All Notes Flashcards
1
Q
Explain the Differences in the following categories for Finance & Management accounting:
Level of Detail, nature of reports, regulation, time orientation, range and quality of information
A
Finance vs Management
Distilled & Highly Simplified vs Very Precise
Formal, standardised and regulated vs vague
Yes vs No
Annual vs frequent
Vague, rounded and generalised vs Extremely precise
2
Q
Users of Finance & Management accounting
A
Finance
Owners (Primary)
Government
Investors
Management
Management (Primary)
3
Q
Matching Convention states that..
A
Expenses should be matched with the revenues they help to generate within a given accounting period
-Will lead to the creation of accruals and prepayments
4
Q
The accruals method involves…
A
Recognising revenue/debt when the sale is made, the are included Trade Receivables & Trade Payables
5
Q
Name the two types of Claims
A
Owners Capital (Equity) Liabilities (current and non-current)
6
Q
Historic Cost Convention states…
A
Transactions should be recorded at their original value
7
Q
What is Prudence?
A
Caution should be exercised when creating accounts, profit should never be anticipated but losses should be if they are reasonably foreseeable
8
Q
Dealing with Bad debts
A
Write debt off - appears as a “administration expense” in Statement of Profit & Loss
Adjusts value of trade Receivables
9
Q
Methods of Depreciation
A
Straight line Method - Same amount every year
Reducing Balance - Fixed percentage every year
10
Q
The monetary measurement convention states…
A
If it does not have a monetary value, it cannot be listed on the balance sheet
11
Q
The Going Concern convention states…
A
You must assume the business isn’t going to close
12
Q
Analysing Financial Accounts
A
Compare profit, revenue & Costs
Calculate %changes
Vertical Analysis
Ratios
13
Q
A published cash flow splits activities into 3 categories. These are…
A
Operating: Buying Boxes
Investing: Buying Equipment
Financial Activities: Taking out loans
14
Q
What is working capital?
A
Current assets - Current liabilities
15
Q
What is the difference between ordinary and preference shareholders?
A
Ordinary: Owners of the company, full voting rights, no entitlement to dividends
Preference: Classified as debt, no voting rights, entitled to dividends, either fixed or culimative
16
Q
Define the following terms: Issued Share Capital,
Authorised Share Capital, Nominal Value,
Share Premium Market Value:
A
Issued Share Capital: The nominal value of shares actually issued
Authorised Share Capital: The total amount the company is allowed to issue
Nominal Value: The minimum a share can be sold for
Share Premium: The value a share is sold above its nominal value
Market Value: Determined through trading on the open market
17
Q
List the profitability ratios.
A
Gross Profit Margin Operating Profit Margin Return on Capital Employed (ROCE) Return on Total Capital Employed Return on Shareholder Funds (ROSF)
18
Q
List the efficiency ratios.
A
Trade Receivables collection period Trade Payables Collection Period Inventory Holding Period Operating Cycle Revenue per Employee Sales Revenue to Capital employed
19
Q
List the Liquidity ratios.
A
Current Ratio
Acid Test
20
Q
List the Gearing ratios.
A
Gearing
Interest Cover
21
Q
List the Investment Ratios
A
Dividend Payout Ratio
Dividend Yeild Ratio
Earnings per Share (EPS)
Price/Earnings Ratio P/E
22
Q
Name and explain the two types of reserves?
A
Revenue:
A cumulative reserve of profits generated in previous years, Distributable
Capital:
Capital redemption: reserves for share buybacks
Revaluation reserves: When a company revalue assets, their added value is represented here.
Non-Distributable
23
Q
What is the difference between basic and diluted EPS?
A
Diluted is a hypothetical value that considers how many shares would be in issue if all people excersided their entitlement
24
Q
How would you gross up a dividend per share?
A
Divide by 0.9
25
What is a non recuring item and why must it be listed seperatley.
Items in the accounts that do not happen every year
| Investors are more concerned in maintainable income
26
What is contained in an annual report?
```
Overview
Strategic Report
Governance
Financial Statements (including notes to the account)
Shareholder information (5year record)
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27
What checks are there that promote integrity within the accounts?
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Company law
Stock exchange rules
Independent audit
UK corporate governance code
Accounting Standards and regulatory framework
Professional ethics
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28
What is an asset?
