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Accounting > Financial Accounting > Flashcards

Financial Accounting Flashcards

1
Q

What is the Cash Flow Statement?

A

The CFS shows a firm’s cash movements for a given period. It tries to show the company’s ability to generate cas and to asses it’s need for cash.

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2
Q

What are the methods of preparing a CFS?

A

The direct method involves all records of cash, which is extremely complex. And the indirect method calculates the CFS from the IS and BS (all in the info is contained there).

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3
Q

What are the 3 main sections of the CFS?

A

Cashflows from operating, investing and financing activities.

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4
Q

What does the CFS provide in terms of totals?

A

1) Net cash from relevant activities 2) Net change in cash and cash equivalents 3) Opening and closing cash and cash equivalents

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5
Q

What is the Balance Sheet?

A

The BS shows what a firm owns (assets) and what the firm owes (claims). In other words the BS shows the business’ wealth at a specific date. The assets always equals claims!

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6
Q

What is the BS formula?

A

Assets = Equity + Profit (or loss) + Liabilities

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7
Q

What is Equity?

A

Equity represents the amount that belongs to the owners of the firm.

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8
Q

What is Liability?

A

Liability represents all claims except those made by the owners.

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9
Q

Generally speaking, what is the difference non-current vs current assets?

A

Current are usually less than 12 months whereas non-current are fixed or longer than 12 months.

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10
Q

What is the Income Statement?

A

The IS is a measure of profitability which aims to show how a business has performed during a period. It also links the BS’s retained earnings section from year to year.

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11
Q

What are the 4 types of IS profit?

A

1) Gross profit 2) Operational profit 3)Profit before tax 4) Net profit

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12
Q

What is Ratio Analysis in accounting?

A

A ratio is a method comparing one number with another, which have a definite relationship, to provide deeper insight on the business. In other words, to examine many ratios may give one a holistic view as opposed to examining individual times on financial statements.

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13
Q

What are the 5 Ratio categories?

A

1) Profitability Ratio 2) Efficiency Ratio 3) Liquidity Ratio 4) Financial Gearing Ratio 5) Investment Ratios

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14
Q

How does one evaluate and interpret ratios?

A

1) Compare if there is a decrease/increase with previous year. 2) Describe the ratio, it’s relation to the question and how it affects the business. 3) Finally, assess what may have caused the change.

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15
Q

What is a Minority Interest?

A

The minority interest is the remaining segment of the business which is not owned by the acquiring company (Parent company). The subsidiary is the company which is owned.

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16
Q

What is Goodwill in accounting?

A

Goodwill is the difference between actual purchase and original price of the business.

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17
Q

What are the 4 different methods to create Group Accounts?

A

1) Cost method (0-20% owned) 2) Equity method (20-50%) 3) Consolidation with Minority interest (50-99.99%) 4) Consolidation (100%)

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18
Q

What does equity equal?

A

Equity = Share capital + Reserves

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19
Q

What is the prudence convention?

A

The prudence convention holds that caution should be exercised when making accounting judgment. Uncertainty about the future is dealt with by recoding all losses at once and in full; both actual and expected loss.

20
Q

What is the accruals convention?

A

The accruals convention asserts that profit is the excess of revenue over expenses for a period not the excess of cash receipts over cash payments.

21
Q

What is the matching convention?

A

The matching convention states that expenses should be matched to the revenue that it helped generate.

22
Q

What is the historic cost convention?

A

The historic cost is used for accounts in the financial statements but in the context of decision making is completely irrelevant.

23
Q

What is the consistency convention?

A

The consistency convention holds that when a particular method of accounting is selected to deal with a transaction, this method should be applied consistently over time.

24
Q

What are the double entries if a dividend is promised but not paid?

A

Deduct from earnings and add a trade payable.

25
Q

Why is cash important?

A

Cash is important because firms can go bankrupt if they are insolvent. Earnings differ from cash; Firms that make a low profit can survive if they have cash but not if they run out of cash.

26
Q

How do we calculate the CFS tax paid?

A

Previous year’s tax (BS) + current year tax declared (IS) - This years tax owed (BS)

27
Q

What is the double entry for previous year prepaid?

A

Deduct last years prepaid as Rates for current year.

28
Q

What is Capital Expenditure?

A

It the purchase of tangible non-current assets.

29
Q

What 5 Ratio Analysis categories?

A

Profitability, efficiency, liquidity, gearing ratios and investment ratios.

30
Q

What is the Earnings Per Share Ratio (EPS)?

A

It shows the growth rate in earnings per share. (Earnings available to shareholders) / (Number of Shares)

31
Q

What is the ROSF Ratio (return on shareholder funds)?

A

It measures the return to shareholders from the use of shareholder funds; higher the better. (Net Profit) / (debt + equity)

32
Q

What is the ROCE (return on capital employed)?

A

It measures the operating performance looking at profits as a whole by ignoring tax and financing methods. Example: xx% of capital employed to generate profit. (Operating Profit) / (debt + equity)

33
Q

What is the Operating Profit Margin Ratio?

A

Shows us how good management are at managing sales; also shows how an increase in sales will come through. (Operating Profit) / Sales

34
Q

What is the Gross Profit Margin Ratio?

A

It measures the profitability in buying and selling goods before any expenses are taken into account. (Gross Profit) / Sales

35
Q

What is the Current Ratio?

A

Shows how well a company’s short term assets cover short term obligations. Reflects liquidity and should be between 1.5-2.0. (Current Assets) / (Current Liabilities)

36
Q

What is the Acid Test Ratio (Quick Asset)?

A

Similar to Current Ratio but more severe as it doesn’t account for inventory (less liquid). Ratio should not be below 1.0. (Current Assets - Inventory) / (Current Liabilities)

37
Q

What is the Gearing Ratio?

A

Shows the proportion of long term capital that is funded by debt. Lower is better. Debt / (debt + share capital + reserves) … Could also add short term debt.

38
Q

What are the 2 Financial Gearing Ratios?

A

Gearing Ratio and Interest Cover Ratio.

39
Q

What are the 2 Liquidity Ratios?

A

Current Ratio and Acid Test Ratio.

40
Q

What are the 4 Efficiency Ratios?

A

Average Inventory Turnover Period, Average Settlement Period for Receivables, Average Settlement Period for Payables and Sales Revenue to Capital Employed.

41
Q

What are the 4 Profitability Ratios?

A

Return on Shareholder Funds, Return on Capital Employed, Operating Profit Margin and Gross Profit Margin.

42
Q

What are the 5 Investment Ratios?

A

Earnings Per Share, Dividend Payout Ratio, Dividend Cover, Dividen Yield and Price/Earning Ratio.

43
Q

What does Profitability Ratios show?

A

Profitability ratios provide an insight to the degree of success in creating wealth for their owners.

44
Q

What does the Efficiency Ratios show?

A

Efficiency ratios measure how particular resources have been used within the business.

44
Q

What does the Liquidity Ratios show?

A

Liquidity ratios examine the relationship between liquid resources held and amounts due for payment in the near future.

44
Q

What does the Financial Gearing Ratio show?

A

Gearing ratios tend to highlight the extent to which the business uses borrowings.

44
Q

What does the Investment Ratio show?

A

Assesses the returns and performance
of shares in a particular business from the perspective of shareholders who are not involved with the management of the business.

Accounting (2 decks)

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