Financial Accountancy (O3)

Question 1

What is Financial Accounting?

Answer 1

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.

Question 2

What is meant by profitability?

Answer 2

Comparing the level of profits over a number of years.

Question 3

Where could you find the information about profitability?

Answer 3

In the trading, profit and Loss A/c.

Question 4

What is meant by liquidity?

Answer 4

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).

Question 5

Where can I find information about liquidity?

Answer 5

This information is found in the Cash Flow Statement and Balance Sheet.

Question 6

What is meant by efficiency?

Answer 6

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.

Question 7

Where can I find information about efficiency?

Answer 7

Most of the information will be found in the balance sheet but some will also be found in the profit and loss account.

Question 8

What is meant by capital structure/ investment?

Answer 8

Examining the sources of finance the company has used and looking at potential investment opportunities.

Question 9

Where can I find information about capital structure/ investment?

Answer 9

This information is mainly in the balance sheet.

Question 10

What is the trading, profit and loss account?

Answer 10

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.

Question 11

What is the balance sheet?

Answer 11

The balance sheet is the statement which shows what the business owns (ASSETS) and what the business owes (LIABILITIES).

Question 12

What information are potential or existing shareholders interested in?

Answer 12

Profitability and efficiency.

Question 13

Why are potential or existing shareholders interested in profitability?

Answer 13

Amounts of profit will determine the dividend received by shareholders.

Question 14

Why are potential or existing shareholders interested in efficiency?

Answer 14

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.

Question 15

Who is interested in profitability?

Answer 15

Shareholders, employees/ trade unions and Government Agencies.

Question 16

What information are employees/ trade unions interested in?

Answer 16

Profitability

Question 17

Why are employees/ trade unions interested in profitability?

Answer 17

(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.

Question 18

What information are government agencies interested in?

Answer 18

Profitability

Question 19

Why are government agencies interested in profitability?

Answer 19

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.

Question 20

Who is interested in liquidity?

Answer 20

Lenders and trade creditors

Question 21

Why are trade creditors interested in liquidity?

Answer 21

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.

Question 22

Why are lenders interested in liquidity?

Answer 22

Banks and financial institutions need information about the cash position of the business organisations when deciding whether or not to lend money.

Question 23

What are trade creditors interested in?

Answer 23

Liquidity

Question 24

What are lenders interested in?

Answer 24

Liquidity

Question 25

Who is interested in efficiency?

Answer 25

Management, shareholders

Question 26

Why is management interested in efficiency?

Answer 26

The more efficient a business organization is, the lower the costs of production and the higher the level of profits. In many large companies managers receive bonuses based on profits made by the companies.

Question 27

Why are shareholders interested in efficiency?

Answer 27

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.

Question 28

Who is interested in capital structure/ investment?

Answer 28

Financial analysts and advisers

Question 29

Why are financial analysts and advisers interested in capital structure/ investment?

Answer 29

This group is interested in gathering information and presenting it to their clients and advising the clients on their existing investments and potential new ones.