An asset is a resource controlled by the firm as a result of past events for which benefits are expected to flow
29
What are the three types of inventory?
Raw materials
Finished goods
Work in progress
30
Name some methods for accounting for inventory?
Reconciling stock (floor & book)
Assessment of the condition & likely selling price of unsold items which
Decisions about the order in which the goods have been sold and thus the appropriate costs of sales to be applied (inventory pricing)
31
What are the three forms of inventory pricing?
First in first out (FIFO) - Earliest stock held is the first to be sold
Last in first out(LIFO) - Last stock to be acquired is the first to be sold
Average cost (AVCO) -average cost to all stock sold
32
If prices are rising, which method of inventory pricing will give a lower cost of sales?
FIFO
33
What is a problem with the historic cost method?
If the asset is held for long periods, the information may become less useful
34
What are the causes of creative accounting?
Directors may need to cover up poor performance
Smooth profits to appeal to stock market
Salary is linked to performance
Desire to manage gearing and improve statement of financial position
35
What are some method of creative accounting?
Anticipation of revenue / deferring income
Provisions - move funds around from year to year
Optimistic inventory valuation
Depreciation
Recognition of intangibles
Omission of substantial liabilities from the SFP
36
What are the different way a cost could be classified?
```
By element (Material, labour & expense)
By function (Production, selling & distribution, admin function)
Direct v Indirect (Overheads)
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37
What is a direct expense?
Something that is incurred every time a unit is produced but is not labour/materials
38
Name some absorbtion bases.
```
Rate per unit
Rate per labour hour or per machine hour
% of direct labour cost
% of direct material cost
% of prime cost
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39
Why would you employ marginal costing?
For volume based decisions as it does not vary based on output
40
How would you calculate marginal costing using the scatter graph method?
Gradient = Variable cost per unit
| Y intercept = Fixed cost
41
How would you calculate marginal costing using the high low method?
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Identify periods of highest / lowest activity
Work out difference
Cost/hours = Variable cost per unt
VCPU*Hours gives total variable cost
TC - TVC =Fixed Cost
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42
How would you calculate contribution in marginal costing?
Selling price p/u - Variable cost p/u = Contribution p/u
Sales revenue - Total variable cost = Total Contribution
Total Contribution - Fixed cost = Profit
43
How would you calculate a break even point?
BEP = FC/Contribution P/U
44
How would you work out how to achieve a given profit?
P = FC+Target Profit/Contribution P/U
45
Why dont businesses sit on cash?
Wasteful
46
What is a special order?
Where you accept a selling price lower than normal
47
What are the other considerations of accepting a special order?
Does price cover MC?
Are there any extra costs such as delivery costs?
Is there space capacity?
What effect would differential pricing have on consumers?
Could it be a loss leader?
48
How do you tackle discount questions?
Calculate total fixed costs and contribution per unit
49
How would you allocate scarce resources?
Allocate to products that have the max contribution per unit
50
What are the three phases of budgeting system?
Planning
Implementation
Review and Control
51
What is a Variance Analysis?
Difference between budget allowance & Actual expenditure
| Can be Adverse (A) or Favourable (F)
52
What are some reasons for variance?
Actual quantities used differ from expected, given level of output achieved
The price for inputs differed from standard
Errors
Interdependent Variances
53
How would you calculate a materials variance?
Usage: (Predicted MU - Actual MU) * Original CPKG
Price: (Predicted P - Actual P) * Actual MU
54
How would you calculate a labour variance?
Efficency: (Predicted Hrs - Actual Hrs)* Predicate WR
Rate: (Predicated W-Actual W) * Actual Hrs
55
What is a reconciliation statement?
Provides all the variations to guide you from predicted to actual costs
56
What are some limitations of variances?
Costs of investigation
Significance levels or tolerance limits may be determined.
Significance must be assessed at the sub variance level
A small but persistent repeated variance may warrant investigation.
57
What is the long range Planning Process?
1. What is our aim or mission?
2. What are our corporate objectives?
3. Which are the strategies most likely to lead to fulfilment of our objectives?
4. Devise a long range financial plan to implement our chosen strategies.
Translate the long range plan into an annual operating plan i.e. BUDGET.
58
Why produce a budget?
1. To plan annual operations
2. To co-ordinate activities / harmonizes
3. To communicate plans with managers
4. Motivate to achieve organisational goals
5. To control activities
To evaluate performance
59
How do you construct a budget?
