Finance Theory Flashcards
What does VAT mean?
Value Added Tax
Who receives the VAT in the end?
Governments
How do you see VAT on the balance sheet?
- VAT Receivables
* VAT Payables
How do you see VAT on the income statement?
You do not
TRUE or FALSE
VAT is an expense for a company
False
TRUE or FALSE
All products have the same % of VAT on top of the sales price
FALSE
TRUE or FALSE
The inventory on the balance sheet is excluding VAT
TRUE
TRUE or FALSE
The trade payable account on the balance sheet is including VAT
TRUE
TRUE or FALSE
The account VAT payable on the balance sheet is a result of sales to customers
TRUE
VAT receivable is …
… an item on the asset side of the balance sheet. It shows the VAT that (needs to be) paid to a supplier which the compant can reclaim/receive from the government
VAT payable is…
an item on the liability side of the balance sheet. It shows the VAT that (needs to be) received from the customer whihc the company needs to pay to the government
What does inventory impact?
Directly impacts balance sheet and income statement, inventory (current asset on the balance sheet) and cost of goods sold (cost on the income statement)
Which two ways can you value inventory?
- Current cost convention
* Historic cost convention
What is current cost convention?
By keeping track of all price changes (impractical, subjective)
What is historic cost convention?
By taking prices from the books, when purchased
What does FIFO mean?
First in First out
What does LIFO mean?
Last in First out
What does AVCO mean?
Average cost assumption
What does periodic mean?
For a whole period
What does perpetual mean?
Per sale made
FIFO or LIFO
Reflects replacement costs more accurately
FIFO
FIFO or LIFO
Not a good indicator of ending inventory value because goods are too old/obsolete
LIFO
FIFO or LIFO
In times of inflation lower profit and inventory valuation
LIFO
FIFO or LIFO
Allowed under both GAAP and IFRS
FIFO
FIFO or LIFO
In times of inflation higher profit and inventory valuation
FIFO
FIFO or LIFO
Not allowed under IFRS, allowed under GAAP
LIFO
Which two ratios are impacted by the inventory cost system chosen?
- working capital
* current ratio
TRUE or FALSE
In the USA the use of LIFO is not allowed
FALSE
TRUE or FALSE
Historical cost is the most widely used cost convention
TRUE
TRUE or FALSE
Suppose two companies are identical but one uses LIFO and the other FIFO. The company using FIFO will have the higher market price per share
FALSE
What are the 3 ways of historical inventory costing?
- FIFO
- LIFO
- AVCO
In times of increasing prices what will happen to the COGS when comparing FIFO and LIFO?
COGS will be lower using FIFO
Which inventory method represents current costing the most closely?
LIFO
What is a merger?
When two companies go together
What is an acquisition?
When one company takes over another company
What is a consolidated financial statement?
The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity
What is Goodwill?
The difference between takeover price and book value, premium paid on top of the book value of the acquisition
What is Minority Interest?
The interest not owned by the parent company
In which two ways can you acquire money as a company?
- Equity (issue shares)
* Liability (get a loan)
What is financial accounting?
Collecting & representing results of past period in the outside world
What does limited liability mean?
That your private assets are protected
What 3 things does the published annual report exist out of?
- Financial report (core)
- Report of executive board (public relations tool: all good things the company has done)
- Additional Data (info on the division of profit)
What is the agency theory?
Main feature of public companies: separation of ownership (principal) and management (agent)
What is a stock option plan ?
allowing employees to own shares in the company. You will want the shares to go up which will keep management and employees motivated for the business to do well.
What is the direct method for a cash flow statement?
Simple list of cash playments and receipts made during a year
What is the indirect method for a cash flow statement?
Derive cash flow statement from balance sheet and income statement
What does the principle ‘going concern’ mean?
Co. assumed to remain in operation unless evidence to contrary
What does the principle ‘prudence’ mean?
Conservative view on profit, asset valuation and losses (cost hits in 1 year)
What does the principle ‘realization’ mean?
Recognition of profit & losses on realization only
What does the principle ‘matching’ mean?
Expenses presented in same period for resulting revenues made (costs are divided over the years in use, depreciation)
What does the principle ‘consistency’ mean?
Consistency in composing financial statements
What does the principle ‘accruals’ mean?
Revenues and expenses recognized and recorded when incurred, not when actual cash takes place
What does the principle ‘objectivity’ mean?
Financial statements prepared free from personal opinion
What does the principle ‘verifiability’ mean?
Possibility to check if information provided is correct
What does the principle ‘relevance’ mean?
Reports should be based on what is relevant
What does the principle ‘economic entity assumption’ mean?
- Separation of business transactions from personal transactions
- Means financial statements can be prepared for a group (consolidation)
What does the principle ‘monetary unit assumption’ mean?
