Financial Accounting Flashcards

Which of the following best describes 'equity' in a company's financial statements?

Answer: The residual interest in assets after deducting liabilities

Equity is the residual interest in assets after all liabilities are deducted. It represents the owners' stake: share capital + reserves (including retained earnings).

When a business receives cash from a customer in advance of providing a service, it records:

Answer: A debit to cash and a credit to deferred revenue (liability)

Cash received in advance (deferred revenue) is a liability — the business owes the service. Entry: Debit cash (asset increases) and Credit deferred revenue (liability increases).

Which of the following statements about the statement of changes in equity is correct?

Answer: It reconciles opening and closing equity balances, showing dividends, profit and new share issues

The statement of changes in equity reconciles opening to closing equity balances by showing profit for the year, other comprehensive income, dividends paid and share issues.

An error of commission occurs when:

Answer: A transaction is posted to the correct type of account but the wrong account

An error of commission means an entry is made in the wrong account of the correct type (e.g., a sale to Jones posted to Smith's account). The trial balance still agrees.

Under IFRS, which of the following is a component of 'other comprehensive income'?

Answer: Revaluation surplus on property, plant and equipment

Revaluation gains on PPE are recognised in other comprehensive income (OCI) rather than profit or loss, accumulating in the revaluation reserve within equity.

Which of the following correctly states the effect of paying a trade payable by bank transfer?

Answer: Decrease assets, decrease liabilities

Paying a trade payable reduces the bank balance (decrease in assets) and removes the payable (decrease in liabilities), keeping the accounting equation balanced.