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Accounting & Finance Unit 3 > Chapter 1 > Flashcards

Chapter 1 Flashcards

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1
Q

Internal Users

A

The internal users of accounting information are business managers, sole proprietors and partners in a business.

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2
Q

External Users

A

The external users of accounting information include:

  • shareholders of a public company, such as, the shareholders of Harvey Normam Holdings Limited. The sharholders of a public company have limited access to information on the performance and health of their business.
  • potential investors in a business
  • creditors, such as, banks or suppliers of inventory on credit
  • employees
  • the Australian Taxation Office
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3
Q

Management Accounting

A

Management accounting is the preparation of accounting reports for internal users, that is, for people who operate a business.

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4
Q

Management Accounting Information Includes the:

A
  • cost of manufacturing a product
  • break even point of a product
  • expected cash at bank balance of a business for each of the next 12 months
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5
Q

Financial Accounting

A

Financial accounting is the preparation of accounting reports, such as, a balance sheet, for external users.

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6
Q

External Accounting Reports

A
  • Statement of profit or loss and other comprehensive income
  • Balance sheet (statement of financial position)
  • Statement of cash flows
  • Statement of changes in equity
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7
Q

Statement of Profit or Loss and Other Comprehensive Income

A

The statement of profit or loss and other comprehensive income also known as the statement of comprehensive income sets out the income and expenses of a company for a period of time, the profit or loss and the same amount of any asset revaluation.

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8
Q

Balance Sheet (Statement of financial position)

A

The balance sheet (statement of financial position) sets out the assets, liabilities and equity of the company on one particular day

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9
Q

Statement of Cash Flows

A

The statement of cash flows sets out the cash inflows and cash outflows of a company for a period of time and the opening and closing cash balances.

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10
Q

Statement of Changes in Equity

A

The statement of changes in equity sets out the changes in the equity items of a company over a period of time.

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11
Q

Internal Accounting Reports

A

Some accounting reports are prepared for the use of business managers and are not issued to external parties. These reports include budgets.

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12
Q

Budgets

A

A budget is a plan for the future of a business expressed in money terms.

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13
Q

Role of Accountant in Managing a Business

A

An accountant has an important role in the management of a business. The duties of an accountant are likely to include:

  • Preparation of financial statements
  • Preparation of budgets
  • Calculation of the cost of a new product
  • Calculation of the break even point of a product
  • Preparation of the payroll of a business
  • Periodic review of internal control system of a business
  • Preparation of individual and company income tax return
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14
Q

Auditing

A

Auditing is the checking of external accounting reports of a business to ensure that these reports are correct and complete and or of the operating systems and policies of a business to ensure that they are efficient.

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15
Q

Internal Auditing

A

Internal auditing is the checking of the operating systems of a business to ensure that they are working properly.

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16
Q

Internal Auditing Includes

A

An internal audit includes:

  • a review of the efficiency of the internal control system.
  • a review of the efficiency of the other systems, such as, the supply chain.
  • a check that the policies of the business are being followed and that the business is complying with all laws
  • the detection of errors made in the accounting system.
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17
Q

External Auditing

A

The external auditor is an accountant who is not an employee of the business and, therefore, can conduct and independent review of the business.

  • gives a true and fair view of the financial position of the company
  • complies with the AASB Accounting Standards
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18
Q

Ethics

A

Ethics can be defined as a set of principles that help people to decide what is right or wrong.

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19
Q

Ethical Dilemmas

A

A business manager can be faced with a range of ethical dilemmas

  • exploitation of employees
  • exploitation of overseas workers
  • exploiltation of investors
  • acceptance of gifts from suppliers
  • breaches of confidentiality
  • exploitation of foreign consumers
  • conflicts of interest
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20
Q

Exploitation of Employees

A

Employees may be required to work excessive hours of unpaid overtime or be expected to find a new job.

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21
Q

Exploitation of Overseas Workers

A

A business that is operating in a third world country may take advantage of its employees in the country by paying them very low wages and requiring that they endure dangerous working conditions.

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22
Q

Exploitation of Investors

A

The shareholders of a public company may be exploited if the senior management of the company decide to invest the company’s money in high risk ventures.

