Accounting Relevant Flashcards
1
Q
income statement
components
A
profit or loss
-revenue (normal trading activities)
-other income (not part of core business disclosed separate interest)
-expenses (used up in period being reported on)
-profit/loss
2
Q
balance sheet
components
A
- assets = resources (of value generate future income)
-non current (+12months)
-current (cash in a year)
-tangible vs intangible
-available for sale
-investments in associates - equity & 3. liabilities = claims/funding
-current (pay within year)
-non-current)
3
Q
debtors
A
trade receivable
owe you money
4
Q
creditors
A
trade payable
owed a supplier money
5
Q
accounting equation
A
assets = liabilities + equity
equity = capital +profit/loss
equity = owners capital + retained profit
6
Q
cash/bank account
A
asset -> debit -> debit to increase
7
Q
capital account
A
owners contribution to business
equity -> credit account -> credit to increase
8
Q
debit
A
increase asset/expense
decrease liability, revenue or equity
cash/bank
drawings
9
Q
credit
A
increase liability, equity
decrease asset or expense
capital
10
Q
drawings
A
owner withdraws cash or other business assets for personal use
decreases equity
11
Q
cash transactions
2 types
A
receipt/payment of cash = immediate
- cash receipt
debit = cash/bank
credit = account where cash receipt is from - cash payments
debit = account what cash payment is for
credit = cash/bank
12
Q
credit transactions
sales
A
cash receipt/payment occurs later after point of transaction
accruals principles - income/expense recognised as earned/incurred not when payment happens
debit = trade receivables
credit = sales
THEN
debit = cash/bank
credit = trade receivables
13
Q
purchase on credit
A
debit = purchases
credit = trade payables
THEN
debit = trade payable
credit = cash/bank
14
Q
trade receivables
A
sales
current asset
15
Q
trade payables
A
purchases
current liability
16
Q
c/d
A
carried down
17
Q
balance sheet accounts for trial balance
A
asset liability capital
balance carried down into next period
18
Q
income statement accounts for trial balance
A
income expense
transferred to income statement
closes the account no balance carried into next period
19
Q
capital related accounts
A
drawings & profit/loss (income statement)
20
Q
debit and credit balances
A
total amount on debit side greater than credit = debit balance
reverse = credit balance
21
Q
trial balance
A
balances in ledger at end of period
22
Q
trade discount
A
discount from 1 trader to another
deducted on invoice
no need to recored already reflected in lower invoice price
23
Q
cash discount
A
reduction in amount customer has to pay
provided payment is made within given period stipulated by seller at time
no need to record discount allowed to customer discount received from suppliers
24
Q
receipts vs payments
A
debit = receipts
credit = payments
25
cost of sales (cost of goods sold)
costs directly connected to purchasing and or producing goods sold
26
matching concept
income must be recognised in period in which it is earned
-expense incurred in achieving income also recognised in same period
-expense should be matched against income generated
27
purchases during accounting year
SOLD - matched with sales generate COS this years I.S
NOT SOLD - cost of items deducted from this years purchase treated as an asset (inventory) this year when items get sold next year = converted into COS in next years I.S closing inventory this year, opening inventory next year
28
inventory in trial balance
always opening inventory (last periods closing inventory)
inventory account not accumulative record
- only entries made are for recording closing inventory and transferring opening inventory
29
classification of costs and expenses
operating expenses: COS, selling and distribution, administrative
finance cots: interest on borrowings
30
income statement for limited companies
operating expenses
finance costs
corporation tax/income tax
31
selling and distribution
costs of selling & warehouse operation
32
administration
cost of administrative functions
33
net profits
profits/loss at end of current year goes from IS -> BS usually added to retained earnings
34
expenditure of acquiring an asset
treated as an asset (capital expenditure)
increases financial position of the business NOT an expense
35
measurement of NC asset
recorded at historical cost
objective and verifiable measure = always relevant
companies can chose between historical costs and fair value (mkt value) after initially recording asset at HC
36
historical cost
cost originally paid to acquire asset and get it in working order includes:
1. delivery charges & installation costs
2. legal costs
3. extensions and improvements (buildings)
not repairs and maintenance
37
depreciation
systematic allocation of depreciable amount of asset over useful life
-carried out to reflect amount of economic benefits of tangible non-current asset consumed during accounting period
38
depreciable amount
cost of asset or other amount substituted for cost - residual value
39
dual effects of depreciation
charged on all tangible non current assets except land (infinite useful economic life)
40
straight line method of depreciation
fixed instalment method
same amount of depreciation charged to I.S every year of assets useful economic life
41
diminishing/reducing balance method
depreciation expense that decreases over the assets useful life
42
ledger entries for depreciation
expense -> IS, periodic, balance -> IS at end of year
contra asset -> BS, accumulative, balance carried down to next year
43
Disposal of non-current asset
record sales proceeds
clear non current asset
clear off accumulated depreciation of disposed asset
close asset disposal account
complete cr entry for profit and dr entry for loss
44
partial year depreciation
1. strict time basis
-in year of acquisition, date of purchase to end of accounting year, year of disposal from start of accounting year to date of sale
2. if date of acquisition or disposal is not given
-full years charge in year of purchase
-none in year of sale
45
bad debts
irrecoverable debts officially written off as uncollectible
TR unable/unwilling to pay amount owed in respect of goods/services supplied on credit
-matter of judgment
-expense on I.S
46
doubtful debt
money predict will be uncollectible and turn into bad debt
47
provision
setting aside income to meet a know/highly probable future liability or loss (estimate)
-prudence concept (providing for losses)
-matching concept (recognising loss/cost against revenue that generates it)
48
types of provision for doubtful debts
1. specific - particular TR identified as unlikely to pay
2. general - estimated % of TR end of accounting year unlikely to pay
49
accruals/accrued expenses
charged against profit for a particular period even though not been paid
-consume now pay later
-instead of payable = recognise accrual = liability
50
arrears
