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Business IB SL > 3.4-3.5 > Flashcards

3.4-3.5 Flashcards

1
Q

Stakeholders that use accounting information 8

A
  • Business managers
  • workforce
  • banks
  • creditors such as suppliers
  • customers
  • government and tax authorities
  • investors and potential investors
  • local community
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2
Q

Limitations of accounting information to stakeholders

A
  1. One set of accounts is of limited use
  2. Accounts do not measure items which cannot be expressed in monetary terms
    3.The accounts of one business do not allow for comparison
    4.Business accounts will only publish the minimum
    Information required by cow
  3. Accounts are historic
  4. Window dressing
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3
Q

Window dressing definition

A

Presenting the accounts of a business in the best possible, or most flattering, way which could potentially mislead users of accounts

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4
Q

Depreciation definition

A

The decline in the estimated value of fixed asset over time

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5
Q

Assets definition

A

Items of monetary value that are owned by a business

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6
Q

Accounts definition

A

Financial records of business transactions which provide information to groups within and outside on arganization. They help to keep track of assets, liabilities, revenue, and expenses

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7
Q

Accounting fraud

A

the intentional manipulation of financial statements in a way that’s intended to falsify the appearance of the company’s finances.

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8
Q

Financial misconduct

A

any misappropriation, mismanagement, waste or theft of the finances of a municipality,

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9
Q

Auditing definition

A

is the process of examining an organization’s (or individual’s) financial records to determine if they are accurate and in accordance with any applicable rules

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10
Q

Corporate governance

A

Corporate governance is the system by which companies are directed and controlled.

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11
Q

Insider trading

A

accountants and financial managers are privy to confidential information. It is therefore essential that those with access to such data and information about a certain company do not misuse this for their personal benefit.

Insider trading occurs when an individual makes a trade on the stock exchange after learning important and confidential information about a particular company for their own personal gain. This information is not, however, available in the public domain.

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12
Q

Principles and ethics of accounting practice

A

-ethics
-integrity
-objectivity
-confidentiality
-professional conduct

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13
Q

Types of accounts

A
  1. The profit & loss (income statement)
  2. Balance sheet
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14
Q

The profit & loss account definition

A

This records the revenue, costs and profit (or loss) of a business over given time period

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15
Q

Balance sheet definition

A

Accounting statement that records the values of a business’s assets, liabilities and shareholders equity at a one paint in time. This shows the net worth of a company: the difference between the value of what company owns (assets) and what it owns (liabilities)

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16
Q

Profit & loss account order of stating

A
  1. sales revenue
  2. Cost of goods sold
  3. gross profit
  4. Expenses
  5. net profit before interest and tax
  6. Interest
  7. net profit before tax
  8. Tax
  9. net profit after tax and interest
  10. Dividends
  11. Retained profit
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17
Q

Trading accounts

A

Snows gross profit/loss from trading activities of the business
Includes:
Sales revenue
Cost of goods sold
Gross profit

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18
Q

Profit & loss part of income statement

A

Calculates net profit/loss and profit/loss after taxes are paid
Includes:
Expenses
Net profit before, interest and tax
Interest
Net profit before tax
Tax
Net profit after tax and interest

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19
Q

Appropriation accounts

A

Shows how profits after tax are distributed (appropriated) to the owners or shareholders
Includes:
Dividends
Retained profit

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20
Q

Cost of Goods sold formula

A

Cogs = opening stock + purchases - closing stock

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21
Q

Explain the use of profit and loss accounts

A

• they can be used to measure and compare the performance of a business over time or with other firms - and ratios can be used to help with this form of analysis
• The actual profit data con be compared with the expected profit level of the business
• Bankers and creditors of the business will need the information to help them decide whether to lend the money to the business
• Potential investors way asses the value of investing in a business from the level of profit made. However, when doing this it is essential to try and differentiate between “ low quality” and “high quality” profit

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22
Q

Low quality profit definition

A

A one-off profit that cannot be repeated - the sale of an asset for example for higher than its balance sheet value

23
Q

High-quality profit

A

Profit that can be repeated or sustained

24
Q

Balance sheet should show two important things

A

•The organization’s source of finance, including borrowings (part of its liabilities) and equity (internal finance invested by shareholders, and accumulated retained profits)
• The orgenzation’s uses of finance, how business has used its sources of finance, such as the purchase of fixed cessets and current assets for trading

