5 - Revision Flashcards
In addition to knowledge of accounting, what other skills and knowledge prepare a university graduate to enter the profession of accountancy?
These skills include:
- ability to communicate
- perform research
- analyse and organise information
- understand and apply knowledge from diverse areas
- judgement.
Employers and professional bodies recommend that these individuals possess functional, personal, and broad business perspective competencies.
Functional competencies relate to the technical competencies, which are most closely aligned with the value contributed by accounting professionals (i.e. knowledge and ability to apply skills).
Personal competencies relate to the attitudes and behaviours of individuals preparing to enter the accounting profession, such as self-management. Developing these personal competencies will enhance the way professional relationships are handled and facilitate individual learning and personal improvement.
Broad business perspective competencies relate to the context in which accounting professionals perform their services. Individuals preparing to enter the accounting profession should consider both the internal and external business environments and how their interactions determine success or failure. They must be conversant with the overall realities of the business environment.
Give an example of a service business and of a manufacturing business. Explain the similarities and differences between the two.
When you buy a ticket from Qantas Airlines, you are purchasing the right to sit on an aeroplane as it travels from one place to another. You are buying transportation. Because transportation is something intangible, it is considered to be a service. Because Qantas Airlines is in the business of providing transportation, it is considered to be a service business.
When you visit your local Toyota dealer to purchase a car, you also are buying transportation. The difference between the purchase of the airline ticket and the purchase of the car is that the car is a means of transportation. It is a very tangible product which will be driven as well as parked in your garage or driveway. Because the Toyota Motor Business is in the business of making cars and selling them to dealers (as opposed to selling and providing transportation), it is considered to be a manufacturing business.
What factors would you consider in deciding whether to operate your business as a sole proprietorship, a partnership, or a company?
First consider factors such as:
- differences in the way each organisation is taxed
- your ability to raise capital
- your business knowledge
- the level of risk you are willing to accept.
A few of the factors you would consider when organising your business as a company is that income taxes on the profits are paid by the business instead of by the individual owners; and a business tends to be less risky because the company, instead of the individual owners, is liable for any debts of the business.
One of the positive factors of operating as a sole proprietor is that it allows flexibility in running the business. As the sole owner, you would be able to make decisions regarding the operation of the business and the use of its capital. The difficulties would be that you would have to be able to raise enough capital on your own to start the business and that you would retain all the risk if the business fails.
If you are not able to raise enough capital on your own or want to share the risk or are lacking in some area of expertise, you may consider organising the business as a partnership. A partner can bring special skills and expertise or additional capital into a business to help make it successful.
How do codes of ethics help business people to make decisions?
Business people may face many situations in which the ethical issues are complicated and the line between right and wrong is fuzzy at best.
To help business people make ethically sound decisions in these complex situations, a code of ethics makes statements about acceptable ethical behaviour.
These statements can be considered guidelines that can be applied to various situations to help in the decision-making process.
How does accounting information contribute to the planning process?
Accountants determine how revenues, variable costs, and fixed costs affect profits, based on their observations of how costs behave and on their estimates of future revenues and costs.
By observing cost-behaviour patterns, accountants are able to classify the costs as either fixed or variable, and then use this classification to predict the amounts of the costs at different activity levels.
Accounting information, then, can help decision makers to evaluate alternative plans by using CVP analysis to show the profit effect of each plan. CVP analysis is a tool that helps managers think critically about the different aspects of each plan.
How can decision makers predict the sales volume necessary to achieve a target profit?
Predicting the sales volume necessary to achieve a target profit is not very different from predicting the sales volume necessary for estimated revenues to cover estimated costs.
The only difference is that decision makers must modify the break-even equation by adding the desired profit to the estimated fixed costs.
Then, after substituting the contribution margin and the estimated fixed costs plus the desired profit into the equation, they can solve for the necessary sales volume.
Explain what cost–volume–profit (CVP) analysis is. How does CVP analysis help entrepreneurs to develop their companies’ business plans?
Cost-volume-profit analysis is a tool (based on a simple profit computation involving revenues and costs) which managers use to study the ways in which a business’s profits will be affected by alternative sales volumes, sales prices, and costs.
Managers can use this analysis to help them determine the number of units that must be sold for the business to break even (sometimes referred to as ‘break-even analysis’) or to earn a desired profit.
During the planning process, cost-volume-profit analysis helps entrepreneurs to think through their business’s business plans and select alternatives by showing how various alternatives will affect profits.
What is a contribution margin?
A contribution margin is the difference between estimated sales revenue and variable costs and can be computed either on a per unit basis or in total.
The per unit computation is the difference between the estimated selling price per unit and the variable costs per unit.
The total contribution margin is the difference between the estimated total sales revenue and total variable costs.
Explain what it means when a business breaks even.
Break-even refers to the point at which a business makes zero profit. In this instance, the sales revenue is exactly enough for the business to ‘cover’ all its fixed and variable costs.
If the total variable cost per unit increases while the selling price per unit and the fixed costs and sales volume remain the same, how would you expect the change in variable costs to affect (a) profit; and (b) the break-even point?
If the total variable cost per unit increases while everything else remains constant, total variable costs would increase, contribution margin per unit would decrease, profit would decrease and the break-even point would increase (i.e. more units would need to be sold for the business to break even).
Campcraft is a small manufacturer of camping trailers. The business manufactures only one model and sells the units for $2500 each. The variable costs of manufacturing and selling each trailer are $1900. The total fixed cost amounts to $180 000 per year.
Calculate Campcraft’s contribution margin per trailer.
Contribution margin per unit = Sales price per unit – Variable cost per unit
= $2500 – $1900
= $600
Campcraft is a small manufacturer of camping trailers. The business manufactures only one model and sells the units for $2500 each. The variable costs of manufacturing and selling each trailer are $1900. The total fixed cost amounts to $180 000 per year.
Calculate Campcraft’s profit (or loss) at a sales volume of 160 trailers.
Profit (at 160 units) = (Contribution margin per unit x Units sold) – Total fixed costs
= $600(160) – $180 000
= $96 000 – $180 000
= $84 000 (loss)
Campcraft is a small manufacturer of camping trailers. The business manufactures only one model and sells the units for $2500 each. The variable costs of manufacturing and selling each trailer are $1900. The total fixed cost amounts to $180 000 per year.
Calculate the number of units that Campcraft must sell for it to break even.
Break-even point = Total fixed costs / Contribution margin
= $180 000 / $600
= 300 units
Campcraft is a small manufacturer of camping trailers. The business manufactures only one model and sells the units for $2500 each. The variable costs of manufacturing and selling each trailer are $1900. The total fixed cost amounts to $180 000 per year.
Calculate the number of units that Campcraft must sell for it to earn a profit of $30 000.
Sales volume for $30 000 profit = (Total fixed costs + Desired profit) / Contribution margin per unit
= (180000 + 30000)/600
= 350 units
How does a budget contribute to helping a business achieve its goals?
A budget helps a business by providing a financial description of the activities planned by the business to help it achieve its goals.
It also helps by:
- adding order to the planning process
- providing an opportunity to recognise and avoid potential operating problems
- quantifying plans
- creating a benchmark for evaluating the business’s performance
