Chapter 30- Accounting fundamentals Flashcards
What is the work of financial accountants?
1-Collection of daily transactions
2-Making income statement, bal sheet and cash flow statement.
3-Accounts are made once or twice a year.
4-Info is used my external groups
5-Accountants are bound by the rules and concepts of the accounting profession. (IAS)
6- Cover past periods.
What is the work of management accountants?
1- Preparing information for managers of the business, its products and departments.
2- Analysing internal accounts like budgets.
3-accounts are made when needed by owners and managers.
4- Info is only used by internal groups
5- No set rules
6- cover both past and future time periods.
What is the double entry principle?
Whenever a transaction happens it should be recorded twice once on debit and once on credit to ensure that the accounts balance.
What are accruals?
Accruals are when a business has been provided with services but hasn’t paid yet. They should still be included in the expenses.
What is the prudence concept?
Anticipated losses should be recorded and provided for before they happen and anticipated profits should not be recorded until they are realised.
What is the money measurement principle?
Money measurement principle states that a business should only record an accounting transaction if it can be expressed in terms of money.
What is the realisation concept?
Sales should only be recorded once the goods/ services are provided to the customer. Not when an order is recieved or payment is made.
What is the income statement?
An accounting statement that records the revenue, costs and profit/loss of a business over a period of time.
What is gross profit?
Revenue minus cost of goods sold
What is the cost of sales?
Direct cost of the goods that were sold during the year.
what is Operating profit?
Gross profit minus overhead expenses.
what is profit for the year?
profit after deducting finance costs and tax.
what are dividends?
share of profits given to shareholders as a return for investing in the company.
what are the uses of income statement?
- to measure business performance
- to compare profits
- to show to bankers and investors
what is low and high quality profit?
low quality profit is one off profit that can’t easily be sustained. high quality profit can be sustained and repeated.
what is the SOFP?
it records a business’s assets,capital and liabilities.
what are intangible assets? (intellectual capital)
items that don’t have a physical presence for eg. trademarks,copyrights,goodwill
what is goodwill?
the value of the reputation of a business.
what is cash flow statement?
a statement that records cash received by a business and cash paid by the business over a period of time.
what is the chairman’s statement?
a report on the achievements of the business, future plans etc.
what is the chief executive’s report?
detailed analysis of the past year. info of new products etc.
what is the auditor’s report?
a report by an independent firm of accountants insuring that the accounts are accurate and valid and IAS are followed.
what are the methods to increase profit margins?
- increase sales
- reduce cost of sales
- reduce overheads
what are liquidity ratios?
they access the firms ability to pay its short term debts.
current ratio formula?
current assets/ current liabilities
acid test ratio formula?
current assets- inventory/current liabilites
what are the methods to increase liquidity?
- sell fixed assets
- sell inventory
- take loan
what are the limitations of ratio analysis?
- incomplete analysis.
- one ratio of its own is of very limited value. needs to be compared with prev. years and other companies.
- comparing with other businesses should be done with caution as they have different ways/ could be window dressed.
what are the limitations of published accounts?
- they become obsolete as soon as they are published.
- they could be window dressed.
- they do not include:
1) future plans and budgets.
2) impact of business on community and environment.
3) the performance of each department
what is window dressing?
presenting the accounts of a business in a favourable light.
what are some ways of window dressing?
- charging low depreciation rates
- not writing off bad debts
- overstating the value of intangible assets.
- overstating the value of inventory
- delaying payments
- selling assets to improve liquidity position.
