Accounting And Finance Flashcards
1
Q
What is needed when making financial comparisons?
A
- avoid bias or misrepresentation
- are all assets of the business been valued on the same manner?
- financial figures are just numbers doesn’t show you other indications
2
Q
What needs to be noted when setting financial objectives?
A
- size of business
- other objectives
- budgets
- state of the economy
- level of competition
- government
- interest rates
- legislation
3
Q
What does working capital mean?
A
Short term finance required for the day to day running of the business
4
Q
How long is short term?
A
Up to 3 years
5
Q
What is cash flow?
A
A business needs sufficient inflows of cash to finance its day to day outgoings; if cash receipts are insufficient, the business is said to have cash flow problem
6
Q
What are examples of short term finance?
A
- overdraft
- loan
- trade credit
- factoring
- hire purchase
7
Q
What factors do banks consider when deciding whether to lend?
A
- what the finance is to be used for
- company’s past trading record
- type of product being sold
- businesses current financial position
8
Q
What is factoring?
A
When a business sells its debt to raise finance (“IOU”)
9
Q
What is trade credit?
A
When here is delayed payment of products
10
Q
What are the advantages and disadvantages of factoring?
A
Advantages - receives most of the finance at once
Disadvantage - lost a percentage of the money owed
11
Q
What ae examples of medium term finance?
A
Medium term loan
Leasing
Hire purchase
Retained profit
12
Q
What is a debenture?
A
A long term loan that are only available to a plc. The company does not borrow but sells debentures to investors in order to raise finance.
13
Q
What are types of long term finance?
A
Loan Debenture Share issue Sale of assets Sale and lease back
14
Q
What is depreciation?
A
Where the value of the asset falls over time
15
Q
What is venture capital?
A
Finance from individuals or firms who lend money to, or buy shares in, small and medium sized businesses that require finance for starting up.
16
Q
What should a business consider when choosing a method of finance?
A
- length of time
- legal structure of the business
- quantitative factors
- qualitative factors (e.g. control)
- state of the economy
17
Q
What are the two categories in accounting?
A
- financial accounting
- management accounting
18
Q
What is management accounting?
A
Concentrates on the internal financial accounts, allowing the business to monitor and evaluate its performance
19
Q
What are the principles of accounting?
A
- consistency
- going concern
- matching (accruals)
- materiality
- objectivity
- prudence (conservatism)
- realisation
20
Q
What does matching/accruals mean?
A
The dates used to record financial transactions are those when the transaction occurred and not when the actual payment is made.
21
Q
What dopes materiality mean?
A
Don’t count the value of all assets in the business when calculating the value of the business
22
Q
What does objectivity mean?
A
Principle that means the accounts must be backed up by evidence and must be realistic and therefore based on facts, not opinions or guesses.
23
Q
What does prudence mean?
A
Means don’t overstate the financial situation.
24
Q
What is generally accepted accountancy practice (GAAP)?
A
Is a framework of accounting rules or principles
25
Why might a business want to comply with GAAAP?
Allows stakeholders to make comparisons on the basis that the businesses all use the same set of principles.
26
What is a fixed cost ?
Where costs do not vary with the level of out put e.g. factory’s rent, business rates, machines
27
What are overheads/indirect costs?
Costs that can not be attributed to a particular unit of output.
28
What is a stepped fixed cost and what is an example?
When production increases the business buys additional machinery to cope with the extra production required.
29
What are variable costs?
Costs that are directly related to the level of output or sales
30
What are direct costs?
Costs that are directly attributable to a unit output (raw materials)
31
What are variable costs?
Costs that change in proportions to the level of goods or services a business produces
32
How do you workout total costs?
Fixed costs + variable costs
33
How do you work out unit cost?
Total cost/output
34
What is a marginal cost?
It is the cost of producing one additional good. It is the increase in variable costs
35
What is a social cost?
It is a cost on an external stakeholder - e.g. pollution
36
What is opportunity cost?
what a business could have spent the money on the next best alternative.
37
How do you work out average revenue?
Total revenue/number of sales
38
What is standard costing?
