11 Accounting Flashcards
What is a P&L account
calculates amount of profit/loss that the business makes inna year.
1st part=Trading acc, gross profit
2nd Part=P&L acc, net profit
What is a net profit
Money made by the business after all the expenses have been paid
How is a typical P&L acc set out and what do they mean
Sales-How much bus sold its stuff for
Cost of Sales- Cost to make/buy product
Gross Profit-Profit made before expenses are paid
Expenses-Total of all the bills that year
Net Profit-Profit after all bills paid
Whats the importance of a P&L acc
If gross profit low business prices might be too low. Increase price!!
-Or cost too high, Cheaper supplier!!
Net profit low=Expenses too high, make cutbacks (wage cuts etc)
Size of net profit tells manager how much can spend in dividends/reinvest/savings
What is a balance sheet
Purpose is to show businesses financial position
Shows everything the business owns (assets) and all the money it owes (liabilities)
NAME the headings in a balance sheet
Fixed assets
Current assets
Current liabilities
Working capital
Financed by
Ordinary share capital
Retained earningss
Preference shares
Long term loans
What is balance sheet 1.Fixed assets
Valuable items business owns that itll keep for more than one year
Cars computers buildings
What is balance sheet 2.Current Assets
All valuable items business owns that itll keep for less than one year
Stock, debtors,cash
What is balance sheet 3.Current Liabilities
Loans the business owes that have to be repaid within a year.
Bank overdraft,creditors,…
What is balance sheet 4.Working Capital
Cash left over to pay bills.
Difference between current assets and current liabilities
What is balance sheet 5.Financed by
Shows amnt of money invested in business by the investors
What is balance sheet 6.Ordinary Share Capital/Equity share capital
Amnt of money that shareholders paid into business by investment
Authorised Share capital=Max no. of shares companys allowed sell
Issued Share Capital=amount sold so far
What is balance sheet 7.Retained earnings/Reserves
Total amnt of profits previously made by the business that have been reinvested in the business
What is balance sheet 8.Preference Shares
amount of money that another type of shareholder paid into the business by way of investments

This share does not entitle them to have a vote, but it does entitle them to a guaranteed share of company profits which must be paid in preference to the other shareholders 
What is balance sheet 9.Long Term Loan
Amounts of money borrowed by the business that it has more than one tear to repay
Whats the importance pf a balance sheet
Tells managers amnt of security available to offer banks when applying for loan
Working Capital figure tells managers whether business has enough cash available to pay any bills. If not business is Illiquid
Financed by tells managers whether the business can get another loan (can see how many u alr have)
what is ratio analysis
Examining your business under three headings:
Profitability
Liquidity
Gearing or Debt/Equity ratio
What is Profitability ratios
Examine whether the profit made by the business id good or bad for the size of the business
3 Ways to measyre:
a) Gross Profit Percentage/GP Margin
b) Net Profit Percentage/NP Margin
c) ROI/Return on Capital Employed
Whats the formula for Gross profit percentage/Gross Profit Margin
(Gross Profit➗Sales)x100
What doe sit mean if Gross profit Percentage/Gross Profit Margin is increasing from one year to another
Good trend
Making more gross profit than last year
Either increased prices or lowered costs
What doe sit mean if Gross profit Percentage/Gross Profit Margin is decreasing from one year to another
Bad trend
Making less grossprofit than last year
Either decreased prices or costs have increased
Whats the formula for Net Profit Percentage/Net Profit Margin
(Net profit➗sales)x100
What does it mean if Net Profit %/Margin increased fro one year to next
Good trend
Making more Net Profit than last year
Expenses have decreased
What does it mean if Net Profit %/Margin decreased fro one year to next
Bad trend
Making less Net profit than last yr
Expenses have increased
Business must immediately make cuts
What is the formula for Return On Investment/Capital employed
(Net profit➗Capital Employed)x100
What happens if the ROI/ROCapital Employed decreases from one yr to the next
Bad trend
Making lower return than last yr
Managers performed badly,less money
Need to reduce capital employed or increase net profit
What happens if the ROI/ROCapital Employed increases from one yr to the next
Good trend
Making better return than last yr
Managers improved their performance,made more money
Who is interested in a Businesses Profitability Ratios
Investors/Shareholders
-Ratios improving=better profits=good dividends=more likely to invest
Employees
-Ratios improving=secure jobs=possible pay raise
Lenders/Bankers
-Ratios improving=more likely able to repay loan interest
Government
-Ratios improving=more tax revenues from the business
Competition
-Ratios improving=threat to others
What are liquidity ratios
examines, whether the business has enough cash available to pay short-term bills when they’re due
2 ratios:
Working Capital/Current ratio
Acid test ratio

what is the formula for working capital/current ratio
current assets ➗ current liabilities
Whats the ideal Working capital/Current ratio
2:1
Meaning business should have twice the ammount that it owes
If ratio less=doesn’t have enough to pay its bills
If ratio much higher=Too mych spare cash lying around
what does it mean when working capital/current ratio is increasing from one year to the next
Good trend
Business has more cash than last yr
Maybe it paid off some bank overdraft
what does it mean when working capital/current ratio is decreasing from one year to the next
Bad trend
Less cash than last year
Wil have difficulty paying bills on time
Creditors will then cut off businesses credit
Maybe increased bank overdraft and spent all the borrowed money
Should sell any investments to inc cash
Whats the formula for Acid Test Ratio
(Current assets-Closing stock)➗Current liabilities
Ideal ratio 1:1
Less ghen this =illiquid
Higher business is liquid and has no difficulty pauong bills on time
What does it mean if Acid test ratio is increasing from one year to next
good trend
more cash than last year
maybe paid off its overdraft 
What does it mean if Acid test ratio is decreasing from one year to next
Bad trend
less cash than last year.