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Identify objectives
Establish Admin Structure
Obtain a forecast
Identify the limiting factor
Construct Subsidiary Budgets
Negotiate Budgets
Co-Ordinate Budgets
Release & Implement
Review
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60
What is a cash budget?
A forecasting document showing cash flows arising from operating and capital investment
61
What are the psychological elements of the budget process?
People may not comply with budget
People may lie to meet goals
People may pad the budget
62
What are some technical approaches to resource allocation
Incremental: Base on previous years
| Zero Base Budgeting: Compete for budget
63
What are control Reports
Compaison of budgeted and actual flexed figures
64
What are the features of an effective budget control system?
Established data collection, analysis & reporting routines
Short reporting periods & timely reports
Achievable targets are set
Clear lines of management responsibility
Reports targeted to individual managers
Action taken in response to reports, but non-disciplinary
65
What is the boston matrix?
A matrix of different products(diagram)
66
What are 3 important considerations for finance sources?
Matching the type of borrowing to the nature of assets
Fexibility
Refund risk
67
What are teh advantages of using retained earnings?
Easier
No dilution of control
Certain amount raised
No delay
68
What are the disadvantages of retained earnings?
Not free
Timing
Level available
69
What are the 5 C's of risk when offering credit?
```
Capital
Capacity
Collateral
Conditions
Character
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70
How could you asses if a customer should be offered credit?
```
Trade & Bank references
Published financial statements
Credit agencies
Registry of County Court Judgements
Other suppliers
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71
What are the costs of holding inventory?
```
Holding Costs: Storage & Handling
Pilferage
Theft
Reorder Costs:
Admin
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72
What are the 3 tools for inventory management?
Economic Order Quantity (EOQ)
Materials requirement planning (MRP) systems
Just-in-time inventory management (JIT)
73
What is economic order Quantity
Gives the number of each item that should be ordered
| Formula
74
What are the assumptions of EOQ
Demand can be accurately predicted
Demand is constant over the period i.e. no fluctuations
No buffer inventory is required
There are no discount for bulk purchasing
A constant rate of usage and inventories are reduced to zero just as new ones arrive
75
What is Materials Requirement Planning>
Objective: Minimise holding costs
76
What is JIT
Goods arrive just as they are needed therefore no holding costs
77
What are the techniques for investment appraisal
Accounting RoR
Payback Method
Net Present Value (NPV)
Internal rate of return
78
What is payback period?
The fastest project to return the cash invested is best
79
What are the advantages of the payback method?
Simple, Easily understood
Priorities cashflow and avoids illiquidity
Considers risks associated with long term projects
80
What are the disadvantages of the payback period?
Ignores profitability
Cashflows after payback are ignored
Does not account for the time value of money
81
What is accounting ROR?
Judges profitability: Average profit per year as a % of inital investment
82
What are the two methods of ARR?
Initial Investment: Average Profit per year/Initial investment x 100
Average Investment: Average Profit per Year / Average Investment x 100
Average Investment = Initial + Residual / 2
83
What are the advantages and disadvantages of ARR
```
Advantages:
Considers full project life
Similarity to accounting ratios i.e. ROCE
Disadvantages:
Definitions may vary
Does not consider time value of money
```
84
What is the formula for compound interest?
Formula
85
How would you calculate the future value when discounting?
A=P(1+R)^NT / N
86
How would you calculate the current value of a future amount
FV(1/(1+r)^n
87
What are the advantages of NPV?
It takes into account the time value of money
Uses cash flows rather than accounting profit
It is directly related to the objective of maximising shareholder wealth
Takes account of all relevant cashflows over the life of project
88
What are the disadvantages of NPV?
Difficult to estimate the values of cash inflows and outflows over the life of the project.
Cost of capital is difficult to estimate, and is likely to change over the life of the project.
89
What is internal rate of return?
% return at which NPV is zero
90
How do you calculate IRR
+ Rate + [ + Value /(Range of Values) * Difference in Rate)
91
Evaluate IRR
Advantages:
Takes into account all cash flows and the time value of money
Disadvantages:
Interpolation
92
How do you calculate ENPV?
NPV * Probablility
93
What is the veil of incorporation?
The difference between a unincorporated and incorporated company
94
What is the difference between a public and a listed company?
A listed company sells shares on the stock exchange
95
What are the four criterion for a public company?
