acounting Flashcards
what is the role of financial accounting in a business
calculation of closing stock value,
calculation of taxable profit
audit process
disclosure related to directors pay
what is the role of financial management in a small business
deciding profit margin of a particular product
budgeting for next month/ year
what is the role of financial management in a small business
working capital management to avoid an overdraft
negotiation with suppliers to delay payment
what is the cash flow
measurements of cash
what is the statement of financial position
an overview of what the company owns and owes
(balance sheet)
what a business owes
current liabilities
non current liabilities
equity
what is equity
And what is included in the balance sheet
book value of shareholder capital
(what a business owe to its owners)
share capital
retained earnings (from the year)
final profit from income statement
treasury shares
withdrawals are minuses from equity
what do non current assets involve
intangible assets
property
deferred tax assets
investment property
Minus the depreciation
(the value worked out plus the existing depreciation in the table)
what do current assets involve
cash
trade receivables (debtors)
inventories (closing) check the date
prepaid expenses
what is the difference between gross amount and net book value
gross amount is the original value of an item when purchased and the net book value his the current value of the item
what do current liabilities involve
accounts payable
taxes payable
accused expenses
dividends
interest
what is retained earnings
profit saved for future use
What is the payback period
the amount of time it takes to recoup the original investment.
Net present value
the sum of all future cash flows over the investment’s lifetime, discounted to the present value
Pay back calculation
- minus annual returns from investment to work out how many years it will take
- (what is still owedl/ remaining payback) X12
How to calculate net present value.
- multiply each return by discount factor
- add all values up
- minus the cost of investment
NPV is always 1 at year 0 because the money hasn’t yet devalued.
how to calculate contribution per unit
selling price- variable cost per unit
break even calculation
fixed cost/ contribution per unit
what is break even
the level of output needed for a firm to cover its costs
Limitations of break-even
- assumes all stock is sold at the same price
- doesn’t take into account the future value of money
- variable costs are likely to change (COVID)
Advantages of break even
- can better be understood by non-financial managers.
- calculations are quick and easy
- can support loans and application
- may be motivational
how to calculate book value
All Assets – All Liabilities = Net Asset (Book Value)
how to calculate total value of a company
value of one share X total shares issued.
positives of asset-based valuation
A company is in financial difficulty – to know the value of assets that may be used as a collateral.
A company is in financial difficulty – to compare benefits of current performance and selling assets
When takeovers are proposed – to know minimum value of assets
Some company’s valuation is composed primarily in their tangible assets – eg. Investment Trusts
negatives of asset bases valuation
Different accounting conventions can affect book value of assets.
Does not pay sufficient attention to whether a company is growing or declining
Undisclosed intangibles – Intellectual capital, Organisational Culture
what is the sales revenue budget.
an account of how much money is made from sales in a time frame
Sales X cost per unit.
months
unit
revenue
what is the trade payable budget
and write the column titles for it
allows you to work out when you will pay for purchases of raw materials
(a)Opening balance
(B) add purchases (the amount of raw materials needed in month)
(C) less payments (not accumulative)
(D) closing balance
Closing balance= (A+ B)-C
what is the trade receivable budget
and write the column titles for it
allows you to work out when you will receive the cash from sales
Opening balance
sales
receipts for current month
recipes for previous month
Total sales reciepts
closing balance
Closing balance= (opening balance +sales)- Total sale receipts.
how to make the cash budget
and write the column titles for it
month
total sales receipts (got from the trade receivables budget)
Payments;
Raw materials
Wages
Fixed overhead
corporation
=total payments
opening balance
closing balance
Closing balance = (opening balance + sales receipts)- total payments
how to make finished inventories budget.
takes into account the quantity of finished goods within the business
opening balance
production
sales (not included in the closing balance for that month as they are no longer in the business.)
closing balance.
closing balance= (opening balance+production)- sales
what is the layout of the income statement
sales
cost of sales (opening + purchases) - closing
Gross Proft
operating costs
Operating profit
interest on debenture
profit before tax
tax
profit after tax
dividends for the year
Retained profit
how to calculate deprecation charge
(using straight line method)
number of years that the asset has use
how to calculate net book value using deprecation charge (using straight line method)
present value- (depreciation charge X number of years)
what is the difference between the straight line and reducing balance depreciation
straight line- depreciates from the initial value
reducing balance- depreciates from the value at each year
how to calculate net book value
(using reducing balance depreciation)
^number of years
initial value X depreciation rate (0.75)
what does operating expenses cover
rent,
repairs,
inventory costs,
marketing,
insurance,
DEPRECIATION (not the accumulative value. Doesnt count for existing deprecation in the table just the ones you have calculated)
Interest
cost of sales calculation
(opening inventory + purchases)- closing inventory
if an item (electricity bill) has not been paid yet which account should it be added to
the item (electricity section) then creditors
to make the table balanced
how to calculate book value of a product
in the income statement
value in the account- depreciation
Book value is current value
what time frame does the income statement account for
the whole year
what time frame does the balance sheet account for
accounts for the assets and liabilities on a specific date.
balance sheet layout
- value of non current assets (accounting for depreciation)
- value of current assets
- equity
less withdrawals - non current liabilities
5.current liabilities
assets= liabilities +equity
what is included in current liabilities
- accounts payable
- overdraft
- taxes and interest
what is included in non current liabilities
debentures
how to calculate special order problems.
calculate contribution per unit
if positive accept the order
if negative reject the order
consideration for special order problems.
