accounting part 2 Flashcards
which types of businesses are incorporated and incorporated entities
what is the difference between the two
what is interest on a loan considered
an expense
what is the taxable profit for each of these businesses
-one has a lank loan so pays 10% interest on their profit
-one has no bank loan but gives out dividends to share holders
what is the nominal value of a share
the minimum value the share is worth set by the owners (usually 10p-£1)
what is IPO
first shares a company creates
what is a share premium
the difference (extra money) between the price of your nominal value of your shares, and the issue value
these are capital accounts, do they go under debit or credit side
credit
what is the difference between the nominal value of a companies shares and their issue price
-and how is share premium related to this
nominal price- the price of the shares decided by the company
issue price- the actual amount they sell for in the market
share premium- difference In these two values if its an increase
what do these tables look like when the company sells its shares for A
capital credit side because it increases capital
and bank debit side because it increases cash in hand of the company (asset)
say that the company actually sells its shares In the market for a higher price of B
how would you record that in these tables
share capital is to do with nominal value
bank is £500,000 because that is what the company bank receives
what is the T account for this
what is the difference between an interim dividend and a final dividend
interim- dividend payed half way through the year
final - dividend payed at the end of year
what are preference shares
-why are they different to ordinary/common shares
-and where are they recorded in the balance sheet
preference shares are payed before common shares if the company goes bankrupt
-recorded under long-term liabilities of the company
define each of these terms
how would you work out how many shares there are in the company (how many shares people have in the company)
-and therefore how much is it going to cost the company paying 3p to each share
ordinary shares of £0.1 each column
there is £300,000 worth of shares in total so if each share is 0.1 then there are 300,000/0.1 = 3 million total shares
shares = 3 million x £0.03 = £90,000
is there is an increase in the value of a non-current asset via re-evaluation, then how is this recorded
debit side for non-current assets
the credit revolution reserve will go to the equity section in the balance sheet
The company bought this non current asset for 3 million ten years ago and now it is worth 5 million, this is recorded on the debit side of non-current assets;
where is this recorded on the credit side
revaluation reserve (equity)
At the moment this re-evalution goes up in value, where would you credit and debit if this went down in value instead
the opposite
credit would go to land and buildings and debit to revaluation reserve
they would go into debit and credit in the balance sheet- but what categories are they in
land and buildings- asset
revaluation reserve- equity
where is the re-evaluation of non-current assets (comprehensive income) added on an income statement
at the end under “comprehensive income”
equity is the amount of the business “owes” to its owners
which company is the most profitable using ratios
40% returns on company A vs 10% on company B
(e.g for every £1 investment the company returns 40p, vs 10p in company B)
net asset= amount of investments in the company
ratio equation for return of capital employed
net capital employed is basically how much has been invested into the company
what does the return of capital employed tell you in simple terms
what the return of the company is
-for every pound invested how much does it return (profit the company makes)
what is the ratio equation for gross profit margin
what does the gross profit margin tell you in simple terms
how much gross profit is earned from every £1 sales
-what percentage of sales revenue is gross profit
what is the equation for gross profit markup
how to calculate gross profit and operating profit
gross = sale - cost of sale
operating= gross profit- other expenses
what is the difference between operating profit and net profit
profit before interest and tax
profit after interest and tax (profit minus all the expenses)
ratio of operating profit margin equation
net profit margin ratio equation
what is the last time in a profit and loss account
net profit
what are the differences between the 3 profits
cost of sale- labour/material/rent
operating cost= everything else minuses expect tax and interest (e.g accounting salary+ selling and distribution costs)
asset turnover ratio equation
NCE- net capital employed (equity+long term liability)
turnover= revenue sales
NCE= 240m equity + non current liabilities (doesn’t have any)
what is liquidity vs working capital management
what is liquidity vs working capital management
we always want working capital management to be equal or above 0
what do each of these days mean
what is the equation for each of these days
what is the working capital cycle equation
two liquidity ratios
how long does it take inventory to be converted into cash
difference between liquidity and solvency
liquidity- ability of company to satisfy short term liabilities
solvency- ability to repay long term liabilities
describe the change between the two years
solvency risk has decreased from 2012 to 2013 as gearing ratio has decreased, therefore the amount of debt the company has has decreased
-interest cover decreases from 2012 to 2013 so there is a higher risk in 2-013 of the firm not meeting its interest financial obligation
what are the ratios for each of these
what is the difference between a cost object and a cost collection system
a cost object- anything (product/service) where a cost is incurred and you can measure it
cost collection system- a way to predict what ‘a cost object’ costs. (e.g you need to figure out how much a marketing activity for the company cost)