Memorandum of Association States Public Company
PLC after Company Name
Authorise Share Capital >£50k (with 25% paid up)
Must have limited liability
96
What do you need to do to set up a company?
Registered address
Appoint Directors
And a company secretary for plc
Shares and shareholders
A memorandum association - a legal statement signed by all initial shareholders agreeing to form the company
Articles of association - written rules about running the company signed and agreed by shareholders, directors and company secretary
Also need to register for corporation tax
97
What are the directors responsibilities?
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Make the company succeed
Follow the articles of association
Declare personal benefits
Register for self assessment
Ensure accounts are true and fair view
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98
What are the responsibilities of Auditors?
Ensure accounts are accurate
| Report to AGM
99
What are the two ways shareholders aim to make money?
Growth of share value
Dividends
Primary Objective: Maximise wealth
100
What is the link between net present value and shareholder wealth?
A companies projects add to its value which effect its share price which effect the wealth
101
Discuss the agency problem
Directors (agents) make decisions which are not compatible with interests of owners (principles)
Arises as: Divergence of ownership an control, goals differ, asymmetry of information
102
What are the rewards packages offered to a director?
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Basic salary
Performance related bonus
Non cash benefits
Executive pension scheme
Share linked option/bonus scheme
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103
What are the responsibilities of a Financial Manager?
Financing decisions: where will the money come from?
Investment decisions: What will the money be spent on?
Divined Decisions: Hybrid Decisions
104
What are they key points of corporate governance?
Rights of Shareholders: Protection
Equitable Treatment:All shareholders the same
Stakeholders: Recognise the rights of non financial stakeholders
Disclosure: Relevant and timely disclosures on relevant matters
Board of Directors: Should set the objective and manage performance
105
Evaluate the Issuing of Equity
Benefits: No interest, no payback, No variable IR
Drawbacks: Lose control, pay taxes on dividends, IPO expensive
106
What are the long term external sources of finance?
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Ordinary Shares
Preference shares
Borrowings
Finance leases
Hire purchase
Securitisation of assets
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107
What are the short term external sources of finance?
Bank Overdrafts
Debt Factoring
Invoice Discounting
108
What are the common methods of share issue?
```
Rights Issue
Bonus Issue
Offer for Sale
Public Issue
Placing
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109
What is a rights issue>
Offered to existing shareholders before expansion so they can maintain control.
Purchase proportion of initial shares
No obligation to take offer
Sold at less than market value
110
What are the key points of bonus issue & offer for sale?
Bonus issue: Does not raise Finance, only changes distribution
Offer for sale: Shares are sold to an issue house who then sells them on to the public
111
What are the key points of a public issue?
Issues directly to public
IPO -Initial public offering
SEO - Seasoned equity offering
112
Discuss private placings?
Not open to public
Placed with selected investors
Cheap as savings on advertising and legal costs
Can result in concentrated ownership
113
Discuss Borrowings & loan convernants
Lenders enter into a contract in which repayment and security is stated.
May require security which could be seized
Loan covenants introduce additional obligations such as providing financial reports or maximum levels of gearing
114
What are some forms of borrowing?
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Term loans
Loan notes ( loan stock)
Convertible loan notes
Mortgages
Finance leases
Sale and leaseback
Hire purchase
Securitisation- Borrowing against future assets
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115
What are the key points of bank overdrafts?
Flexible current account with negative balance
| Cheap and popular but with higher IR
116
What are the key points of Debt factoring and Invoice Discounting?
Trade Receivables turned into cash through selling them to others
Debt Factoring: Handling Admin of portfolio to a service
Invoice Discounting: Selling Individual Invoices
117
Evaluate Debt Factoring?
More certain cash flows, Key personnel can do other tasks
| Sell value is less than invoice value, reputation?
118
Evaluate Invoice Discounting
Confidential, Cheap, No need to upset stakeholders
| Still a delay on payment, just more certain
119
What is the formula for constant dividends in perpetuity?
Forever the same returns:
| Price today = Dividend / ROR
120
What is the formula for non constant dividends?
Price today = Dividends for next period / (Shareholder ROR / Expected future growth of dividends)
121
What are the key points of dividend payment?
Paid in two batches: Interim (paid before earnings known) and Final
Directors can recommend the 4 states of dividend
Some shareholders require a constant source of income i.e pension funds
