Balance sheet - JSS3 Business studies Past Questions and Answers - page 2
Which of the following is an example of a non-current asset?
Accounts receivable
Inventory
Property
Cash
What does total assets represent in the balance sheet?
The sum of liabilities and equity
The sum of current assets and non-current assets
The sum of current liabilities and non-current liabilities
The sum of current assets, non-current assets, and equity
Explain in your own words what a balance sheet is and its importance in understanding a company's financial health.
A balance sheet is a financial statement that shows what a company owns and owes at a specific point in time. It's important because it helps investors, creditors, and management assess the company's financial position and make informed decisions.
Describe the difference between current assets and non-current assets, providing examples of each.
Current assets are assets expected to be converted into cash or used up within one year, like cash, accounts receivable, and inventory. Non-current assets, on the other hand, are assets expected to provide economic benefits beyond one year, such as property, plant, and equipment.
How are liabilities and equity related in a balance sheet, and why is this relationship important?
Liabilities represent the company's obligations, while equity represents the owners' stake in the company. The relationship is important because it shows how the company's assets are financed – either through debts (liabilities) or investments by shareholders (equity).
Discuss the significance of retained earnings in a balance sheet and how it reflects a company's financial performance over time.
Retained earnings represent the accumulated profits that have not been distributed as dividends. They reflect the company's ability to generate profits and reinvest them for growth. Higher retained earnings indicate better financial performance and potential for future growth.
Why is it important for a company to maintain a balance between its assets and liabilities?
Maintaining a balance between assets and liabilities ensures the company can meet its financial obligations and continue operating smoothly. Too many liabilities relative to assets could indicate financial risk, while too few liabilities might mean the company is not leveraging enough for growth.
Using the provided balance sheet format, update the balance sheet after the following transactions:
- Invested ₦50,000 cash in the business.
- Purchased inventory worth ₦8,000 on credit.
- Sold goods for ₦12,000, receiving ₦5,000 in cash and the rest on credit.
- Paid ₦3,000 towards short-term loans.
- Paid ₦2,000 for accrued expenses.
- Purchased equipment for ₦30,000, paying ₦10,000 in cash and the rest on credit.
- Received ₦5,000 from accounts receivable.
- Paid ₦1,000 dividends.
Explanation:
- Cash: Increased by ₦50,000 investment and ₦5,000 from accounts receivable. Total cash is now ₦65,000.
- Accounts Receivable: Received ₦5,000, so accounts receivable increased to ₦7,000.
- Inventory: No change, remains at ₦8,000.
- Accounts Payable: Increased by ₦8,000 due to inventory purchase.
- Short-term Loans: No change, as no transactions related to short-term loans occurred.
- Accrued Expenses: No change, as no transactions related to accrued expenses occurred.
- Equipment: Increased by ₦20,000 due to equipment purchase.
- Share Capital: No change, remains at ₦50,000.
- Retained Earnings: Increased by the difference between total assets and total liabilities and equity, which is ₦100,000 - ₦67,000 = ₦33,000.
- Reserves: No transactions occurred, so remains at ₦0.
|
Assets |
Liabilities and Equity |
||
|
Current Assets |
Current Liabilities |
||
|
Cash |
₦65,000 |
Accounts Payable |
₦8,000 |
|
Accounts Receivable |
₦7,000 |
Short-term Loans |
₦0 |
|
Inventory |
₦8,000 |
Accrued Expenses |
₦0 |
|
Total Current Assets |
₦80,000 |
Total Current Liabilities |
₦8,000 |
|
Non-current Assets |
Non-current Liabilities |
||
|
Property |
₦0 |
Long-term Loans |
₦0 |
|
Equipment |
₦20,000 |
||
|
Total Non-current Assets |
₦20,000 |
||
|
Total Assets |
₦100,000 |
₦100,000 |
|
|
Share Capital |
₦50,000 |
||
|
Retained Earnings |
₦33,000 |
||
|
Reserves |
₦0 |
||
|
Total Liabilities and Equity |
₦100,000 |