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23
Q

Acceptance of Gifts from Suppliers

A

A manager of a business may be offered gifts from a supplier of inventory. If a cheaper supplier of inventory is found the manager may have to decide whether to stay with the existing supplier or change to the new supplier but may lack the objectivity required to make this decision.

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24
Q

Breaches of Confidentiality

A

A manager may be asked to pass on confidential business information to a friend who is working for a competitor.

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25
Q

Exploitation of Foreign Consumers

A

The senior managers of a business may exploit foreign consumers.

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26
Q

Conflicts of Interest

A

The manager may have to choose between his or her duty to act in the interest of the company and self interest.

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27
Q

Corporate Social Responsibility

A

Corporate social responsibility (CSR) exists when a business builds a concern for the protection of the environment and of the good of society into its activities.

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28
Q

A business can develop a CSR program by:

A

A business can develop a CSR program by:

  • recycling as much waste as possible or reducing the amount of pollution it emits or reducing its energy consumption (protection of the environment)
  • contributing to a charity fund raising appeal or sponsoring disadvantaged groups (concern for the community).
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29
Q

Advantages of Implementing a Program of Corporate Social Responsibility

A

There are a number of advantages to a business in acting in a socially and environmentally responsible manner.

  • Community respect and reputation
  • More enthusiastic and better motivated employees
  • A greater ability to recruit high quality employees
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30
Q

Community Respect and Reputation

A

A business that has a reputation of acting with concern for the environment and for the welfare of the community is likely to be respected by the public. This may, in turn, generate higher sales.

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31
Q

More Enthusiastic and Better Motivated Employees

A

The morale of employees of a business that has a reputation for acting in a socially responsible manner is likely to be high and this may lead to a high level of work motivation.

32
Q

A Greater Ability to Recruit High Quality Employees

A

A business that has a reputation for responsible conduct may be able to attract a larger number of quality job candidates than other businesses.

33
Q

Costs to a Business of Acting Responsibly

A

The costs of a business acting to protect the environment may include higher operating costs and the need to purchase new energy saving or pollution reducing plant and equipment.

34
Q

Principles of Asset Management

A
  • An appropriate level of investment in non-current assets

- appropriate management of cash

35
Q

An Appropriate Level of Investment in Non-Current Assets

A

A business must have the non-current assets it needs to provide a satisfactory service to customers. However, a too large an investment in non-current assets will mean that a business has assets that it is not using efficiently.

36
Q

Appropriate Management of Cash

A
  • The handling of cash should be separated from the recording
  • All cash receipts should be banked daily
  • All payments should be approved by a senior employee and large payments should be approved by two employees.
  • Cash budgets should be prepared on a continuing basis
37
Q

Appropriate Management of Inventory

A
  • The handling of inventory should be separated from the recording of inventory transactions
  • Inventory should be stored in a secure location. Access to this location should be restricted.
  • The inventory records should be maintained using the perpetual inventory system.
38
Q

Appropriate Management of Accounts Receivable

A

A business should have a set of rules in place to try and ensure that only good customers are sold products on credit and that money owing from debtors is collected in an efficient manner.

39
Q

Appropriate Management of Accounts Receivable Rules

A
  • A business may conduct credit checks on new customers before agreeing to sell them inventory on credit and may impose credit limits on new consumers
  • A monthly statement should be sent to all debtors setting out the transactions that have taken place during the month and the amount owing at the end of the month
  • A business may decide to follow up overdue debtor accounts as soon as they exceed the payment date. an overdue debtor may be contacted, reminded of the amount owing and asked to settle the debt.
  • The recording of debtor transactions should be separated from the handling of cash so that an employee cannot steal cash and make false entries in the accounting records to cover theft.
40
Q

Appropriate Management of Liabilities (Debt) and Equity

A

The assets of a business are obtained either from money supplied by the owners (equity) or from debt (loans from banks and other creditors). Loans must be repaid on time and interest is paid on loans. A business must ensure that its debt level is not excess.

41
Q

Company Insolvency

A

A company is insolvent if it cannot pay its debts as they become due. Company insolvency is covered by the Corporations Act (Cwlth) 2001.

