Finance #4 Flashcards
cost centres
particular areas, departments or sections of a business to which costs can be directly attributed
- monitoring expenses through this allows for greater controls of total costs
expense minimisation
minimising expenses,
- profits are weakened if business expenses are overly high as they consume valuable resources
- savings can be substantial if people take a critical look at costs and eliminate waste and unnecessary spending
revenue controls
in determining an acceptable level of revenue with a view to maximising profits, a business must have clear ideas and policies
accounts receivable turnover ratio
sales/accounts receivable measures the effectiveness of a firm’s credit policy and therefore how efficiently it collects debt, high turnover ratios indicate the business has efficient debt collection, measured in days
return on equity ratio
net profit/total equity, shows how efective the funds contributed by the owners have been in generating profit and thus the return on investment, the higher the percentage the better the return for the owner although consider other comparative analysis
comparative ratio analysis
comparisons as a means of measuring the success/meaning of the financial ratios
types of comparative ratio analysis
time comparison, industry average comparison and benchmark against similar businesses
normalised earnings
earnings adjusted to take into account changes in the economic cycle or to remove on off or unusual items that will affect profitability.
- given to make an accurate depiction of the companies true earnings
capitalised expenses
accounting method where a business records an expense as an asset on the balance sheet rather than an expense on the income statement.
- this doesn’t accurately represent the true financial condition of the business - understates the expenses and overstates the profits
valuing assets
process of estimating the value of assets when recording them on a balance sheet.
- hard to measure
valuing assets - historical costs
assets are listed with the value when they were purchased.
- cost can be verified
- value may distort balance sheet due to inaccuracy
- depreciating assets demonstrate the negative effect of this feature
valuing assets - difficult to value
goodwill, trademarks etc, are harder to place a value on, therefore some are overvalued to present the business in the best way possible
timing issues
the time in which the financial report was recorded
timing issues - matching principle
expenses incurred by a business must be recorded on the income state for the accounting period. when revenue is recorded, expenses related to revenue should be recorded at the same time.
financial report limitations - debt repayments
financial reports can be limited because they do not have the capacity to disclose specific information about debt repayments, including
- how long the business has had or has been recovering from debt
- capacity of business or debtors to repay the amount owed
- adequacy of provisions and methods the business has for the recovery of debt
- provisions in place for doubtful debts