Allows accountants to express assets as dollar amount and also assumes, dollar does not lose purchasing power over time combine $10,000 on fixed asset in 2016 $20,000 on fixed asset in 2020
What does the principle ‘time period assumption’ mean?
Business operations and financial results can be divided into distinct periods (months, years)
What does the principle ‘cost principle’ mean?
- Transactions recorded at cost at time of transaction
* Results in intangibles not being recorded
What does the principle ‘materiality’ mean?
Accounting principle can be ignored if amount is significant
Who needs to publish ? (2)
- companies with limited liability feature
* Publicly listed companies (these have more detailed regulations)
What is a published annual report?
It states the affairs of a company in a past period
What does GAAP stand for?
Generally Accepted Accounting Principles
Is GAAP rules-based or principles-based
Rules-based
What does IFRS stand for?
International Financial Reporting Standards
Is IFRS rules-based or principles-based
Principles-based
What are the 3 leverage ratios?
- Debt ratio
- Debt to equity ratio
- Times interest earned
What are the 3 activity ratios?
- Average collection period
- Average inventory period
- Turnover rate
What are the 3 liquidity ratios?
- Current ratio
- Quick ratio
- Net working capital
What are the 4 profitability ratios?
- Margin on sales
- Return on Equity (ROE)
- Return on Debt (ROD)
- Return on Investment (ROI)
What are the 7 valuatio ratios?
- Earnings per share (EPS)
- Price to earnings ratio (P/E ratio)
- Dividend yield
- total yield
- dividend cover
- Market to book ratio
- Payout ratio
What do liquidity ratios measure?
the ability to pay all short-term obligations
What do leverage ratios measure?
how heavily a bysiness is financed with debt
What do profitability ratios measure?
how worthwile an investment is to providers of funds
What do activity ratios measure?
How effectively a business is using its resources
What do valuation ratios measure?
They assess the performance of the company
What are limitations of financial ratios? (3)
- Based on historical data and limited data in financial statements
- Useful comparison with companies in similar industries
- Companies apply accounting principles differently
TRUE or FALSE
The Sarbanes-Oxley act is a corporate responsibility act which mandates strict rules regarding financial disclosures of the financial report to prevent financial accounting fraud.
TRUE
TRUE or FALSE
An independent external auditor needs to check financial statements on its accuracy, completeness and reliability
TRUE
TRUE or FALSE
A complete annual report consists out of three components: the financial report, the report of the executive board, and additional data like the proposed distribution of profit.
TRUE
TRUE or FALSE
The stockholders can be identified as the agents and management as the principal when looking at agency costs.
FALSE
It is the other way around, the management is recognized as the agent. It is hired on behalf of the stockholders.
TRUE or FALSE
In Anglo-Saxon countries (UK, USA) the dominant opinion is that management should not only look after the best interest of stockholders, but also of other stakeholders like employees and suppliers.
FALSE
TRUE or FALSE
There is one set of accounting standards which is used worldwide.
FALSE
TRUE or FALSE
When looking at R&D costs from the point of view of the prudence principle, these costs need to be taken up as expenses in the income statement straight away.
TRUE
TRUE or FALSE
Long-term investments in shares or other financial titles are called securities.
FALSE
Securities are short-term investments in shares or other financial titles. Long-term investments are called financial assets.
TRUE or FALSE
In economic terms the company can be seen as the owner in the case of operational lease. Therefore assets that are required under operational lease are treated as purchased assets.
FALSE
This is only done under financial lease.
TRUE or FALSE
The indirect method of preparation for the cash flow statement is often less costly and time-consuming.
TRUE
TRUE or FALSE
The main function of financial accounting is collecting and presenting financial data to outside partners.
TRUE
TRUE or FALSE
Management accounting provides past information and has to deal with many legal constraints on how it is presented and organized
FALSE
Management accounting is focused on gathering, recording and modifying information for internal use which is used in decision making regarding the future. It has no legal obligations or standards it has to comply to, like IFRS.
TRUE or FALSE
In the USA the reported profit on the income statement will not be the same as the taxable income.
TRUE
TRUE or FALSE
Regulation in common law countries is mainly left to acknowledged professional organizations that dictate the rules
TRUE
For example the FASB, it is independent organization that establishes the US GAAP.
TRUE or FALSE
Profit reported to the tax authorities is always the same as the profit reported in the financial statements.
FALSE
Although in some countries this is true, e.g. Germany, in other countries substantial differences can exist between the taxable profit and the reported profit in the annual report. A reason for this can be the difference in calculating depreciation expenses based on tax regulation/standards.
TRUE or FALSE
In countries where banks have traditionally provided a majority of the funding, there is less need for publishing financial reporting to external stockholders.
TRUE
In countries where banks have traditionally provided a majority of the funding, there is less need for publishing financial reporting to external stockholders.