The main forms of company insolvency are:

  • voluntary administrations
  • receivership
  • liquidation
42
Q

Voluntary Administration

A

The directors of a company that is insolvent or heading towards insolvency or a secured creditor who has not been paid, may appoint an external administrator known as a voluntary administrator.
A voluntary administrator will assess the health of the company, report to the creditors and recommend if the company should be liquidated or returned to the control of the directors.
A voluntary administration gives a company time for its future to be worked out. Creditors cannot take action to recover amounts owing to them without court approval or without the approval of the administrator.

43
Q

Receivership

A

A receiver is usually appointed by a secured creditor who has not been paid on time.
A receiver will sell the secured assets of the company to repay the creditor. The receivership ends when the money owing is repaid.

44
Q

Liquidation

A

A liquidation occurs when an external person is appointed to:

  • collect and sell off the assets of an insolvent company
  • distribute the money to the creditors
  • investigate the conduct of the directors and other company officeholders
  • close the company
45
Q

Order of Repayment of the Creditors of a Company

A

The assets of a company that is in liquidation are often distributed to stakeholders in the following order:

  • the liquidators, administrators or receivers fees and costs
  • the secured creditors
  • employee entitlements owing, such as, wages, superannuation and annual leave
  • the unsecured creditors
  • the shareholders
46
Q

Indicators of Insolvency

A
  • continuing losses
  • a current ratio below 1
  • overdue commonwealth and state taxes
  • a poor relationship with the company’s bank, such as, not being able to borrow additional money from the bank
  • not being able to borrow money from other financial institutions
  • not being able to raise additional share capital
  • suppliers placing the company on cash on delivery (COD) terms
  • taking an excessive amount of time to pay creditors
  • issuing postdated cheques
  • dishonored cheques
  • making special repayment agreements with some creditors
  • poaying overdue creditors by installments
  • receiving letters demanding payment of debts
  • not being able to produce information about a company’s recent preformance
47
Q

Indicators of Insolvency

A

A company may have a current ratio of less then 100%. this does not mean that the company is insolvent. the company may be operating in an industry in which current liabilities have long repayment times.
The main test of company insolvency used by the courts is known as the cash flow test. This test compares the current assets of a company to the current liabilities of the company as they fall due. The courts are also likely to consider the ability of the company to raise money from the issue of shares, from loans and from the sale of non-current assets before deciding if the company is insolvent.

48
Q

The Duty of a Company Director in Relation to Insolvency

A

A director of a company must be aware, at all times, of the financial health of the company, and when a company incurs debt, the director must consider whether or not the company can repay this debt. A director must ensure that the company does not trade while insolvent.

49
Q

Short Term Investment Options

A
  • Cash management trusts
  • The money market
  • Term deposits
50
Q

Cash Management Trusts

A

A cash management trust raises money and invests this money in short term securities, such as, treasury notes. Investors are paid interest on the money they have invested. Treasury notes are short term loans, usually for periods of less than six months, made to a government authority.

51
Q

The Money Market

A

The money market is a place where banks and other financial institutions buy and sell debt instruments, such as, promissory notes, bank bills and commercial bills.
A bank bill is a short-term bank loan. The usual length of a bank bill is 30 to 180 days. A commercial bill is a non-bank loan. A commercial bill may be issued by a company. These bills are usually issued at a discount to the face value of the bill. The holder of the bills receives the face value of the bill when it matures.

52
Q

Term Deposits

A

A term deposit is an amount of money that has been invested with a financial institution, such as, a bank, for a fixed period of time, at a fixed interest rate.

53
Q

Long Term Investment Options

A
  • shares listed on the Australian Securities Exchange
  • debentures
  • unsecured notes
  • unit trusts
  • term deposits
54
Q

Shares Listed on the Australian Securities Exchange

A

A share is the unit of ownership of a company. The ASX is a market place for the buying and selling of the shares of companies listed on the exchange.

55
Q

Debentures

A

A debenture is a loan made to a company. An investor receives interest, at a fixed rate, of the money loaned. A debenture is backed by a right to sell the property of the company if the loan is not repaid on time.

