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Y10 - Accounting > Lesson 15/16/17/18 - Booklet 2 Revision > Flashcards

Lesson 15/16/17/18 - Booklet 2 Revision Flashcards

1
Q

Define liquidity.

A

The ability of the business to meet short term debts as they fall due.

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2
Q

Define stability.

A

The ability to meet debts and continue operation in the long term.

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3
Q

Define profitability.

A

The ability of a business to generate a profit compared against a base of sales, assets or owner’s equity.

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4
Q

What is the WCR formula?

A
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5
Q

T/f - WCR measures liquidity.

A

True - Working Capital Ratio is a liquidity indicator that measures the ratio of current liabilities to current assets to assess the firm’s ability to meet its short term debts.

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6
Q

Complete the answer…
For every $1 of Current Liabilities, this business has $0.37 of Current Assets, which is an indication that it is likely to have trouble meeting it’s short-term debts as they fall due because …

A

…the business has fewer current assets that can be converted to cash or used to generate cash than it has in current liabilities.

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7
Q

What is the debt ratio formula?

A
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8
Q

T/f - Debt Ratio measures the stability of a business.

A

True - debt ratio measures the proportion of the firm’s assets that are funded by external sources of finance. It is a measure on the stability of a business. It is expressed as a percentage.

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9
Q

Complete the answer…
A relatively low debt ratio is good for the stability of the business because …

A

…the business should easily be able to make repayments on its debt and continue operations into the long term due to the low level of risk.

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10
Q

Complete the answer…
However, a low debt ratio could be problematic as…

A

…this could be a sign of a missed opportunity for business as they could take on more debt to fund further expansion of the business leading to a larger market share and a higher profit for the owners.

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11
Q

What is the ROA formula?

A

Return on assets is a profitability ratio that provides how much profit a company can generate from its assets. In other words, return on assets (ROA) measures how efficient a company’s management is in earning a profit from their economic resources or assets on their balance sheet.

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12
Q

Give two ways a business could improve its ROA.

A

**Strategies could include: **
1. Renegotiate with existing supplier to secure a cheaper price for supplies/materials
2. Change suppliers to access a cheaper price for supplies/materials
3. Buy materials in bulk in order to access a discount making materials
4. Review staff rostering in order to minimise wage expense
5. Effective marketing / advertising that will boost sales by a greater amount that the amount spent on marketing / advertising.
6. Improve service delivery in order to build positive word of mouth in the market = boost to sales

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13
Q

How could we improve ROA if net profit was to remain steady?

A

Reduce average total assets:
* Sell unproductive / idle / obsolete assets.
* Sell assets, and then lease back

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14
Q

Complete the answer…
A ROA of 2.37% indicates that the business does not use its assets efficiently to generate a profit, a strategy they could use to improve this is …

A

…to boost sales through the use of effective marketing. This would increase the business ROA by increasing the level of profit relative to the assets used by the business as sales revenue is increased at a faster rate than expenses.

Another option would be to sell idle assets and this will improve the ROA by reducing the average total assets in the business without getting rid of assets that contribute to the generation of revenue.

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15
Q

What is cash in a business context?

A

In a business context, cash refers to physical currency, coins, and funds in a company’s bank accounts that can be used for transactions and payments to assist with the day-to-day running of the business.

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16
Q

What is profit in a business context?

A

Profit is the financial gain a business makes after deducting all its expenses from its revenue. It represents the net income or earnings generated by the business.

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17
Q

How is cash different from profit?

A

Cash is the actual money a business has on hand, while profit is a measure of the business’s financial performance and is calculated based on its income and expenses.

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18
Q

Can a business have cash without making a profit?

A

Yes, a business can have cash on hand even if it’s not profitable. This can occur when the business receives loans or investments, or if it collects money from customers before incurring expenses.

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19
Q

Can a business make a profit without having much cash?

A

Yes, a business can make a profit on paper by generating more revenue than it incurs in expenses, even if it has limited cash due to ongoing expenses or debt payments.

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20
Q

How do expenses affect cash and profit differently?

A

Expenses reduce profit when they are incurred, but they may not immediately impact cash flow if they are paid at a later date.