Is the cost that the business would normally expect for the production of a particular product. E.g. the cost for a hairbrush is $3 this is what the business expects the final cot of production.
39
What are the advantages of standard costs?
- gives the business a simple target
- gives employees a target to aim for and can alert them to problems as and when they arise
- can be used as a reward motivation policy
- encourages workers to look for better and more efficient ways of completing a job.
40
What are the disadvantages of standard costs?
- may be time consuming to collect information
| - may result in a situation where quality is sacrificed to keep costs of production down
41
What is a cost centre?
Specific part of a business where costs can be identified and allocated with reasonable ease. E.g. the marketing department may get $10000 is costs allocated to them
42
What are the advantages if cost centres?
- use the information to highlight inefficient departments
- can be used to motivate workers
- may encourage management to fin new suppliers or more efficient production techniques.
43
What are the disadvantages of cost centres?
- time consuming
- for some businesses it may be difficult
- the way in which costs are allocated can have a significant effect on the performance
- some costs for a business may be out of their control
44
What are profit centres?
Profits are split into different parts of the business
45
What is absorption costing?
Where all indirect costs or overheads of a business are absorbed by different cost centres.
46
What is contribution or marginal costing?
Where fixed costs or overheads are ignored and the business only considers the variable costs of production
47
How might costing methods be useful to stakeholders?
- may affect future investment (shareholders)
- may affect job security
- may use it to back up loans etc
48
How do you calculate contribution per unit?
Price - variable costs
49
How do you work out contribution?
Revenue - variable costs
50
How do you work out profit?
Total contribution - fixed costs
51
How do you work out break-even level by formula?
Fixed costs/contribution per unit
52
How would you find break even by using a chart?
Total revenue = Total costs
53
What would the break even point look like on a graph?
Where the total revenue and total cost lines intercept.
54
What is the margin of safety?
The difference between the actual and breakeven level of output
55
What are the benefits if break even analysis?
- easy to view and compare
- aids the decision making process
- can be used to show the level of profit at a given level of output
- can consider the impacts of changes on a particular product
56
What are the limitations of break even analysis?
- used using redacted figures
- direct and variable costs may change
- doesn’t take into account economies of scale
- if batch production is being used breakeven wont be obtainable because they are producing a fixed quantity
57
How do you work out total revenue?
Price x quantity sold
58
What are three methods of investment appraisal?
- Pay back
- accounting rate of return
- Net present value
59
What is pay back?
Measures how quickly the cost of the investment can be paid back.
Longer it is to payback the riskier the investment.
60
EOY 3 - cumulative cash inflow - (20,000)
EOY 4 - cumulative cash inflow - 10,000
What month did the investment payback?
20,000/30,000 = 2/3 = 0.66 = 8 months
61
What are the advantages of investment appraisal?
- It is easy to calculate ad understand
- it is quick and a useful guid to the level of risk
- effective method for companies in markets which are constantly changing.
62
What are the disadvantages of payback?
- ignores inflation
- does not take into consideration any cash inflows after the payback period
- does not measure the level of profits from the investment.
63
What is accounting rate of return (ARR) what does it measure?
Measures the profitability of any investment - higher the rate of return the better the investment.
64
How do you work out ARR?
1) total inflows
2) total inflows - cost of investment = profit
3) average annual profit/life of printer
4) return on investment = annual average profit/cost of investment
5) convert it into a percentage
65
What are the advantages of ARR?
- takes into account all of the cash flows throughout the life of the investment
- it measures the profitability of the investment
- relatively easy to calculate
- allows simple comparison
66
What are the disadvantages of ARR?
- no indication of when the cash inflows occur within any given year.
- ignores the value of money over time
- life of the investment needs to be known and may alter over time
- harder to calculate than payback
67
What does Net present value take into count that ARR and payback don’t?
It takes into account inflation and the value of money.
68
How do you work out Net present value?
Net return x discount factor
69
What are the advantages of NPV?
- It takes into account the value of money
| - all cash inflows are accounted for
70
What are the disadvantages of NPV?
- more complicated to work out than payback and ARR
- takes longer to workout, therefore more expensive
- can only guess the discount factor in the future
71
What are some Non-financial factors affecting investment?
