Business Accounting/Regulations Flashcards
How do you work out the operating profit?
Operating profit/sales x100
How do you calculate the current ratio?
Assets/liabilities
How do you calculate the quick ratio?
Liquid assets/liabilities
What are the advantages and disadvantages of using salary instead of dividends? (6)
Advantages PAYE is simple Tax paid, no need to save Qualify for state pension/benefits Allowable expense for CT Higher salary makes finance easier
Disadvantages
Less tax efficient
Pay NICs
Tax paid immediately
What are the advantages and disadvantages of dividends compared to salary? (6)
Advantages Tax efficient Use dividend allowance Reduce NICs Tex deferred/paid via SA
Disadvantages Corporation tax paid on this before distribution No entitlement to state pension/benefits Need to complete SA Not pensionable income
What are the advantages of invoice factoring? (4)
Cash flow maximised
Cash for new business opportunities
Save time and money of debt management as no need for own credit control
Factor will credit rate customers to reduce likelihood of bad debts
What are the implications of high gearing (3) and actions they can take to reduce it (5)
Increased cost of servicing loans
Reduced operating profits
Vulnerable to adverse market forces
Focus on cost control Improve credit control Reduce stock Refinance to reduce interest costs Covert debt to equity/share issue
What are the benefits to a director selling their company via selling its shares to another company? (3)
Share sale avoids double tax charge as no company assets are being sold
No net proceeds are extracted and directors get cash
Entrepreneurs relief would mean they pay 10% CGT instead of potentially higher
Outline the legal protection for employees if their company is bought by another.
Transfer of undertakings (protection of employment) regulations 2006 guarantee employee’s rights to continued employment on the existing terms with the new employer where the existing business is integrated into the new business
Explain the responsibilities TUPE places on the directors.
They must inform each employee of proposed transfer and consult them
The buying company takes on all employees with their existing terms and conditions
If the selling company follows all the rules they’re absolved of responsibilities which are taken on by the buying business
If procedures are not followed employees and claim compensation via tribunal
If any employees don’t transfer/agree to TUPE, how are they treated?
Treated as having resigned from date of transfer
Not treated as dismissal
No right to redundancy and no obligation for new employer to take them on
What are the advantages of financial ratios?
Simplify financial statements Understand easily Helpful to compare companies of different sizes Useful in trend analysis Highlight important information
Disadvantages of financial ratios
Can’t be used in isolation
As could lead to misinterpretation
Many large firms are drastically different so it’s difficult to find any meaningful industry averages
Inflation can distort balance sheet
Accruals based accountancy means input information includes estimates and assumptions
Doesn’t address qualitative issues like customer service
Based on historical information (may not be a reflection of current business)
What factors help better understand the financial viability of a company?
Level of liabilities Cash flow Order book/sales Prospective customers Security of current customer base Relationship with lenders Relationship with suppliers Potential for redundancies
What are the rules around capital allowances?
Capital expenditure isn’t allowed but capital allowances are
Buildings not allowed, 2% allowance for cost of construction/major renovation
100% of up to 200k for expenditure pre 1/1/19
100% of up to £1m for expenditure between 1/1/19 and 31/12/20
First year allowance of 100% for energy efficient technology
Writing down allowance 18% (medium emission) or 6% (high emission) to allow for depreciation