There should not be any strategic long term consequences for accepting the order.
The one time order should not affect the firm’s ability to serve other more profitable orders
There should be unused resources that can be deployed to service the one-off order.
how to calculate make or buy problems.
calculate opportunity cost
- find contribution
- this effectively increases unit cost if producing the other product.
how to calculate whether the product should be discontinued or not.
calculate contribution on each product.
whichever product has the lowest contribution should be discontinue.
however it depends as if products are complementary to one another it may be useful to keep products.
reasons to continue accept order
Saturating home market
Access to new market
access to export business
Better capacity utilization
why does a budget need to be flexed
(3 items)
and what does the flexed budget do
The volume of activity was different from planned
Unit costs differed from planned (i.e. usage changed from planned)
or unit prices changed from planned.
Flexible budgeting adjusts revenue and variable cost elements of the budget to reflect changes in the volume of activity
how to calculate the flexed budget
(budgeted cost/ budgeted output) X actual output
FIXED COSTS ARE NOT INCLUDED
how to calculate adverse and favourable variance
Sales Revenue Variance= Actual – Flexed
All Cost items = Flexed – Actual
Positive = favourable
Negative= adverse
what are the three major components of the working capital
(debtors+ inventory)- Creditors
Lower levels of working capital may indicate that a company manages stock effectively and collects cash from its customers quickly.
5 c’s for credit
Character - Prospective borrower’s willingness to pay
Capacity - Prospective borrower’s ability to pay
Capital – Prospective borrower’s amount of wealth
Collateral – Property the borrower may forfeit if he defaults
Conditions – Business environment in which the prospective borrower operates
what is contributions relationship to profit
Contribution is the money generated for each product/unit sold after deducting the variable portion of the firm’s costs.
Shows the portion of sales that helps to cover the company’s fixed costs. Any remaining revenue left after covering fixed costs (margin of safety) is the profit generated.
The operations manager has planned to ensure that the raw materials needed for any given month’s production should be available at the end of the previous month. He has also decided to produce all the units planned to be sold in any given month in the month preceding that.
What does this mean
raw materials purchased 2 months before sales
production is one month before sales
The operations manager has planned to ensure that the raw materials needed for any given month’s production should be bought in the same month. She has also decided to produce all the units planned to be sold in any given month in the same month.
What does this mean
raw material purchase, production and sales all happen in the same month.
how to make raw materials budget budget
opening
purchases
production
closing
how to calculate share premium
the difference between the nominal value and the market value of those shares.
- calculate number of new shares issues
- number of new shares/ what shares were bought for
- market value- nominal
what is the gearing ratio and how do you calculate it
refers to the proportion of finance that is provided by debt relative to the finance provided by equity (or shareholders)
total debt loans
————— —————–
total equity total finance (including loans)
what is the difference between authorised and issued share capital
Authorised share capital is the maximum number of shares that a company is permitted to issue, while issued share capital is the actual number of shares a company has issued.
if a company decided to distribute profit to its shareholders how do you calculate the return each shareholder will get.
net profit
———————————– X Shares owned
number of total shares
how to calculate interest cover
earnings before tax and interest
——————————————- X100
total interest expense
(look at debentures)
how to redraft the capital structure
eg if a business decides to make a “one-for-five” rights issue of further £1 shares at a price of £1.70p per share.
- calculate how many more shares are issued to get new share issue.
- multiply new shares times change in share price to get new share premium
what is the benefit of a rights issue
company: They are spared the trouble and expense of issuing a prospectus, advertising to the general public and having the issue under-written.
shareholder: This is largely financial i.e. they receive the opportunity to buy shares at a discount to what would have been asked of the general public
what is a rights issue
an issue of shares offered at a special price by a company to its existing shareholders in proportion to their holding of old shares.
what is the role of external auditors in financial accounting
they control on the quality of financial reports to ensure accounting regulations have been followed
Reports must represent ‘true and fair’ view of the status and performance of the company.
Qualitative characteristics
Materiality- not telling owners certain information as it is insignificant as the business is so large
reliability- is the information from a credible source
Comparability- accounting methods should allow comparison between periods and businesses (don’t use market values)
Faithful representation- presenting wrong information to hide negative aspect
Understandability
what is the accruals concept
a systems to record financial transfers regardless of whether cash transactions have been made.
When the consulting company provided the service, it would enter a debit of $5,000 in accounts receivable (debits increase an asset account). When the payment is made on Nov. 25, the consultant credits (credits decrease an asset account) the accounts receivable by $5,000 and credits the service revenues account, a revenue account (credits increase a revenue account ) with $5,000.
what is the going concern concept
Financial statements are prepared on the assumption that the business will remain in operation in future periods.
what is the consistency concept
Once a business chooses to use a specific accounting method, it should continue using it on a go-forward basis.
By doing so, financial statements prepared in multiple periods can be reliably compared.
what is the prudence concept
making sure the estimates of income or assets are not overstated and expenses or liabilities are not understated.
how to work out full costing.
cost per unit accounting for overheads
- total overheads/ number of units= overhead per unit
- add onto unit cost
how to work out absorption costing.
The process of allocating costs to the correct department.
- divide hours in department/ total hours
- mulitply it by cost
