Financial Accounting Flashcards
Describe the difference between a private and public company
Private- minimum one director and shareholder, described as ltd.
Public (plc)- must have min share capital of £50,000 and can be listed on stock exchange.
What is the financial conduct authority?
the FCA is the listing authority in the UK and imposes additional rules on stock exchange listed companies
What are the duties of an auditor?
report on the financial performance, position and cash flow. Opinion must accompany the financial statements sent to shareholders
What is the objective of an annual finance report?
Provide financial information about the reporting entity - useful to present to potential equity investors, leaders, and other creditors in making decisions about providing resources to the entity
What are the assumptions for a company submitting a financial statement?
- Economic entity
- Going concern
- Monetary unit
- Periodicity
- Accrual basis of accounting
What are the three type of financial statements?
- Statement of financial position
- Income statement
- Statement of cash flow
Describe a statement of financial position
balance sheet that shows a companies worth.
Assets = Liabilities + Equity
A - resources the company owns
L - amounts owed by company to third party
E - amounts owed by company to shareholders
What are current assets?
cash and other assets a company expects to convert into cash in one year (or one operating cycle, whichever is longer)
Describe an Income Statement
income includes revenues and gains.
R - ordinary activity (sales, rent)
G - not ordinary (long-term sale, trading security)
What is gross profit?
gross profit = net sales - cost of goods
What is operating income?
OI = gross profit - (income and expense)
What is gross profit percentage?
GPP = gross profit / sale
Describe a statement of cash flows
Includes operations, financing and investing activities. Purposed to provide information about cash payments (where?what?)
How do you calculate return on capital employed
ROCE = (operating profit) / (equity finds + non-current liabilities)
ROCE = operating profit margin x net asset turnover
How do you calculate gross profit margin?
GPM = gross profit / revenue
How do you calculate operating profit margin?
OPM = operating profit / revenue
How do you calculate net asset turnover?
NAT = revenue / (equity + non-current liabilities)
What are the three main efficiency ratios?
- Inventory holding period
- Trade receivables collection period
- Trade payables payment period
How do you calculate inventory holding period?
IHP = 365 * closing inventory / cost of sales
How do you calculate collection period?
365 * trade receivables / revenue
How do you calculate payment period?
365 * trade payables / cos of sales
What is a current ratio?
CR = current assets / current liabilities
approx. = 2 indicates debts could be met when they fall due
What is the acid test ratio?
ATR = (current assets - inventory) / current liabilities
measure of immediate short term liquidity.
What is financial gearing (leverage)?
assesses mid-term capital structure by looking at its solvency.
G = debt / equity
G = (non-current liabilities + overdraft + preference shares) / (share capital + retained earnings)
What is an interest cover?
IC = operating profit / interest payable
to assess the risk of not being able to meet interest payments
What is likely to occur if a company is highly geared?
- gives rise to a low interest cover ratio
- returns to shareholders are likely to be more volatile
Describe a stewardship
a person accountable to shareholders for managing the company’s resources. Must provide financial accounting information to shareholders to demonstrate accountability
