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Finance for Managers > 4 chp 3 Financial Performance > Flashcards

4 chp 3 Financial Performance Flashcards

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1
Q

what is the formal name of the term INCOME STATEMENT

A

STATEMENT OF FINANCIAL PERFORMANCE

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2
Q

what is the formal name of the term PROFIT AND LOSS ACCOUNT

A

STATEMENT OF FINANCIAL PERFORMANCE

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3
Q

what common terms are used for the STATEMENT OF FINANCIAL PERFORMANCE

A
  1. PROFIT AND LOSS ACCOUNT

2. INCOME STATEMENT

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4
Q

what report shows the amount of wealth a business generated over a given period?

A

STATEMENT OF FINANCIAL PERFORMANCE

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5
Q

what is the purpose of the STATEMENT OF FINANCIAL PERFORMANCE?

A

the STATEMENT OF FINANCIAL PERFORMANCE reports on the amount of wealth generated by a business over a given period.

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6
Q

the difference between the increases in owner equity (known as capital) and the decreases in owner equity (known as expenses) is known as..

A

PROFIT (OR LOSS)

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7
Q

what is PROFIT (OR LOSS)

A

PROFIT (OR LOSS) is the difference between increases in owner equity (known as capital) and decreases in owner equity (known as expenses).

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8
Q

what items are excluded from the PROFIT/LOSS equation?

A

Owner injection of capital and owner withdrawal of capital

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9
Q

increases in economic benefit through the inflow of assets through revenue and other gains (except owner contributions) or reduction in liabilities.

A

INCOME

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10
Q

what is INCOME

A

INCOME is the increase in economic benefit through the inflow of assets or decrease of liabilities.

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11
Q

REVENUE and OTHER GAINS are two categories of ……

A

INCOME

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12
Q

INCOME is made of what two categories?

A

INCOME is made of REVENUE and OTHER GAINS

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13
Q

the gross inflow of benefits gained by operating activities is known as …..

A

REVENUE

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14
Q

what is REVENUE?

A

REVENUE is the inflow of economic benefits as a result of operating activities

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15
Q

the net inflows of economic benefits from non-operating activities are known as..

A

OTHER GAINS

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16
Q

what is meant by OTHER GAINS

A

OTHER GAINS refers to economic benefits that are generated through non-operating activities.

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17
Q

A shoe store sells $1,000 worth of shoes, the $1,000 is known as…

A

REVENUE

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18
Q

A shoe store gains $1`,000 of interest from their savings account. The $1,000 is known as …

A

OTHER GAINS

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19
Q

what type of income is GROSS?

A

REVENUE

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20
Q

what type of income is NET

A

OTHER GAINS

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21
Q

what is the opposite of INCOME?

A

the opposite of INCOME is EXPENSE

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22
Q

what is the opposite of EXPENSE?

A

the opposite of EXPENSE is INCOME

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23
Q

the outflow of assets (or increases in liabilities) as a result of conducting business are known as …….

A

EXPENSES

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24
Q

what is an EXPENSE?

A

an EXPENSE is the outflow of assets (or increases in liabilities) as a result of conducting business.

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25
Q

what is the formula for determining profit/loss?

A

Total Income - Total expenses incurred generating the income

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26
Q

What is the formula for identifiying the amount of assets at the beginning of a period?

A

A beginning of period = liabilities at beginning + owner equity at beginning

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27
Q

a calculation of profit for a period based on comparing the net assets at beginning and end of period, adjusted for any equity injections and withdrawals is known as …

A

the STOCK APPROACH

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28
Q

what is the STOCK APPROACH?

A

the STOCK APPROACH identifies profit for a period by comparing the beginning and end net assets (being assets minus liabilities) adjusted given any owner equity injection or withdrawal.

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29
Q

The difference between sales revenue and cost of sale is known as…

A

GROSS PROFIT

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30
Q

what is GROSS PROFIT?

A

GROSS PROFIT is the difference between sales revenue and the cost of sales.

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31
Q

GROSS PROFIT - OPERATING EXPENSES =

A

OPERATING PROFIT

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32
Q

the profit remaining after cost of sale and overhead expenses have been deductied is known as….

A

OPERATING PROFIT

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33
Q

OPERATING PROFIT + NON-OPERATING INCOME (INTEREST RECEIVED) - NON-OPERATING EXPENSES (INTEREST PAID) = ?????

A

PROFIT FOR THE PERIOD

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34
Q

what is the formula for calculating PROFIT FOR THE PERIOD?

A

PROFIT FOR THE PERIOD = OPERATING PROFIT + NON-OPERATING INCOME (e.g. interest received) - NON-OPERATING EXPENSES (e.g. interest paid)

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35
Q

for reporting purposes what are the four classifications of expenses?

