because 4 quarters in a year)

Non-current liabilities (in order):

Note payable
Interest-free loan from a shareholder ((number/8)*4, because 4 quarters in a year)
Provision for employee benefit
6.
Understandability:
The concept that financial information should be presented so that a reader can easily
comprehend it.

Verifiability:
The extent to which information is reproducible given the same data and assumptions.

Relevance:
The concept that the information generated by an accounting system should impact the
decision-making of someone perusing the information.

Comparability:
The level of standardization of accounting information that allows the financial statements
of multiple organizations to be compared to each other.

7.
The going concern assumption is a fundamental accounting principle that a company is
financially stable enough to stay in business in the long term or at least beyond the next
fiscal period.

8.
The statement of comprehensive income reports the change in net equity of a business
enterprise over a given period. The statement of retained earnings includes two key parts:
net income, and other comprehensive income, which incorporates the items excluded from
the income statement.
Income statement: provides an overview of revenues and expenses, including taxes and
interest.

Comprehensive income includes net income and unrealized income, such as unrealized
gains or losses (sales) on hedge/derivative financial instruments and foreign currency
transaction gains or losses.

Depreciation expense is recorded on the income statement as an expense or debit, reducing

net income.

Answer: retained earnings

9.
An income statement by function is the one in which expenses are disclosed according to
different functions they are spent on (cost of goods sold, selling, administrative, etc.)

An income statement by nature is the one in which expenses are disclosed according to
categories they are spent on, such as raw materials, transport costs, staffing costs,
depreciation, employee benefit etc. The expenses will not be further classified into their
functions (i.e cost of goods sold, selling, administrative, etc).
10.
The going concern assumption assumes your business is viable and your accounting ratios
are all within good ranges, you are generating good cash flow to pay your creditors and long-
term liabilities and everything you read on the balance sheet says this. Because your
business is a going concern your assets will be based on historical cost which is the price you
have paid for the assets.