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21
Q

What happens when a business generates a profit?

A

When a business generates a profit, it means that it has earned more money than it has spent on operating costs and expenses.

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22
Q

How can a business increase its profit while managing its cash flow effectively?

A

To increase profit while managing cash flow, a business can focus on strategies like controlling expenses, increasing sales revenue, and optimizing its operations to ensure it operates profitably while maintaining sufficient cash reserves.

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23
Q

A cash surplus is…

A

An increase in the Net Cash Position = Cash Surplus (i.e. Cash receipts > cash payments so we have more cash coming into the business than go out)

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24
Q

A cash deficit is…

A

A decrease in the net cash position = Cash Deficit (i.e. Cash payments > cash receipts so we have more cash leaving the business than coming in.)

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25
Q

Which financial report allows is to monitor our Net Cash Position/Closing Bank Balance?

A

Statement of Receipts and Payments.

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26
Q

The Statement of Receipts and Payments is a consolidated report based on the data from which two journals?

A

Cash receipts journal
Cash payments journal

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27
Q

T/f - The Statement of Receipts and Payments helps a business to calculate its profit or loss.

A

False - only the Income Statement calculates profit or loss.

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28
Q

What is the structure for a Cash vs. Profit exam question?

A

Structure:
1. Cash and Profit are two different measures of performance.
2. Net profit is revenues earned minus expenses incurred, whilst net cash is cash receipts minus cash payments. There are some items that will impact net profit but not net cash and vice versa.
3. One example is …
4. Another example is …

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29
Q
A
30
Q

What is revenue?

A

An increase in assets or reduction in liabilities that leads to an increase in owner’s equity (except for a capital contribution)

31
Q

What is an expense?

A

An expense is a decrease in assets (or increase in liabilities) that reduces owner’s equity (except for Drawings).

32
Q

What is the purpose of an income statement?

A

To calculate whether the business has made (or is predicted to make) a profit or a loss.

33
Q

What are the most common types of revenue?

A

Fees, sales and interest on investments

34
Q

What are the most common types of expenses?

A

Advertising, electricity, wages, rent, insurance, interest on loan

35
Q

T/f - Inventory is an expense.

A

False - Inventory is not classified as an expense because it represents goods or products that a business has purchased but has not yet sold.

Expenses are costs incurred in the process of generating revenue, and they are typically recognised on the income statement when they are consumed or used up in the normal course of business operations.

36
Q

T/f - Capital contribution is a revenue.

A

False - A capital contribution is not classified as revenue because it represents funds or assets that an owner or investor injects into a business. Revenue, on the other hand, is income earned by the business through its primary operations, such as selling goods or providing services to customers.

37
Q

T/f - GST Settlement is an expense.

A

False - A GST (Goods and Services Tax) settlement is not classified as an expense because it involves the collection and remittance of taxes on behalf of the government, rather than representing a cost incurred in the normal course of business operations.

38
Q

T/f - Wages are an expense.

A

True - Wages are classified as an expense because they represent the compensation paid by a business to its employees for their labor and services. These payments are considered a cost of doing business because they are necessary to support the company’s operations and generate revenue.

39
Q

If an income statement indicates that the business has made a loss, what are the two things they should do next month?

(to increase the liklihood that they will make a profit)

A

Increase revenues.
Reduce expenses.

40
Q

Give two possible ways a business could increase its revenue.

A
  1. Increase sales through the use of effective advertising.
  2. Increase inventory mix/offer a wider variety of products.
  3. Offer complimentary products (e.g. selling helmets, locks and lights as well as bikes)
41
Q

Give two possible ways a business could reduce its expenses.

A
  1. Reduce the amount of staff during quieter times of the week (reducing wage expense)
  2. Source cheaper supplies/switch suppliers
  3. Buy supplies in bulk to get a better price per unit.
  4. Renegotiate loans to repay over a longer period to reduce repayments.
42
Q

An income statement falls under which section of the accounting process?

A

Reports

43
Q

The formula for net profit is…

A

Revenue - Expenses

44
Q

T/f - Drawings will reduce the level of profitability.