money owed and should have been paid earlier
51
accruals concept & matching concept
expenses recognised when incurred not when they are paid for
expenses are matched to revenue that generate them
52
prepayments/prepaid expenses
services are paid for in advance
rise to a receivable in respect of services paid for but not yet consumed
53
limited company
legal entity in own rights
separate from owners = ordinary SHs
limited liability
private or public
54
ordinary share capital
nominal value of funds raised from share issue
funds raised by company through issues of ordinary shares
proceeds recorded in share capital account
55
nominal value
basic value of the share
fixed known as face value
56
issue price
shares issued at price at least equal to nominal often exceeds to try and raise money
57
share premium
reasons for issuing at premium
excess of shares issue price over nominal value
-maintain control = issue less but at higher price = limit number of shares
58
market value of a share
fluctuates
according to market expectations and company performance
doesn't feature of financial statements
59
equity
credit balance
share capital = credit
60
reserves
1. capital
-cant be distributed as dividends
-share premium = type of capital reserve
2. revenue
-can be distributed as dividends
-retained earnings
61
dividends
appropriation of profit - distribution of profit, reduced retained earnings
62
debenture/loan stock
raise funds issuing to public
liability
holders = entitled to = repayment of nominal/face value of debenture when reach maturity after fixed time period
fixed interest payments until reach maturity
63
interest on debenture
EXPENSE
charge against profit finance cost
usually in 2 instalments
liability from the accrual = sometimes referred to as interest payable
64
taxation
company liable for tax on annual profit
lower net profit
accrued tax = increase liabilities
EXPENSE
65
accrual in terms of taxation
should be created at year end reflect estimated tax due
liability arising sometimes referred to as tax provision/tax payable
66
horizontal analysis
comparison of historical financial info over 2 or more reporting periods
start with base year and a comparison year = determine year on year change
performed on income statement and balance sheet
67
vertical analysis
income statement:
-take revenue as base figure
-express every line on IS as % of sales
-proportion of line items to sales
-complements profit margin rations - illuminate why profit margins are what they are, focus in costs
balance sheet:
-asset- total assets as base figure and express every asset as % of total assets
-claims (liabilities + equity) total claims as base figure and express liability and equity items as % of total claims
68
ratio analysis
expression of relationship between figures
evaluate financial performance and position = decision making
69
point of reference for ratios
1. comparisons with other firms
2. historical comparisons
70
profitability ratios
profit margins (GPM, OPM)
ROCE
ROE
71
boost profit margins
1. increase revenue (SP x vol)
2. cost control (boost GPM, lower expenses through efficiency reforms/outsourcing)
72
efficiency ratios
-evaluation of working capital management
1. collection days
2. trade payable days
3. inventory turnover days
73
working capital management
working capital: level of CA & CL in business
'right' level of inventory, TR, TP to have in business relative to level of trading (buying and selling) activity
74
liquidity ratios
ability to generate cash to pay for current liabilities
1. current ratio
75
financing ratio
ability to meet long term liabilities and pay interest
1. gearing ratio
76
investor ratios
computed from investors perspective
1. dividend cover
77
shares
1. book value (value of shares issued as reported in accounts)
2. nominal value (face or per value)
3. share premium
78
dividend
distributions of profit to SHs, determined by company's dividend policy
79
market value (share price)
reflects investors perceptions and reactions to company performance and decisions also affected by wider economy
80
costs
expenditure attributable to an item or activity
81
cost concepts in financial accounting
expenses (revenue expenditure) - costs consumed in generation of revenue during given period, decrease profit on I.S
assets (capital expenditure) costs of items to be retained for use within business capitalised as assets, increase financial position on B.S
82
cost classifications in management accounting
1. by type (product cost vs period cost) (direct vs indirect)
2. by behaviour (fixed cost, variable cost, semi-variable cost)
3. by relevance to decision making (sunk cost, opportunity cost, future outlay)
83
product costs in manufacturing
1. direct costs (direct materials, direct labour) - traceable to product, prime cost
2. indirect costs (production/manufacturing overheads) - cant be traced to specific products
84
cost object
anything that needs own cost measurement can be a unit of product or a job
85
absorption costing
traditional full costing technique
86
full costing
term
trying to cost a product so that it includes both direct costs and indirect costs are the production overheads
-cost of unit of product (all direct costs and allocation of production overheads)
87
method of allocation of production overheads
different forms
single blanket overhead absorption rate
separate absorption rates for each department
take total production overheads and divide by some kind of allocation basis (can be random basis)
88
allocation basis for OAR (overhead absorption rate)
direct labour hours used as allocation basis (most common)
machine hours is common
no single correct
89
activity based costing (ABC)
cause and effect allocation of overheads, modern full costing technique
individual products and jobs are then assigned overheads according to consumption/use of said activities
instead of 1 overhead absorption split overheads into activities and track how much of activities
90
ABC process
1. split overhead costs into activities (cost pools)
2. each cost pool identify cost driver (what causes it)
3. each cost pool calculate cost per driver
4. allocate overhead to individual products using cost per driver x usage of cost driver by product
91
contribution margin
proportion of sales revenue not consumed by variable costs and contributes to covering fixed costs
92
cost volume profit analysis assumptions
-Selling price and unit variable costs are constant within the relevant range
-Costs can be readily and accurately split into fixed and variable elements
-VC = linear relationship with volume – in practice costs behave in a non-linear way due to EOS and capacity limits
-FC doesn’t vary with volume of activity – practice FC may increase with activity in a step-like way when volume of output exceeds certain level
-one product line or one sales mix for multi-product businesses (rare in practice)