Difficulty paying bills on time
could lead to creditors cutting off businesss credit,
maybe bought large amount of stock which remains unsold
business should have a sale. 
Who is interested in a Businesses Liquidity Ratios
suppliers-improving means more likely to be able, pay invoice in full and on time
Employees-job is more secure, more likely to be paid on time
Lenders/bankers- more likely to repay a loan and interest in full and on time
Governments- more likely to pay taxes in full on time 
Explain the debt/equity ratio
examines the capital structure of the business (how its financed)
shows how much of the Capital has come from long-term loans, and how much has come from shareholders
indicates how much long-term debt the business is carrying, whether it’s too much or not
Too much long term debt is bad
Whats the formula. for debt/equity ratio
Long term debt. ➕ Equity shares
+preference shares. +Retained Ernings
What is the ideal Debt/Equity ratio
There is no ideal ratio
Explain the debt/equity ratio
how much money it has borrowed in long-term loans relative to the amount owners of the business invested in it
What is equity capital
total amount of money invested by owners of business consist of original amount of money owners put
in (issued ordinary/equity share capital) and all profits that owners reinvested (retained earnings)
What is low gearing Debt/Equity ratio
Debt<Equity
< 1:1
Business has borrowed less money than the shareholders have invested
What is high gearing Debt/Equity ratio
Debt>Equity
>1:1
Business has borrowed more money than the shareholders have invested
What is neutral gearing Debt/Equity ratio
Debt=Equity
=1:1
Borrowed exactly same amount as shareholders have invested
What 4 thinfs does Debt/Equity ratio tell a buiness
1.How much the business has borrowed relative to how much owners have invested
-low,high,neutral gearing
2.How much interest she can expect business will have to pay back.
-High geared =more interest to pay back
3.If business is in danger of going bankrupt.
-High geared=lots of loans to pay back
4.If business able to take out more loans or not
-High geared=lots of loans so hard to convince bank to get another
What does it mean if Debt/Equity ratio is increasing from one year to next?
Bad trend
More long term loans outstanding than last yr
Maybe took out another one?
Should sell more shares to reduce ratio
What does it mean if Debt/Equity ratio is decreasing from one year to next?
Good trend
Less long term loans outstanding than last yr
Maybe paid back long term loan/sold some shares?
Should continue with this strategy
Whos interested in a Businesss Debt/Equity ratio?
Shareholders/Investors:
-Increasing=more profits being used to pay interest=fewer dividends=less likely to buy shares.
Employees:
-Increasing=less secure jobs as risk of bankruptcy=less likely pay raise
Bankers:
-Increasing=less likely to repay loan+interest in full on time
Suppliers:
-Increasing=more likely to go bankrupt,less likely pay invoice
Government:
-Increasing=More likely to go bankrupt and not pay tax
Limitations of ratios
Only analyse historical figures. Mightnt be true indicators of whatll happen in the future
May calculate accounting figures differently. Change calculation method from one year to next=inaccurate
Limited picture of a businesss. Only show financial info. No insight to important aspects of business such as staff morale.
Explain a Gross Profit Percentage/Gross Profit margin
How good the gross profit number is by judging it against the size of the business’s sales figures
Explain a NET PROFIT PERCENTAGE/MARGIN
Look at how good net profit number is by judging it against the size of the business sales figures.
6% net profit percentage means that cor every 100€ product the business sells, it gets to keep 6€
Explain a Return on Investment/Capital Employed
How good net profit number is by judging it against total amnt of money invested.
Less than 2%=bad
Explain a Working Capital/Current ratio
See if business has enough cash by comparing its current assets with its current liabilities
Explain Acid Test Ratio
How much cash business has in an emergency situation.
When we exclude stock, business shiuld have exactly the amount that it owes
Lets a business know its liquidity position in an emergency
We exclude stock as stock is hard to turn into cash very quickly
