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Law Office Management and Accounting > Accounting > Flashcards

Accounting Flashcards

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1
Q

What are Budgets?

A
  • Budgets are useful control tools used by business entities to drive desired outcomes.
  • Budgets promote planning and control.
  • A budget is a quantitative plan of the business objectives.
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2
Q

what does the budgeting process involve?

A

The budgeting process involves the identification of the firm’s capacity followed by a provision of estimates.

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3
Q

What are the different types of budgets?

A
  • Production budgets
    Estimates the numbers of items in units to be produced.
  • Sales Budgets
    Set Sales targets, number of items to be sold.
  • Overheads/Expense Budgets
    Estimates overhead costs to be paid.
  • Capital budgets
    Plans for acquisitions and disposals of non-current assets such as Buildings, Vehicles, Furniture, Computers etc.
  • Cash Budgets
    Estimates of cash inflows and outflows (including funds at the bank). The cash budget highlights whether there is likely to be any shortfall in cash or
    where there is excess.
  • Master Budget
    The Master budget is a combination of all budgets that produce a set of final Accounts.
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4
Q

How is the Cash Budget to be headed?

A

“Name of company”
Cash Budget
Quarter ending “date”

for example:

John Dodge
Cash Budget
Quarter ending 31, March 2020

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5
Q

What are the column necessary in the Cash Budget?

A

Receipts, Month1, Month 2, Month 3, Total

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6
Q

What are the Rows necessary in a Cash Budget?

A

Receipts:

Payments:

Summary:

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7
Q

What items may be included under Receipts in a Cash Budget?

Hint: RCCCR

A
  • Receipts
    Capital
    Cash payments
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8
Q

What items may be included under Payments in a Cash Budget?

Hint: PIMP TOD

A
  • Payments
    Investment
    Machinery Purchase
    Purchases
    Taxation
    Overheads
    Dividend Payment
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9
Q

What items are to be included under Summary in a Cash Budget?

Hint: SNOB

A
  • Summary
    Net Cash Inflow(Outflow)
    Opening balance
    Balance c/f
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10
Q

True or False.

The summary balance of the total column must agree with the end of period balance.

A

TRUE.

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11
Q

How is the Summary balance arrived at?

A

This is arrived at by subtracting the total inflows from the outflows and then adding the opening balance.

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12
Q

How is the Net Cash inflow(outflow) calculated?

A

Total Receipts minus Total Payments

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13
Q

True or False.

Depreciation is not a cash flow

A

TRUE.

Depreciation is an accounting convention and should not be included in your cash budget.

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14
Q

If it says 100,000 overhead including depreciation 30,000

What should you do?

A

Depreciation is not included, so you minus the 30,000 from the 100,000 and you are left with 70,000.

The 70,000 is spread across the period.

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15
Q

Is Capital Cash Inflow or cash outflow?

A

Capital - is cash inflow – what is used to start the business

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16
Q

What are the advantages of Budget?

A
  • Standards of performance can be agreed upon.
  • Allows for the effective management of funds.
  • Improves decision-making.
  • Allows for the identification of cash problems when such problems are likely to occur and provides an opportunity for management to forward the plan.
  • Helps to keep the business entity focused on financial goals.
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17
Q

What are the disadvantages of Budget?

A
  • Budgeting can be time consuming.
  • Budgets could be too rigid.
  • Sometimes expenses are incurred just because such expenses are budgeted. [A spend it or loose it attitude].
  • Budgets tend to focus on financial outcomes.
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18
Q

How is the opening balance for the month following calculated?

A

The closing balance of cash in any month is the opening balance of cash in the following month.

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19
Q

What is the formula for Working Capital Ratio?

A

Working capital ratio = current assets ÷ current liabilities.

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20
Q

What is the formula for Interest Cover/Solvency Ratio?

A

Formula Interest Cover = operating profit ÷ interest expense

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21
Q

What is the formula for Interest Cover/Solvency Ratio?

A

Formula Interest Cover = operating profit ÷ interest expense

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22
Q

What is the formula for Interest Cover/Solvency Ratio?

A

Formula Interest Cover = operating profit ÷ interest expense

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23
Q

What is the formula for Return on Total Assets/Rate of Return on Gross Assets?

A

Return on total assets = (operating profit ÷ total assets) x 100

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24
Q

What is the formula for Post Tax Rate of Return on Shareholder’s Equity

A

(Profit after tax ÷ shareholders’ equity) x 100

25
Q

Price/Earnings Ratio

A

Price/Earnings Ratio = market price of share ÷ earnings per share

Earnings per share = profit before tax ÷ number of shares

26
Q

Debt/Equity Ratio

A

Debt Equity = (borrowings ÷ shareholders’ equity) x 100.
Equity = share capital + share premium + reserves/evaluation reserves + retained profits/profit and loss account.

27
Q

How are the results for Ratios presented?

A

The result will be followed by the word “times.” E.g. if the result is 2, it would be written as 2 times. Ratios will go to 2 decimal places.

28
Q

What is the purpose of the bank reconciliation statement

A
29
Q

Define budgeting and what is the purpose of budgeting in the management cycle

A
30
Q

What factors are essential to successful budget implementation

A
31
Q

What are some of the reasons for the differences between the Cash Book and the Bank Statement balances at the end of the month?

A
32
Q

What do the debit and credit balances in the current accounts of partners mean?