- Resources available
- the economy
- data sources
72
How is internal rate of return different to NPV?
It allows the return to be calculate NPV does not do this.
73
What is internal rate of return?
The discount rate at which the NPV is equal to zero.
74
What is an overdraft facility?
An agreement with a bank to be able to overdraw on an account up to a stated limit.
75
What is zero budgeting?
Involves setting all budgets at zero, requiring managers to justify any requirement for funds.
76
What are flexible budgets?
Allow businesses to make allowances for changes in the level of sales volume so that adverse variances are advoided
77
What is variance?
The amount by which the actual financial results for an item differ from the mount in the budget.
78
What are the reasons for cash flow forecasts?
- allows a valuable planning procedure
- useful for helping the business set its prices
- can be used to address marketing strategies
- looked at by potential investors
79
What are the limitations of cash flow forecasts?
- changes to the rate of interest
- changes in economic policy
- changes in economic climate
- they’re only estimates
- changes in technology
80
What is the impact of cash flow forecasts and statements on a business?
- they are used as a measure of performance
- they allow management to correct any problems that may occur
- employees may be able to judge the ability of the business to offer higher levels of pay.
81
What may be some of the causes of cash flow problems?
- level of sales
- business sales
- business environment
- excess stock
- late payments
82
What are liquidity ratios?
They assess the level of cash within a business
83
How might you improve the cash flow of the business?
- increase sales
- reduce stock levels
- factoring
- leasing not buying
- loans
- changing creditor and debtor days
- cut operating costs
84
How do you work out index numbers?
Number in year required/number in base year x 100
85
How do you work out gross profit?
Revenue - cost of sales
86
How do you work out operating profit?
Gross profit - expenses
87
How do you work out profit for the year?
Profit and dividends - tax
88
How do you work out revenue?
Price x sales
89
How do you work out cost of sales?
Direct costs
90
What is an asset and liability?
Asset - what a business owns
| Liability - what a business owes
91
What are current and non current liabilities?
Current - less than one year
| Non current - money owed for more than one year
92
What is liquidity?
The ability to convert assets to cash
93
What is goodwill?
The difference in the value of the business and the net asset value
94
What is depreciation?
The concept that the fixed asset will be of less value over time.
95
What is net book value?
Cost of asset - depreciation value
96
What is straight line method?
Simplest method of depreciation.
97
How do you work out straight line method?
Initial cost - residual value/life of asset
98
What are the disadvantages and advantages of straight line depreciation method?
advantages
- amount of depreciation is lower in the first few years
- by having lower level of depreciation there is a higher valuation of an asset
Disadvantages
- estimate of residual value is required
- Assumes that the life of the assets is known
- having lower amount of depreciation in the first few years can be misleading
99
What is declining balance?
Applies a constant percentage rate of depreciation each year
100
What are the advantages and disadvantages of declining balance?
Advantages
- method reflects more realistically the value of assets that lose value significantly in the early years
- no estimate of the residual value is required
Disadvantages
- with a higher level of depreciation in the early years, the valuation of the assets is lower on the balance sheet
- lower valuation of assets may make it harder to borrow against assets
101
What are examples of liquidity ratios?
- current ratio
| - acid test ratio
102
What are examples of profitability ratios?
- gross profit margin
- net profit margin
- return on net assets
- return on capital employed
103
What are some Examples of efficiency ratios?
- Asset turnover
- stock turnover
- debtor days
- creditor days
104
What are efficiency ratios concerned with?
How efficient the business is to move stock, collect money it is owed or pay oink money it is owed
105
What are some examples of gearing ratios?
- Gearing
| - interest cover
106
What are gearing ratios concerned with?
Concentrates on the long term liabilities of the business and its ability to borrow money and its ability to cover the cost of borrowing
107
What does liquidity mean?
The ability to convert assets into cash
108
How do you work out current ratio?
Current assets/current liabilities
109
What is the ideal ratio for the current ratio and what does it mean?
1.5 - for every $1 of liabilities the business hods $1.50 in assets
110
How do you work out acid test ratio?
