Financial Accountancy (O3) Flashcards
What is Financial Accounting?
Financial Accounting is mainly concerned with reporting and giving accounting information to EXTERNAL USERS ie those groups or people who are not involved in the day to day running of the business organization. Included in the list would be shareholders (the owners) and banks and other financial institutions who lend to business organisations.
What is meant by profitability?
Comparing the level of profits over a number of years.
Where could you find the information about profitability?
In the trading, profit and Loss A/c.
What is meant by liquidity?
Examining the cash side of a company. This information can be found in the Cash Flow Statement (where cash came in from and where, what cash went out and where to) and balance sheet (what business has in terms of cash and what the business owes in the short term).
Where can I find information about liquidity?
This information is found in the Cash Flow Statement and Balance Sheet.
What is meant by efficiency?
How well the company uses its assets (premises, equipment, machinery) to generate sales revenue, how quickly it collects the money owed to it, how it manages the debt it has itself.
Where can I find information about efficiency?
Most of the information will be found in the balance sheet but some will also be found in the profit and loss account.
What is meant by capital structure/ investment?
Examining the sources of finance the company has used and looking at potential investment opportunities.
Where can I find information about capital structure/ investment?
This information is mainly in the balance sheet.
What is the trading, profit and loss account?
The trading, profit and loss account is the statement which records INCOME and EXPENSES for the year. The expenses are deducted from the income to calculate profit.
What is the balance sheet?
The balance sheet is the statement which shows what the business owns (ASSETS) and what the business owes (LIABILITIES).
What information are potential or existing shareholders interested in?
Profitability and efficiency.
Why are potential or existing shareholders interested in profitability?
Amounts of profit will determine the dividend received by shareholders.
Why are potential or existing shareholders interested in efficiency?
Shareholders asses the efficiency of the company to help them evaluate the company’s performance and that of its management to help them decide whether to retain their shares, sell them or purchase more.
Who is interested in profitability?
Shareholders, employees/ trade unions and Government Agencies.
What information are employees/ trade unions interested in?
Profitability
Why are employees/ trade unions interested in profitability?
(request pay increase)
Requests for pay increases and the size of pay increases are partly based on the increase in profits achieved by the organization.
(schemes as shareholders)
Many employees belong to profit sharing schemes or share option schemes receiving dividends as shareholders.
(security of job)
If profit decrease, managers usually look to cut costs to increase profitability. Labour costs are usually the first to be cut resulting in job losses and less job security.
What information are government agencies interested in?
Profitability
Why are government agencies interested in profitability?
Revenue and Customs require information on profits in order to asses the company’s corporation tax liability. They are also interested in profitability, sales and expense items for VAT purposes, to verify the VAT returns are accurate.
Who is interested in liquidity?
Lenders and trade creditors
Why are trade creditors interested in liquidity?
Suppliers want to know that businesses to whom they are going to sell on credit will be able to pay them on the appropriate date.
Why are lenders interested in liquidity?
Banks and financial institutions need information about the cash position of the business organisations when deciding whether or not to lend money.
What are trade creditors interested in?
Liquidity
What are lenders interested in?
Liquidity