A
33
Q

What are financial ratios and what are they used for

A
34
Q

Write short notes on the following:
(a) unpresented cheques
(b) dishonoured cheques

A
35
Q

Write short notes on the following:
(a) unpresented cheques
(b) dishonoured cheques

A
36
Q

In partnership accounts, why is:
(i) interest allowed on capital; and
(ii) interest charged on drawings?

A
37
Q

What is the Ratio for calculating the Gross Profit Margin?

What is the importance of it?

A

Gross Profit x 100 / Sales

Measures how much gross profit is generated for each dollar of sales. The gross profit is supposed to cover, operating expenses and produce a net profit at the end.

38
Q

Alpha company has sales in the amount of $210,000 and a gross profit of $47,000. Calculate the Gross Profit Margin.

A

GP Margin = 47,000 x 100 = 22.38%
210,000

39
Q

What is the Ratio for calculating Net Profit Margin?

What is the importance of it?

A

Net Profit x 100 / Sales

Looks at how much of the company’s revenues are retained after paying expenses.

40
Q

Alpha company has sales in the amount of $210,000 and gross profit of $47,000 and expenses of $32,000.

Calculate the Net Profit Margin

A

net profit of $15,000
[GP of 47,000 – Expense of $32,000]

NP Margin = 15,000 x 100 = 7.14%
210,000

41
Q

What is the Current Ratio?

What is the importance of it?

A

Current Assets / Current Liabilities

This ratio indicates the extent to which current liabilities can be covered by current assets.

42
Q

Alpha Limited has current assets in the amount of $69,765 and current liabilities in the amount of $28,500.

Calculate the Current Ratio.

A

Current ratio = 69,765 = 2.45
28,500

43
Q

If a company has a Current Ratio of 2.45 what does that mean?

A

2.45 ratio means that the company has almost two and a half times more assets than current liabilities. This is a good position. The company has sufficient short-term assets to meet short-term liabilities.

44
Q

what is inventory turnover?

How is it calculated?

A

Measures how quickly the inventory is sold and replaced over a given period. It provides a good indication of popular moving items.

Cost of goods sold / Average inventory

45
Q

Alpha company has average inventory of $25,000 and cost of goods sold in the amount of $250,000 for the year.

Calculate the inventory turnover

A

Inventory turnover 250,000 - 10 times per year
25,000

46
Q

What is Asset Turnover?

How is it calculated?

A

Measures the sales generated per dollar of assets.
It gives an indication of how efficient the company is in utilizing assets to generate sales.

Asset Turnover = Sales [in times]
Assets

47
Q

Alpha has sales of $320,000 and total assets of $190,000.

Calculate the Asset turnover.

A

Asset Turnover = 320,000 = 1.68 times
190,000

48
Q

Trade Receivable Days

A

Measures the number of days the receivables remain unpaid. Money tied up in receivables is unproductive money. This is tantamount to giving your customers an interest free loan.

It measures the length of time a debtor takes to pay.

Average collection period = Trade receivables x 365
Credit Sales

49
Q

Alpha has traded a receivables in the amount of $29,920 and credit sales in the amount of $260,000.

Calculate Trade Receivable Days

A

Average Collection period = 29,920 x 365 = 42.0 days
260,000

50
Q

Trade Payable Days

A

Measures the number of days the company takes to pay its creditors.

Payment period = Trade Payables x 365
Cost of Sales

51
Q

Alpha has $18,500 owing to creditors. Cost of sales amounted to $163,000

Trade Payable Days

A

Payable days 18,500 x 365 = 41.4 days
163,000

52
Q

Gearing

A

Long term capital needed to finance the business may be provided by:
* Share capital and or
* long-term loan called debt capital

The relationship between Equity capital/Share Capital and long-term loans is called gearing.

A company with significant loans are considered high geared and maynot be attractive to either purchase or invest in.

Low geared companies are considered safe and attractive.

Gearing = Equity Capital x 100
Debt (long term loan)

53
Q

Alpha company has share capital and retained earnings in the amount of $400,000 and loan of $100,000

Gearing

A

Gearing = 100,000 x 100 = 25%
400,000

This company is low geared.

54
Q

Alpha has $260,00 in debt/long term loan and $120,000 in equity capital.

Gearing

A

Gearing = 260,000 x 100 = 216.7%
120,000

The company is highly geared, has too much debt and is likely to default on its payments and go into bankruptcy.

55
Q

Earnings per share

A

Indicates how much of each dollar of profit is earned by each share.

Earnings per share Net profit after tax
Number of ordinary shares

56
Q

Alpha company has net profit after tax of $320,000 and has on issue $400,000 - $1.00 shares.

What is the EPS?

A

$320,000 = 0.80 / or 80 cents
$400,000

57
Q

Dividend Yield

A

Measures the rate of return earned by owning a share

Dividend Yield = Divided per share x 100
Market price per share

58
Q

Alpha company paid dividend of 60 cents per share. The marker price of the company’s share is $6.50.

What is the Dividend yield?

A

Dividend Yield = 0.60 x 100 = 9.23%
$6.50

The share was purchase for $6.50 and the dividend income to the purchaser is 60 cents, a return of 9.23%.

This may seem small but an investor does not purchase, a single share he will purchase a number of shares.

Law Office Management and Accounting (2 decks)

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