Acid test = current assets - inventory(stock)/ current liabilities
111
What is the ideal value for the acid test ratio?
1
112
What are the advantages of using liquidity ratios?
- comparisons can be made
- useful to stakeholders
- measure of performance
- aids decision making process
113
What are the limitations of ratios?
- inflation may distort figures such as profits
- state of the economy may mean that a fall in certain ratios is not due to the poor performance of the business
- external factors may have an impact on the figures
114
What are gearing ratios also called?
Solvency ratios
115
How do you work out the gearing ratio?
Non-current liabilities/capital employed x 100
116
If the value of the gearing ratio is 28.1% what does that mean?
Indicates that 28.1% of the total capital employed in the business is financed by long term borrowing - low gearing
117
How do you work out debt to equity ratio and what type of ratio is it?
Gearing - debt/equity x 100
118
What are the benefits to being highly geared?
- it may be cheaper than alternative source of funds when compared to shares
- may suggest fewer shareholders which means higher control of the business
- may reduce dividend payments
119
How do you work out interest cover and what type of ratio is it?
Operating profit/interest payable
120
For interest number what value is most desirable and why?
Higher the value as it shows how many Times the loan can be paid over with the operating profit
121
How do you work out asset turnover?
Revenue/non current assets
122
What value is most desirable with asset turnover?
The higher the ratio, the better as it implies that the assets are being used in a more efficient manner
123
What does asset turnover measure?
Measures how efficiently a business is able to use its non-current assets to generate sales revenue
124
How do your work out stock turnover and what type of ratio is it?
Efficiency - cost of stock/sales/average sales
125
How would you try and find out how many days it takes to Turn the stock over?
Stock/cost of sales x 365
126
What value is most desirable with stock turnover?
Higher the value the better
127
How do you work out debtor days? What type of formula is it?
Efficiency ratio - Trade receivables/revenue x 365
128
How do you work out creditor days?
Trade payables/cost of sales x 365
129
What dies a creditor days value of 36.5 mean?
It men’s that the business takes in average 36.5 days to pay its creditors
130
How do you work out gross profit margin?
Gross profit/sales(revenue)x 100
131
What does a Gross profit margin of 40% mean?
It means for every $1 of sales $0.40 is gross profit
132
How do you work out net profit margin?
Net profit (operating profit)/sales x 100
133
Why is net profit better than gross profit?
Takes into account direct and indirect costs where as gross profit only takes into account
134
How do you work out ROCE? And what type of ratio is it?
Profitability ratio - operating profit/capital employed x 100
135
What does ROCE show?
Shows the amount of money earned by the business in terms of profits in relation to the amount invested by share holders
136
What does capital employed mean? And the formula
capital employed is total assets minus current liabilities.
137
How do you work out return on equity and what type of ratio is it?
Profitability - profit for the year/shareholders equity
138
What does return on equity measure?
Measures the ability of a business to generate profits from its shareholders investments into the business.
- how much profit is generated for every pound of shareholders funds invested
139
What is the difference between ROCE and return on equity?
ROE considers the amount of profits generated from equity(shares). Whereas ROCE takes into consideration shareholders funds and liabilities.
140
How do you work out dividend per share and what type of ratio is it?
Shareholder ratio - total dividends paid/number of shares issued
141
What does dividend per share measure?
how much of the profits are distributed to the shareholders.
142
How do you work out dividend yield?
Dividend per share/market price of share x 100
143
What does dividend yield measure?
Measures the return on the investment - comparing the dividend per share and the price of the share
144
How do you work out earnings per share? What type of ratio is it?
Share holder ratio - profit for the year/number of shares issued
145
What does earnings per share measure?
Shows how much each share earned in a financial year.
146
A EPS is $0.55 what does this mean?
Means that each share has earned $0.55 profit
147
How do you work out price earning ratio?
Market price of share/earnings per share
148
What does price earnings ratio measure?
Measures and compares the current market price with the earnings for that share.
149
If the PE ratio is 16.4 what does that mean?
The market price is 16.4 times the earnings per share, it would take 16.4 years to cover the cost of buying the shares.