25
Q

Balance sheet categories

A

Assets - things the company owns
Liabilities- money the company owes

26
Q

Types of assets

A

Fixed-these ave tangible items that will be retained and used by a business for at least a year. Examples are land, buildings and vehicles
Current - items that are seen as liquid easily converted to cash such as inventory, accounts receivable and cash

27
Q

Working capital definition

A

The money that the firm has for its daily operations. Also known as net current assets

28
Q

Working capital formula

A

Working capital = current assets- current liabilities

29
Q

Net assets definition

A

Refers to the overall value of organisation’s assets after all its liabilities are deducted

30
Q

Net assets formula

A

Net assets= total assets- total liabilities
Or
Net assets = (fixed assets+ current assets)- (Long- term liabilities + current liabilities)

31
Q

For a balance sheet to be balanced

A

Net assets = the value of equity

32
Q

Equity is compromised of

A

Share capital and retained profit

33
Q

Share capital definition

A

The value of equity in a company that is funded by shareholders, either through initial public offering or via a share issue

34
Q

Retained profit definition

A

Is value of equity in a business that is funded by net profit after tax that is not distributed as dividends to shareholders. Instead, it is kept as an internal source of finance for the business to use
It appears in both the balance sheet and profit and loss accounts

35
Q

Balance sheet order of stating

A
  1. Fixed assets
  2. Accumulated depreciation
  3. net fixed assets
  4. Current assets
  5. Cash
  6. Debtors
  7. stock
  8. Current liabilities
  9. Overdraft
  10. Creditors
  11. short term loans
  12. total current liabilities
  13. net current assets (working capital)
  14. Total assets less current liabilities
  15. Long-term liabilities (debt)
  16. Net assets
    Financed by:
    • share capital
    • accumulated retained profit
  17. Equity
36
Q

Intangible assets definition

A

Assets that have no physical substance and are not financial instruments (such as bank accounts and accounts receivable). They include assets such as goodwill, copyright, patent, and trademarks

37
Q

Goodwill definition

A

The reputation and established networks (know-how) of an organnization, which adds significant above the market value of the firms physical assets

38
Q

Patent definition

A

The official rights given to a business to exploit an invention on process for commercial purposes

39
Q

Copyright definition

A

Gives the registered owner the legal rights to a creative pieces of work

40
Q

Trademark definition

A

Form of intellectual property; give the listed owner the legal and excessive use of the registered brands, logos, and/or slogans

41
Q

Intangible assets are difficult to value

A

Due to their subjective nature and in many cases they will not show on the balance street. Thus, they can be used to “window dress” on artificially increase a firm’s value just before a purchase

42
Q

The market value with many intangible assets

A

Will be much greater than the balance sheet or book value

43
Q

Ratio analysis

A

Quantitive management planning and decision-making tool used to analyse and evaluate the financial performance of a business
These can be further categorized as:
• profitability
• liquidity
• efficiency

44
Q

Purpose of ratio analysis

A
  1. Examine a firm’s financial position
  2. Asses a firm’s financial performance
  3. Compare actual figures with projected or budgeted figures
  4. Aid decision-making
45
Q

Ratio comparison

A
  1. Historical - comparing the same ratio in two different time periods for the same business
  2. Inter firm - comparing the ratios of businesses in the same industry
    You cannot compare ratios of firms in different industries because the level of risk and gross profit margin will differ greatly.
46
Q

Gross profit margin and net profit margin

A

Are used to asses how successful the management of a business has been at converting sales revenue into both gross profit and net profit. It is a measure of the percentage of gross profit or net profit a firm earns on each dollar it makes
Net profit margin accounts both direct costs and indirect costs thus it is a better measure of profitability

47
Q

Gross profit margin formula

A

Gross profit (%) = (gross profit/sales revenue)*100

48
Q

Operating profit (net profit or profit before interest and taxation) formula

A

Gross profit- overhead expenses

49
Q

Net profit margin formula

A

Net profit margin (%)= (net profit before tax and interest/ sales revenue)*100

50
Q

Capital employed formula

A

Capital employed= loan capital (or long-term liabilities)+share capital+ accumulated retained profit

51
Q

Gross profit formula

A

Sales revenue- cost of goods sold

52
Q

Improving profit margins

A

Increase selling price
Reduce direct costs (labour and raw materials)
Reduce indirect costs (overhead)
Increase sales through advertising and promotion

53
Q

ROCE (return on capital employed) definition

A

Efficiency ratio
Look at how efficiently an organization uses its capital or total assets to create goods and services that are turned into profit
It can be thought of as a measure of reward (profit) for the risk taking by entrepreneurs
The higher the value the better

Business IB SL (9 decks)

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