A
  1. COST OF SALES
  2. SELLING AND DISTRIBUTION
  3. ADMINISTRATIONS AND GENERAL
  4. FINANCIAL
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36
Q

what are the main criteria for recognising revenue?

A
  1. The amount can be measured reliably.
  2. It is probable the economic benefit will be received.
  3. If it is a sale of a good, the ownership and control of the item whould pass to the buyer.
37
Q

Payments that are paid before the buyer receives the goods or service is known as….

A

DEFFERRED REVENUE

38
Q

what is DEFERRED REVENUE

A

revenue that is received prior to the buyer receiving the goods or services.

39
Q

Where are deferred renvenue recorded and why?

A

DEFFERRED REVENUE is recorded as a liability as the company owes assets to the buyer. Once the asset has been rendered, the revenue may then be reported as income.

40
Q

what is ACCRUALS ACCOUNTING

A

ACCRUALS ACCOUNTING recognises income on the basis that it has been earned; irrespective of whether the payment is in advance or in arrears.

41
Q

The accounting convention that holds expenses should be matched to the revenues they help generating in the same accounting period as those revenues were realised.

A

MATCHING CONVENTION

42
Q

Expenses that have been realised but not yet paid are known as…

A

accrued expenses

43
Q

A company owes it’s staff $6,000 in commission in total. The company has paid $5,000 but still have an outstanding $1,000 yet to pay at the end of the financial year. How is the $1,000 recorded.

A

The $1,000 is recorded under accrued expenses or ‘accruals’ with the statement of financial performance under the category ‘current liabilities’ given the expense will be paid over the next reporting period.

44
Q

What is the purpose of ACCRUED EXPENSES?

A

to record expenses that relate to the current reporting period but have not yet been paid. This allows the expense to be in the same reporting period as the income.

45
Q

If a company pays for expenses relating to the next reporting period in this reporting period, how is this recorded?

A

Within the statement of financial performance, the amount relating to the following year is entered in the assets area as PREPAID EXPENSE.

46
Q

expenses that are outstanding at the end of the acounting period are known as …

A

ACCRUED EXPENSES

47
Q

what is an ACCRUED EXPENSE

A

an ACCRUED EXPENSE is an expense that is still outstanding at the end of the reporting period.

48
Q

expenses that have been paid in advance for the next reporting period are known as …

A

PREPAID EXPENSES

49
Q

What is a PREPAID EXPENSE

A

a PREPAID EXPENSE is one that relates to a future reporting period but was paid in this reporting period.

50
Q

How are PREPAID EXPENSES recorded?

A

PREPAID EXPENSES are recorded as an asset that we drawn down as relavent in subsequent reports.

51
Q

the convention that important (material) items need to be separately disclosed is known as …

A

MATERIALITY CONVENTION

52
Q

The convention that profit is the excess revenue over expenses (not the ecess of cash received over cash paid) is known as ….

A

the ACCRUALS CONVENTION

53
Q

what is the ACCRUALS CONVENTION

A

the ACCRUALS CONVENTION holds that profit is the amount of revenue remaining after expenses have been taken into acount; not the difference between the amount of cash received and cash paid for a period.

54
Q

A measure of the portion of the cost of a fixed asset which has been expensed during an accounting period less residual value.

A

DEPRECIATION

55
Q

what is DEPRECIATION?

A

a measure of the portion of the cost of a fixed asset which has been expensed during an accounting period.

56
Q

what factors must be taken into account when calculating depreciation?

A
  1. the cost (or fair value) of the asset.
  2. the useful life of the asset
  3. the residual value after its useful life
  4. the method of depreciation to be used
57
Q

In determining an assets cost for depreciation purposes, what element of the purchase can be taken into accoutn?

A

any cost relating to the acquisition of the asset (e.g. transport, installation, legal title transfer costs) and any costs relating to the improvement or alteration of the asset.

58
Q

What type of depreciation, allocates the amount to be depreciated evenly over the useful life of the asset?

A

STRAIGHT-LINE DEPRECIATION

59
Q

what is STRAIGHT-LINE DEPRECIATION?

A

allocating the amount to be depreciated evently over the useful life of the asset.

60
Q

The cost or fair value of an asset minus accumulated depreciation to date is known as …

A

the WRITTEN-DOWN VALUE

61
Q

what is meant by the WRITTEN-DOWN VALUE

A

the WRITTEN-DOWN VALUE is the cost or fair value of an asset less the accumulated depreciation to date.

62
Q

An asset’s WRITTEN-DOWN VALUE is also known by what terms?

A

NET BOOK VALUE or CARRYING AMOUNT

63
Q

what is the more formal term for an assets’s NET BOOK VALUE

A

WRITTEN DOWN VALUE

64
Q

what is the more formal term of an asset’s CARRYING AMOUNT?

