Financial Stamens (6) Flashcards
Define Changes in equity?
Involves the movement in capital accounts (such as share capital), distributable reserves (such as retained earnings) and non-distributable reserves (such as revaluation reserves).
Define Economic substance?
The underlying commercial benefit or drawback of a transaction.
Define Finance lease?
Refers to a lease agreement which transfers substantially all the risks and rewards of an asset which are incidental to ownership.
Define Financial performance?
This is how well or poorly the entity performed financially. Financial performance is measured by calculating net profit.
Define Financial position?
Indicates the net asset position of the business. Note that owner’s equity is equal to net assets. This is shown by the accounting equation.
Define Financial statements?
A summary of results of business activities for an accounting period.
Define Legal form?
Refers to how a business transaction is interpreted in terms of the law.
Define Public interest score:
The sum of points allocated to a business based on specific attributes, such as average number of employees, sales and liabilities. The public interest score is used to determine whether a company must be audited externally, as well as the interest that the public has in a company.
Define Revenue?
Income generated by an entity from ordinary activities, including income from sales made.
The main aim of financial statements is to provide useful information that enables interested parties to make?
sound economic decisions.
What does ‘solvency’ mean?
Having enough assets to cover your liabilities
What is the main objective of financial statements?
To provide useful information about a business
Why would a business’s suppliers look at its financial statements?
To decide if they should grant the business credit
Which of the following groups is most likely to be interested in tax liability?
SARS
What information on the financial statements would potential investors likely be most interested in?
Return on investment for current shareholders
Calculate the percentage return on equity for the business for its first year of operations?
Percentage return on equity = Net profit / Equity × 100
Recommend to Mr Duma the investment option he should make if he bases his decision only on the expected percentage return on each investment.
The recommendation (based on return on investment only) to Mr Duma should be to purchase the business. This is because it is currently earning a return of 18.75 per cent, whereas the money market account only earns interest of 10 per cent per annum.
What non-monetary considerations should Mr Duma make before purchasing the business?
Non-monetary considerations:
- The number of hours he will have to work, and the effort involved to run the business.
- The value of the business’s good customer base, its brand name, a good location, good relations with existing suppliers etc.
- External risks that are beyond the business owner’s control
Explain Going concern?
- Going concern is the assumption that the business will continue to operate in the foreseeable future. (This means that the business has no intention to liquidate or materially cut back on operations in the foreseeable future.)
The accrual basis of accounting stipulates that income must be recognised when it is earned and not only when it is received, and expenses must be recognised?
- When they are incurred and not only when they are paid.
This means that the effects of transactions are recorded in the financial period to which they relate – they are not necessarily recorded when money is received or paid.