Financial Accounting

Question 1

To calculate equity

Answer 1

Equity = assets - liabilities

Question 2

What to include in Income Statement? (In order)

Answer 2

1. Sales
2. Cost of sales
3. Any other income
4. Gross profit
5. Expenses
6. Operating profit
7. Interest and profit after interest
8. Tax and profit after tax
9. Net profit

Question 3

Purchases

Answer 3

Cost of buying inventory

Question 4

What to include in SOFP? (In order)

Answer 4

1. Non current assets
2. Current assets
3. Current liabilities
4. Net current assets/liabilities
5. Non current liabilities
6. Net assets
7. Capital
8. Retained profit
9. Capital + retained profit (equal to net assets)

Question 5

Double entry for depreciation

Answer 5

Dr Depreciation Expense

Cr Accumulated Depreciation

Question 6

Current ratio (indicator of liquidity)

Answer 6

Current assets / current liabilities

Question 7

Acid test (indicator of liquidity)

Answer 7

(Current assets - inventory) / current liabilities

Question 8

Inventory holding period (working capital efficiency)

Answer 8

Number of days inventory is held

Inventories days = (average inventory / cost of sales) x 365 (or 52 or 12)

Question 9

Trade payable days (working capital efficiency)

Answer 9

Number of days payments to credit suppliers outstanding
Creditor days = (average trade payables / cost of sales*) x 365**
*Strictly credit purchases but cost of sales used it credit purchases not known
** or 52 or 12

Question 10

Trade receivable days (working capital efficiency)

Answer 10

Number of days payments from credit customers outstanding
Debtor days = (average trade receivables / sales revenue*) x 365**
*Strictly credit sales but sales revenue used if credit sales not known
** or 52 or 12

Question 11

Return on capital employed

Answer 11

ROCE = operating profit / (total assets - current liabilities) expressed as a %

Question 12

Gross profit margin

Answer 12

Gross profit margin = (gross profit / sales revenue) x 100

Question 13

Operating profit margin

Answer 13

Operating profit margin = (operating profit / sales revenue) x 100

Question 14

Debt/Equity (Gearing)

Answer 14

Debt/Equity = non current liabilities / equity

Question 15

Interest cover (Gearing)

Answer 15

Interest cover = operating profit / interest

Question 16

Earnings per share

Answer 16

Profit after interest and tax / number of shares

Question 17

Price / earnings ratio

Answer 17

Price / earnings ratio = market value per share / earnings per share

Question 18

Dividend cover

Answer 18

Dividend cover = profit after interest and tax / dividend

Question 19

Dividend yield

Answer 19

Dividend per share / market value per share (%)

Question 20

Disposal of non current assets

Answer 20

Compare net book value with sales proceeds, remove from assets in SOFP and add gain/loss in income statement

Question 21

Operating activities

Answer 21

Cash flows from the main revenue producing activities of a company:

• cash receipts from sale of goods/services
• cash payments to suppliers of goods/services
• cash payments to employees
• cash payments/refunds of taxes

Question 22

Investing activities

Answer 22

• Cash payments to purchase non current assets
• Cash receipts from the disposal of non current assets
• cash payments for investment in other companies
• cash receipts from the sale of investments in other companies
• interest received

Question 23

Financing activities

Answer 23

Alter equity / borrowing structure of the company

• cash receipts from owner investing capital / share issues
• drawings
• cash payments on redemption of shares
• cash receipts from issuing debentures and other borrowings
• cash payments on repaying amounts borrowed
• cash payments under leases

Question 24

Things to remember for Statement of cash flows

Answer 24

Operating profit includes before interest RECEIVED too

Interest and tax need to be calculated using the 1st payable balance + expense - 2nd payable balance

Question 25

How cash flows from operating activities is laid out

Answer 25

1. Profit before interest and tax
2. Depreciation
3. Disposals
4. Adjusted profit
5. Inventory change
6. Receivables change
7. Payables change
8. Increase/decrease in cash due to working capital changes
9. Interest paid (be careful)
10. Tax paid (be careful)
11. Net cash inflow/outflow from operating activities

Question 26

How cash flows from investing activities is laid out

Answer 26

1. Purchase of PPE
2. Sale of PPE
3. Purchase/Sale of investments
4. Interest received
5. Net cash inflow/outflow from investing activities

Question 27

How cash flows from financing activities is laid out

Answer 27

1. Loans
2. Share capital
3. Share premium
4. Dividends
5. Net cash inflow/outflow from financing activities

Question 28

Summary of statement of cash flows

Answer 28

1. Increase in cash and cash equivalents
2. Cash and cash equivalents at start of period
3. Cash and cash equivalents at end of period
   IF IT DOESNT MATCH WITH NUMBER 1 YOU HAVE MESSED UP

Question 29

Dividends paid

Answer 29

Expense

Question 30

Retained profit

Answer 30

Do not touch until bottom of SOFP

Retained profit + net profit - dividend

Question 31

Asset

Answer 31

A resource with:

• a probable future benefit which arises from a past transaction or event
• must have control of it
• must be possible to measure in monetary terms

Question 32

Liability

Answer 32

Obligations with:

• a present obligation which arises from a past transaction or event
• settlement of the obligation is expected to result in an outflow of economic benefits (usually cash)