56
Q

Unsecured Notes

A

An unsecured note is a loan to a company where the money borrowed is not secured by any right to sell the property of the company if the loan is not repaid.

57
Q

Unit Trusts

A

A unit trust raises money that is invested in assets, such as, fixed interest bank deposits, land or shares of companies listed on the Australian Securities Exchange.

58
Q

Term Deposits

A

A term deposit is money invested with a financial institution, such as, a bank, for a fixed period of time , at a fixed interest rate.

59
Q

Short Term Sources of Finance

A
  • bank overdraft
  • credit terms offered by suppliers
  • factoring of debts
  • commercial bills
60
Q

Bank Overdraft

A

A bank overdraft is a loan that allows a business to withdraw more money from its bank account than has been deposited in the bank account.

61
Q

Credit Terms offered by Suppliers

A

A trading business may be able to negotiate 30 day or more payment terms from a supplier of inventory.

62
Q

Factoring of Debtors

A

A business may be able to sell its accounts receivable to a factoring company. The factoring company, may, for example, buy the accounts receivable at a price equal to 80% of the amount owing. The business receives the cash and the factoring company collects the full amount owing on the due date.

63
Q

Commercial Bills

A

A commercial bill is a bill of exchange issued by a bank or by a company. It is a form of loan and may be for up to a period of 1 to 6 months or for a number of years.
A bills of exchange is ‘an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at fixed or determinable future time, a sum certain in money or to the order of a specified person, or to bearer’.

64
Q

Long Term Sources of Finance

A
  • share capital
  • bank loan
  • lease finance
  • debentures
  • unsecured notes
65
Q

Share Capital

A

Public companies can raise money by issuing shares to the public. Proprietary companies cannot raise money from the public.

66
Q

Bank Loan

A

A business can borrow money from a bank, for periods of 5 years or more. This type of loan should be used to purchase plant and equipment that will be used by the business for many years.

67
Q

Lease Finance

A

A lease is an agreement to rent a particular item of plant and equipment for a fixed number of months or years.
There are two types of leases. A finance lease means that the business has the right to purchase the item of plant and equipment at the end of the lease agreement. An operating lease means that the business can use the plant and equipment for the length of the lease agreement but the plant and equipment must be returned to the finance company at the end of the lease agreement.

68
Q

Debentures

A

A debenture is a type of loan agreement made with a company. The investor receives interest, at a fixed rate, on the money loaned. The debenture is backed by a right to sell certain assets of the company if the loan is not repaid on time.

69
Q

Unsecured Notes

A

An unsecured not is a type of loan agreement with a company where the money loaned to the company s not secured by any right to sell the property of the company if the loan is not repaid.

70
Q

Business Strategies

A
  • Cost Leadership
  • Product Differentiation
  • Strategic Initiatives
  • Performance Management
71
Q

Cost Leadership

A

Cost leadership is a strategy in which a business has lower costs than its competitors and is able to sell products at lower prices than its competitors.
Cost leadership may be achieved by setting up a chain of large retail shops, buying large volumes of products at low prices and having a management team that is focused on finding other cost savings.

72
Q

Product Differentiation

A

Product differentiation occurs when a business offers customers a product that has superior benefits to competing products.

73
Q

Strategic Initiatives

A

A strategic initiative is a major plan of a business that, once implemented, is likely to have a significant impact on the future of the business.

74
Q

Performance Management

A

Performance management is the process in which the employees of a business are made aware of the level of performance expected of them and involves the periodic review of their performance.

75
Q

Methods of Profit Calculation

A
  • Cash Accounting

- Accrual Accounting

76
Q

Cash Accounting

A

Cash accounting is a method of profit calculation in which income is recognised as existing when cash is received and an expense is recognised as existing when its paid.

77
Q

Accrual Accounting

A

Accrual accounting is a method of profit calculation in which income is recognised as existing when a service has been carried out or when inventory has been sold and an expense is recognised as existing when it is consumed.

The AASB accounting standards require the use of accrual accounting in preparing general purpose financial reports.

Accounting & Finance Unit 3 (11 decks)

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