Accounting

Question 1

What is Accounting?

Answer 1

An information science that focuses on the financial recording, reporting and decision making processes of a business which helps them organise, analyse and collect their financial information

Question 2

What are inflows + example

Answer 2

When a firm receives money

e.g. sales of goods and services (revenue)

Question 3

What are outflows + Example

Answer 3

when a firm pays money/loses money

e.g. payment of rent

Question 4

What is Budgeting

Answer 4

the continuous process of estimating the future financial events for a given period of time and can be used for individuals or businesses.

Question 5

Purpose of Budgeting

Answer 5

Planning- predicts what is likely to occur in the future. Can plan ahead for possible problems and opportunities.

Decision-making- provides a standard against which the actual figures can be compared and can identify areas that are going well and areas that are under performing.

Question 6

Net profit margin formula

Answer 6

= Net profit/Net sales x 100

Question 7

Gross Profit formula

Answer 7

=Gross profit/net sales x 100

Question 8

Profitability indicator: NPM definition

Answer 8

Indicates the businesses financial health through highlighting the % of sales revenue the business keeps once expenses have been paid

e.g how well a business controls its spending/expenses

Question 9

How to increase NPM

Answer 9

Increasing NPM:
- Reduce staff
- Cheaper suppliers
- Increase selling price (not too much so that you have no customers)

Question 10

Profitability indicator: GPM definition

Answer 10

-Indicates how much profit a business makes after accounting for the direct costs associated with running a business (producing the goods and services you sell)

e.g. how well a business turns sales into profits and measures adequacy of the mark-up

Question 11

How to increase GPM

Answer 11

Increasing GPM:
- Buying in bulk
- Reducing cost associated with inventory
- Minimising costs of suppliers

Question 12

What is Revenue

Answer 12

Income business has earned (e.g sales revenue, interest revenue)

Question 13

What are expenses?

Answer 13

Cost of business operation (e.g rent, employee wages, electricity)

Question 14

What are Assets?

Answer 14

Resources that a business owns or controls (e.g. inventory, cash at bank, premises, vehicles)

Question 15

What are Liabilities?

Answer 15

Debts or obligations a person or company owes to someone else, usually a sum of money (e.g. loans, accounts payable mortgage loan)

Question 16

What is Owner’s Equity

Answer 16

The portion of a company’s assets that an owner can claim, its what is left after subtracting a company’s liabilities from it assets (e.g. capital contribution, drawings, net profit)

Question 17

THE ACCOUNTING EQUATION

Answer 17

OWNERS EQUITY= ASSETS – LIABLITIES
ASSETS= LIABLITIES + OWNERS EQUITY
LIABLITIES= ASSETS – OWNER’S EQUITY

Question 18

Accounting reports: Income statements

Answer 18

report on the financial performance of a firm, comparing revenue and expenses (ONLY) during a reporting period to determine if a profit or loss was made.

Question 19

Strategies for controlling/ reducing expenses

Answer 19

• Find cheaper suppliers
• Manage staff and their wages e.g by cutting middle management or front line staff
• Strategies such as offshoring (relocating business operations to another country) for lower costs
• Outsourcing non-essential functions of the business to reduce expenses (hiring a party outside of the company to perform services or create goods)

Question 20

Strategies for improving revenues

Answer 20

• Bring selling price DOWN to INCREASSE sales
• Advertise more effectively
• Get ride of slow moving stock by using promotional methods such as sales, buy one get one free
• Improve customer service repeat sales and increase sales by word of mouth

Question 21

Accounting reports: Balance sheet

Answer 21

statement of the assets, liabilities, and owner’s equity of a business at a particular point in time.

• The purpose of a balance sheet is to give interested parties an idea of the company’s financial position.
• On a balance sheet total assets must equal (balance) with total equity (liabilities plus owner’s equity)

Question 22

Why is inventory the most important asset to a firm?

Answer 22

• It is the main source of revenue, therefore key to a business’s ability to earn a profit
• It is one of the significant (major) assets
• It is one of the most vulnerable assets as it is susceptible to damage, spoilage, theft, changes in tastes and fashion e.g. clothing brand no longer being as popular or in fashion

Question 23

What are the two prices inventory is recorded at?

Answer 23

COST PRICE: the price it cost the firm to buy the inventory from a supplier

SELLING PRICE: the price the firm sold it to a customer

Question 24

What is the mark-up method?

Answer 24

When a firm receives inventory from a supplier they have paid the cost price. The firm will then add a percentage mark-up to this cost price to determine the selling price to customers (allowing them to make a profit).

Question 25

Determine selling price

Answer 25

Cost price x (1+ mark-up %) = selling price

Example:
Cost price $4, 50% mark up
4 x (1+0.5)= $6

Question 26

Determine cost price

Answer 26

Selling price ÷ (1 + mark-up %) = cost price

Example:
Selling price $200, 100% mark up
200/(1+1)= $100