A

WRITTEN-DOWN VALUE

65
Q

under-depreciation of an asset is often referred to as … …

A

LOSS ON SALE OF NON-CURRENT ASSET

66
Q

what is meant by LOSS ON SALE OF NON-CURRENT ASSET?

A

the value of the asset had to be readjusted as it had been under depreciated over its useful life. Therefore, the actually residual vale was less than its written-down value.

67
Q

what is meant by PROFIT ON SALE OF NON-CURRENT ASSET?

A

the asset had been over-depreciated over the term of its useful life. As a result, the actual residual value is more than it written-down value.

68
Q

How are PROFITS/LOSSES ON SALE OF NON-CURRENT ASSETS recorded?

A

These items are made as an addition or reduction in the expense in the reporting period of disposal of the asset.

69
Q

finished good, raw materials, stores or suplies, and work in progress are all types of ……

A

INVENTORY

70
Q

what are the types of inventory?

A

finished goods, raw materials, stores or supplies, and work in progress.

71
Q

what should be included in the cost of inventory?

A

all costs directly related to bringing the inventory into a saleable state?
e.g. cost of purchase (price, freight)
costs of converting the raw goods into finished products
other costs to bring inventories to their final sold designation/condition (storage, security, display)

72
Q

What are the three methods that can be used when transferring INVENTORY COST to COST OF SALE?

A
  1. FIRST IN FIRST OUT (FIFO)
  2. LAST IN FIRST OUT (LIFO)
  3. WEIGHTED COST
73
Q

which INVENTORY COST to COST OF SALE method is based on using the oldest inventory first?

A

FIRST IN FIRST OUT (FIFO)

74
Q

what is FIFO?

A

FIFO (FIRST IN FIRST OUT) is a method used to transfer cost of inventory to cost of sale on the based that the first inventory bought will be the first inventory sold.

75
Q

which INVENTORY COST TO COST OF SALE transfer method is based on using the most recently used inventory value first?

A

LIFO (LAST IN FIRST OUT)

76
Q

what is LIFO

A

LIFO (LAST IN FIRST OUT) is a method used to transfer inventory cost cost of sale and is based on using the value of the last inventory first.

77
Q

Which INVENTORY COST TO COST OF SALE transfer method is based placing all inventory in a single pool witth the weighted averages of the inventory used as the basis.

A

WEIGHTED AVERAGE COST

78
Q

what is WEIGHTED AVERAGE COST?

A

WEIGHTED AVERAGE COST is a method of inventory valuation with makes the assujption that the valutio attached to cost of sale is based on an average cost of inventory.

79
Q

If inventory prices are falling, which COST OF SALE inventory method provides the best profit?

A

LIFO, as the last in is the cheapest.

80
Q

what are the two type of INVENTORY RECORDING SYSTEMS?

A
  1. the PERPETUAL INVENTORY SYSTEM

2. the PERIODIC INVENTORY SYSTEM

81
Q

which inventory costing method does IFRS NOT accept for external reporting?

A

LIFO

82
Q

amounts owed to a business that are considered to irrecoverable are known as …

A

BAD DEBT

83
Q

how do you account for a bad debt in the financial records?

A

when accounting for BAD DEBT in financial records, one must:
1. reduce the amount within Statement of Financial Reporting - current asset - account receiveables

  1. increase the amount with Statement of Financial Performance (Income Statement) - operating expenses - BAD DEBT WRITTENT OFF
84
Q

what are the two common ways of determining doubtful debts for a period?

A
  1. On the basis of credit sales.

2. By analysing the balances outstanding from accounts receivable.

85
Q

How are DOUBTFUL DEBTS recorded?

A
  1. in the Income Statement, an expense labelled “doubtful expenses” are included.
  2. in the Statement of Financial Position, a line item deduction “less allowance for doubtful debts” is included adjusting the Accounts Receivable.
86
Q

What is the meaning of the following:

Doubtful debts expense

A

“Doubtful depts expense” is a line item withn the Statement of Financial Performance (Income Statement, Profit/Loss Account) and accounts for the estimate number of debts that will not be paid by customers for the period.

87
Q

Its the end of the year and you know that $1,000 worth of credit will not be repaid. How do you record this?

A

In the Income Statement, create “Bad debts written off” as an expense line item.

In the Statement of Financial Position, ensure the accounts receivable asset line reflects the bad debt has been subtracted.

88
Q

In 2014, $1,000 was writtent off as doubtful debt. In 2015, you relise that the bad debt was only $500. How do you record this?

A

In the income statement, create “Doubtful debts written back” as a revenue line item (+) or as an expense line item (-).

In the Statement of Financial Position, ensure the account receivable asset line item includes this amount as a positive.

Finance for Managers (4 decks)

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