Accounting Flashcards
outline formula for breakeven, margin of safety and margin of safety percentage
what are the benefits of budgeting and what are the order of budgets
Benefits of Budgeting
1. Help strategic planning
2. Help performance evaluation
3. Set plans in financial terms
4. Managers made responsible
5. Encourage cooperation and coordination
Order of budgets:
- Sales
- Production (number of units that need to be produced to meet sales needs and provide for the desired end inventory)
- Direct Materials (amount of raw materials to fulfil production budget)
- Direct Labour (amount of labour hours required)
- Cash (shows expected cash inflows and outflows)
what are the actions to be taken in short or long term surplus or deficits
Short-term surplus
- Pay creditors early for discounts
- Try increase sales through debtors & stocks
- Short term investments
Short term deficit
- Increase creditors (accounts payable)
- Reduce debtors (accounts receivable)
- Arrange an overdraft
Long term surplus
- Reduce/update fixed assets
- Expand
- Make long term investments
Long-term deficit
- Raise long term finance
- Consider shutdown/disinvestment options
outline uses of cash budget
- Cash budgets allow managers to plan and find out immediately if they have the funds to carry out their plans
- The firm can negotiate for a loan / credit in advance for periods when the profit is potentially running low - it is better to apply for a loan in advance than at the last minute
- The firm can plan for alternative sources of finance in advance (e.g liquidation of assets or issuing of shares)
- If there is a surplus then you can plan to use it for another use
how do you calculate absorption costing?
what are the advantages of activity based costing?
- Does not overcharge on high labour hours and vice versa
- Focuses attention on the nature of cost behaviour
- Recognises costs aries from complexity and diversity of operations
- Takes product costing beyond traditional factory floor methods
- Can help us budget for planned activity levels and plan our machine / labour requirements
How do you rectify limitng factors?
Invest in R&D
Work with suppliers
Look for other suppliers
Can you improve delivery of materials
Can you improve reliability of the materials, which again needs coordination with the supplier
Looking internally, can you you reduce wastage materials by improved training of labour
Can you reduce wastage of materials by using better machinery?
Could you possibly change the design of the product, or use alternative materials
A55
what are the reasons for material price and usage variance
Reasons for a material price variance include:
* Purchase of better (if favourable) or poorer (if unfavourable) quality materials
* Bulk buying leads to discounts
* Price changes for the material
* Inflation rates
Reasons for material usage variance:
* Purchase of better (if favourable) or poorer (if unfavourable) quality materials
* High / poor skilled labour
* Modern / out of date machinery
* Theft / damage
* Stricter quality control (more used)
give reasons for labour price and efficiency variance
outline reasons for sales price and volume variance
outline formula for internal rate of return
if discount rate is higher than IRR then it is not a good investment
outline advantages and disadvantages of payback method
Advantages
- Quick simple calculation
- Easily understood concept
Disadvantages
- Ignores any cash flows after the payback period
- Ignores time value of money
outline advantages and disadvantages of NPV
Advantages:
- Correctly accounts for the time value of money
- Uses cash flows, not profit
- Absolute measure
Disadvantages
- Need to estimate cost of capital
- Assume all cash flows are at the end of the year
- Can be complex
outline advantages and disadvantages of IRR
Advantages:
- Readily understood concept of % return
- Does not require an exact cost of capital
- Uses the time value of money
Disadvantages
- Difficult calculation
- Cannot cope with changing discount factors
- Complex and time consuming
what is on the debit and credit side of a trial balance
Overall a business spends money, which is entered on the debit side, when:
* Increasing assets (e.g buying new van)
* Increasing expenses (e.g paying for advertising)
* Decreasing liabilities (e.g paying interest on loans)
Overall a business receives money, which is entered on the credit side, when:
* Decrease assets (e.g liquidation of PP&E)
* Increase in liabilities (e.g raising a loan / debentures)
* Increasing sales (e.g selling inventory)
* Increase in capital (e.g funds contributed by the owner)
difference between cost, expense, addition, etc
Cost is product related while expense is not
Purchases are product related additions are not
Sale are product disposal is not
what are the two types of depreciation
Straight line
Reducing balance (NBV)
N/B: intangible assets do not depreciate
Land doesn’t depreciate but buildings (40% of L&B) do for 50 yrs to zero scrap value (if it is not given)
what happens when you sell at a loss?
When we expect to sell items at a loss we recognise it in the current period even if it hasn’t happened yet unlike profit which is recognised after the sale is made
This is to ensure profits aren’t overstated
We must find the net realisable value - the estimated value we can sell the product for minus estimated costs
eg if products are damaged
what is cashflow from operating activities and what will appear on the statement
Operating profit
Adjustments for:
Depreciation charges
(Profit)/Loss on sale of non-current assets
Increase/(Decrease) in trade & other payables
(Increase)/Decrease in trade & other receivables
(Increase)/Decrease in inventory
Cash generated from operations (TOTAL)
Income taxes paid (LAST YEAR TAX PAID THIS YEAR)
what is included in cash flow from investing activities?