a cost object- anything (product/service) where a cost is incurred and you can measure it
can be split into two categories; direct cost and indirect cost. Describe these
direct cost (prime cost)- spent on something that can be identified (materials and direct labour
indirect cost- cannot be specifically identified
(e.g rent for a production factory, you cannot identify how much rent went into each product produced)
which are direct and which are indirect costs
general layout for product costs:/ cost per unit table
prime costs= total direct costs
direct costs section and indirect highlighted
what is relevant costs
costs that are related to the product produced
what is a sunk cost and are they a relevant or irrelevant costs
costs that have been made by decision making in the past and cannot be changed in the future
(e.g past depreciation costs on non-current asset is a sunk cost)
-irrelevant to decision making
what are avoidable and unavoidable costs and are they relevant or irrelevant costs
costs that can be avoided/ saved by not adopting a given alternative
-relevant to decision making
unavoidable costs are the opposite and irrelevant
what are opportunity costs
a cost that measures an opportunity that was sacrificed when choosing another option
initial £100,000 is a sunk cost and irrelevant cost as you already paid it and it is irrelevant to the decision making
-second option is getting £20,000 sale instead of £10,000 in first one
-materials cannot be shown in the sheet at £100,000 because they are not worth that and hat would be an overvaluation. You would put the better option £20,000 as inventory worth
what is the most important
-relevant cost and
-irrelevant cost
we usually deal with
-irrelevant= sunk cost
-relevant= opportunity cost
what is the difference between job costing and process costing
job costing- each unit produced is unique so cost of each must be calculated separately
process costing- masses identical units. cost per unit is assumed to be the average cost per unit of output; production costs/number units
describe each of these costs
classification of costs depends on the time period involved (e.g in long term all costs change with the level of activity)
add lines of total fixed cost, total costs, total sales and breakeven point onto the graph
breakeven is where profit = 0
this is the equation for profit,
what is the calculation for it
what is the equation for the breakeven quantity (quantity that needs to be sold to break even with 0 profit)
p= price per unit
q= quantity
v= variable costs per unit
what is the equation for profit including total fixed costs and contribution costs
derive an equation for figuring out the quantity needed to be sold to make a profit of £X if breakeven quantity=
p= price per unit
q= quantity
v= variable costs per unit
calculate break even point
how many units need to be sold to make £40,000 profit
what are the equation for total contribution costs and contribution costs per unit
profit = total revenue - total costs
Management has suggested two scenarios to improve profits:
what are the equations for the
-profit/volume ratio
-margin of safety
-percentage margin of safety
what are overheads
indirect costs
what is absorption
the process of allocating overheads to cost objects
-turning indirect costs into measurable costs
what are the two categories of cost driver
in absorption costing you only use 1 of the 2
what does this absorption rate tell us
1 unit of product needs 1 labour hour to be produced meaning the overhead being given to this unit is £10
-if this 1 unit needs 2 hours to be produced, the overhead being given to this unit is £20
is the overhead larger or smaller for a product that needs more labour hours
more hours- usually larger overhead
what is the cost of an object that needs 20 labour hours
10 x 20 = 200
what are these two systems of absorption rate
-blanket overhead absorption rate
-departmental overhead absorption rate
Blanket overhead- the same absorption rate is used in the whole organisation
Departmental- different absorption rates are used in different departments of the organisation
calculate the overhead rate using the ‘blanket overhead absorption rate’ method
900,000/60,000 = £15 per direct labour hour
calculate the overhead rate using the ‘departmental overhead absorption rate’
describing the tables
-different products W, X, Y, Z and each have their own costs and labour hours
-store requisitions onwards are other activities leading to cost incurred
-overhead costs for the month table are all the total indirect costs for all units of W, X, Y and Z
labour hour is the cost driver to be used
1. Blanket overhead rate= total overhead rate/total hours [18,225/6,950] = £2.622 per labour hour
- times rate for each labour hour by the labour hours of each product
Calculate the overhead absorption rate per unit for each product on an activity basis
describing the tables
-different products W, X, Y, Z and each have their own costs and labour hours
-store requisitions onwards are other activities leading to cost incurred
-overhead costs for the month table are all the total indirect costs for all units of W, X, Y and Z
- Calculate overhead rate for each of the store drivers (store costs, maintenance costs…)
- Calculate how much each product gives to each overhead costs for each store driver [e.g overhead rate x each driver
- All these add up to total overhead
You decided to start a new project and this is the information you have
what are the relevant costs that should be taken into account
revise this initial project plan in light of the new information
-what is relevant information and what is not
should accept the order
Only variable costs, the extra selling costs and sales revenues differ between alternatives
Since relevant revenues exceed relevant costs the order is acceptable subject to the following assumptions:
Normal selling price of £40 will not be affected.
No better opportunities will be available during the period.
The resources have no alternative uses.
