Introduction to Accounting Flashcards
What is Financial Accounting?
Providing financial information, like balance sheets and cash flows to external users ( lenders and investors)
Capital and Drawings
Capital is money the owner invested into the business.
Drawings is money withdrawn for personal use.
How to calculate Gross Profit, and GPM.
Gross profit = sales - cost of sales (payments to suppliers)
GPM = Gross Profit / Sales x 100
Double entry system
Claims that every transaction involves 2 parties, with Credit to one account, and Debit to another.
Trial Balance
All financial transactions within a year are consolidated onto the trial balance.
Accounting equation
Owners equity = assets - liabilities
Difference between cash and profit
Cash is the funds available, whereas profit is the excess of income over expenses.
Capital Expenditure & Revenue Expenditure
Capital Expenditure is spending to acquire assets, which doesn’t affect profits.
Revenue is spending on day-to-day expenses.
Cost of Sales Formulae
COS = Opening Inventory + Purchases - Closing Inventory
Accrual Principal & Prepayments
Records payments in the year they occur, not when they are paid.
But, Prepayments are recorded when the cost is paid, rather than incurred.
Bad Debt
When a customer cannot pay the business, you reduce trade receivables and add it to expenses as ‘Bad Debt’.
Difference between
the straight-line
and reducing depreciation method
The straight line method depreciates an equal amount per annum.
The reducing method depreciates a % per annum.
Difference between ordinary and preference shares
Ordinary shares receive ordinary dividends from the company, and have voting rights.
Preference shares receive a fixed dividend before ordinary dividends are paid, but no voting rights.
Debentures
Companies can raise finance by issuing debentures and long term loans (liability).
Comprehensive income
Comprehensive income is the revaluation gain or loss of assets e.g. property and vehicles
3 Main Section on a statement of Cash Flow
Cash flows from operating activities (Working capital, CA & CL, depreciation & interest)
Cash flows from investing activities (Sales or purchases of long-term assets)
Cash flows from financing activities (equity and NCL)
Return on Capital Employed - Profitability Ratio
Operating profit / Shareholder funds + NCL
Operating profit formula - Profitability Ratio
Operating profit / Sales x 100
Expenses Ratio - Profitability Ratio
Expenses / Sales x 100
Current Ratio - Liquidity Ratios
Current Assets / Current Liabilities
Acid test ratio - Liquidity Ratios
Current Assets - inventories / Current Liabilities
Inventory Days - Efficiency Ratios
Inventory / Cost of sales x 365
Payable days - Efficiency Ratios
Payables / Cost of sales x 365
Receivable days - Efficiency Ratios
Receivables / Sales x 365
Gearing - Investment Ratios
Debt / Equity x 100
Interest cover - Investment Ratios
Operating profit / Interest Expense
Earnings per share
Net income / Number of shares issued
Margin of Safety
Sales - Break Even Point