Cash flows from investing activities
Interest received
(Payments) to acquire intangible non-current assets
Receipts from sale of tangible non-current assets (NBV + PROFIT ON SALE)
(Payments) to acquire tangible non-current assets (GIVEN)
Net cash from investing activities (TOTAL)
what is cash flow from financing activity?
Cash inflows and outflows relating to the long-term financing of the organisation. This will include cash flows from raising and redemption of the company’s debt and equity.
what is included from cash flow from financing activity and complete the cash flow
*Cash flows from financing activities:
*
* Issue of equity share capital (change in share capital AND premium)
* Issue of debenture (change in long term loan on BS but remember a decrease in loan will negatively affect cash flow)
* Debenture interest paid (Income statement)
* Equity dividends paid
* Net cash used in financing activities (TOTAL)
Net increase in cash and cash equivalents (work out using difference in bank BS)
OVERALL TOTAL incl OP and Inv
Cash and cash equivalents at beginning of period (cash/bank of previous year)
Cash and cash equivalents at end of period (equal cash of current year)
Ratios
outline the profitability ratios and give relevant formulars
GP and OP margin
OP margin x Asset turnover = ROCE
ROCE = EBIT/Capital employed
Asset turnover = Sales/capital employed
Capital employed = Total Assets - Current lIabilites
outline the liquidity ratios
Debtors collectors period
Creditors collectors period (creditors/purchases) * 365
Stock period (0.5 x Op stock +close stock)/COGS * 365
Current ratio
Acid test ratio
Outline the financing ratios
Gearing
Interest cover
what must you consider when you start analysing financial statements
Analyse vertically and horizontally
Have we made enough profit?
* Do our profits compare well to last year?
* Do our profits compare well to our competitors in marekt cap and indsutry avg?
* What are the reasons for our good/poor performance?
* What actions can we take to improve profits next year?
* Is our level of debt (liabilities) under control?
* Are we able to pay our debts quickly if necessary?
* Are we too reliant on borrowing when there are alternative sources of finance?
* Is our stock ageing?
* How strong is our credit control?
what are the investment ratios
Dividend yield: Dividend related to market price
Dividend per ordinary share / Share price
Dividend Cover: How many times profit covers dividends?
Profit **after tax **minus preference dividends / Ordinary dividends
Earnings per Share (EPS): Earnings related to number of shares
Profit after tax minus preference dividends /Number of ordinary shares
Price Earnings Ratio: Relates EPS to market price
Share price /Earnings per share
Link the liquidity ratios (days) and give recommendations
Adding debtors and stock turnover gives you the actual time from when stock is recieved to when money is paid
Increasing creditor time, although good for cashflow but can lose goodwill of suppliers and hence discount
Higher stock turnover could also mean you are keeping a wider range of products
low stock turnover and debtors days is consistent with reducing investments in current assets
Recommendations:
* offer discounts to get rid of slow stock and reduce debtors days
* be aware that reducing debtors time may be bad customer service
* chase outstanding debts and have stricter controls on credit
* Compare to comp
Link current and acid ratio to others and give recommendations
Current ratio should be more than 2 (a bit lower for supermarkets and acid test ratio1:1)
A current ratio of 1 means you’ll stagnate
Acid ratio: better estimate of immediate liquid positon
A low CA is bad but could mean that the business is investing in non current assets(check BS) to fund growth so may be good in the future.
Supermarkets normally have low CA
CA recommendations:
* To increase it, short-term creditors could be paid off using long-term debt.
* To decrease it, current assets could be converted into investments
* Stock may not be a liquid asset. In reality, some c. liabilities are not payable immediately.
Acid test recommendations:
* To increase it, short-term creditors could be paid off using long-term debt.
* To decrease it, current assets could be converted into investments
Explain gearing and interest cover and link to other areas
Gearing should be between 25-50%
Interest cover should be moe than 6: any less and it is difficult to raise more debt
Gearing:
* a higher capital gearing ratio (above 50% and comp to peers) is risky because there are higher loans meaning more interest to pay and thus it may affect the ability to pay ordinary dividends (and ordinary holders may not be able to get a refund upon liquidation).
* Also long term debts are paid first so a higher gearing ultimately reduces dividends so not good
* Fix by issueing ordinary shares to pay long term debts
need share price to check if to invest
Explain the profitability ratios and link to any other ratios
Give recommendations
ROCE and Asset turnover, the higher the better
GP margin
* Due to higher price, higher brand, good relatonship with suppliers
* GP margin decreases if you reduce price to try and improve overrall sales
* Asset turnover can be linked to gearing, like if you get too much liabilty but cant generate sales, you’re effd.
OP margin
* will increase Due to low ovhds