A

True - Drawings lead to a reduction in profit because they represent withdrawals of funds or assets by the owner(s) from the business for personal use.

When an owner takes money or assets out of the business, it doesn’t contribute to the company’s revenue or cover its expenses, which are the typical components that determine profit.

45
Q

What is the formula for Net Profit Margin?

A
46
Q

What is the NPM for this business?

A

23.49%

47
Q

Revenue is…

A

An increase in assets or reduction in liabilities that leads to an increase in owner’s equity (except for a capital contribution).

48
Q

Expenses are…

A

Expense is a decrease in assets (or increase in liabilities) that reduces owner’s equity (except for Drawings)

49
Q

Examples of revenues include…

A

Sales
Fees
Interest earned/received

50
Q

Examples of expenses include…

A

Electricity
Interest on loan
Advertising
Rent
Inventory of supplies
Wages
Insurance

51
Q

In the context of the Accounting Equation, an increase in Expenses will…

A

Decrease the amount of Owners Equity (as it will likely decrease Net Profit)

52
Q

In the context of the Accounting Equation, an increase in Revenue will…

A

Increase the Owners Equity (as it will likely increase Net Profit)

53
Q

When explaining expenses we use the terms…

A

“Consumed” or “Used Up”

54
Q

T/f - Petrol is an expense.

A

True - Petrol is an expense as once it has been consumed there is no lasting benefit and therefore must be paid again.

55
Q

T/f - Purchase of inventory is an expense.

A

False - Purchasing inventory will not impact the Owners Equity. It will lead to a decrease in bank and an increase in the value of inventory (both assets) - the lasting benefit will be realised when the inventory is sold/converted to cash.

56
Q

T/f - A bakery selling off an old oven is a revenue.

A

False - selling off an old oven is not considered an “ordinary business activity”

E.g. A regular business activity for a bakery would be selling cakes, bread, etc.

Selling an old oven would be considered irregular and would only be recorded as a Cash Receipt.

57
Q

T/f - Cash receipts will always be revenues.

A

False - An item can be a cash receipt BUT NOT a revenue.

58
Q

T/f - A revenue will always be a cash receipt.

A

True - Any revenue item will also be a cash receipt.

59
Q

T/f - An expense will always be a cash payment.

A

True - Any expense will also be recorded as a cash payment.

60
Q

T/f - All cash payments are expenses.

A

False - not all cash payments are expenses. (e.g. Drawings, purchases of assets, etc.)

A cash payment will only be classified as an expense if it impacts the Owners Equity.

61
Q

What is the link between Revenues & Expenses and Net Profit?

A

Net profit increases if:
Revenues increase
Expenses decrease

Net profit decreases it:
Revenues decrease
Expenses increase

62
Q

The formula for Net Profit is…

A

Revenues - Expenses

63
Q

Cash payments are recorded in the…

A

Cash receipts journal

64
Q

Cash payments are recorded in the…

A

Cahs payments journal

65
Q

After being recorded in the CRJ and the CPJ, the totals are transferred to which report?

A

Statement of Receipts and Payments (SoRP)

66
Q

What is the purpose of the Statement of Receipts and Payments?

A

To calculate the Cash Surplus/Deficit and Closing Bank Balance

67
Q

How do you calculate Cash Surplus/Deficit?

A

Cash Receipts - Cash Payments

68
Q

What is the name given to the headings of each column in the CRJ and CPJ?

A

Classification columns

69
Q

What is the name given to the classification column used for infrequent receipts and payments?

A

Sundries

70
Q

In the SoRP, how are the Sundries to be recorded?

A

Sundries should be recorded individually rather than reporting a single “Sundries” total.

71
Q

T/f - The total amount of the transaction always goes in the “Bank” column.

A

True - the total goes in Bank, then the amount is split up in the classification columns.

E.g. Purchase of cleaning supplies for $550.
Bank = $550
Cleaning supplies = $500
GST = $50

72
Q

T/f - The GST column is for recorded GST Paid or GST Received only.

A

True - some items that appear in the CRJ and CPJ do not attract GST because they are not goods or services.

E.g. Drawings, capital contribution, interest, wages

Y10 - Accounting (19 decks)

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