Need to remember Flashcards
Capital Terminology
Assets?
Equity?
Total capital?
Total capital?
Capital employed?
Working capital?
Assets = Liabilities + Equity
Equity = total owner investment + reserves = total capital
Total capital = Total assets – Total liabilities
Total capital = NCA + CA – CL – NCL
Capital employed = NCA + CA – CL
Working capital = CA – CL
Performance ratios - their formulas and use? (5)
Gross profit
- (𝑮𝒓𝒐𝒔𝒔 𝒑𝒓𝒐𝒇𝒊𝒕)/𝑹𝒆𝒗𝒆𝒏𝒖𝒆 x 100%
- Effectively shows the percentage of revenue that’s generated from the main trade of the organisation.
Very industry specific.
Operating profit margin
- (𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒑𝒓𝒐𝒇𝒊𝒕)/𝑹𝒆𝒗𝒆𝒏𝒖𝒆 x 100%
- Shows a measure of profit that is generated per £1 of revenue that can contribute towards tax and finance costs. Very industry specific.
Return on capital employed (‘ROCE’)
- (𝑷𝒓𝒐𝒇𝒊𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒕𝒂𝒙 𝒂𝒏𝒅 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕)/(𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔 𝒍𝒆𝒔𝒔 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔)
=
- (𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒑𝒓𝒐𝒇𝒊𝒕)/(𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅) x 100%
- Indicates how efficiently and effectively a company has utilised its assets during a period in generating profit
Asset turnover
- 𝑹𝒆𝒗𝒆𝒏𝒖𝒆/(𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅)
- Expressed as a number of times per annum
- Effectively shows the sales revenue generated for every £1 of capital employed.
- Measure of the level of activity and productivity.
Non current asset turnover
- 𝑹𝒆𝒗𝒆𝒏𝒖𝒆/(𝑵𝒐𝒏 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔)
- Expressed as a number of times per annum
- Effectively shows the sales revenue generated for every £1 of non current asset.
- Measure of the level of activity and productivity.
Financial position/ liquidity - their formulas and use? (6)
Inventory turnover
- (𝑪𝒐𝒔𝒕 𝒐𝒇 𝒔𝒂𝒍𝒆𝒔)/(𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚)
- How many times inventory is turned over in a year
Inventory days
- (𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚)/(𝑪𝒐𝒔𝒕 𝒐𝒇 𝒔𝒂𝒍𝒆𝒔) 𝑿 𝟑𝟔𝟓
- How long on average inventory is stored before it is sold
Receivables’ days
- (𝑻𝒓𝒂𝒅𝒆 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔)/(𝑪𝒓𝒆𝒅𝒊𝒕 𝒔𝒂𝒍𝒆𝒔) 𝒙 𝟑𝟔𝟓
- How long it takes on average to collect receivables
Payables’ days
- (𝑻𝒓𝒂𝒅𝒆 𝒑𝒂𝒚𝒂𝒃𝒍𝒆𝒔)/(𝑪𝒓𝒆𝒅𝒊𝒕 𝒑𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔) 𝒙 𝟑𝟔𝟓
- How long it takes on average to pay payables
Current ratio
- (𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔)/(𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔)
- Measure of extent current liabilities are covered by current assets
Quick ratio
- (𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔 𝒍𝒆𝒔𝒔 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚)/(𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔)
- Measure of ability to cover liabilities with most liquid current assets
Investment ratio’s - their formulas and use? (5)
Capital Gearing
- (𝑳𝒐𝒏𝒈 𝒕𝒆𝒓𝒎 𝒍𝒐𝒂𝒏𝒔)/(𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅)
- Gearing or leverage is relationship between fixed interest capital (debt) and total capital (debt and equity).
- Measure of financial risk
Dividend Cover
- (𝑷𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙)/(𝑬𝒒𝒖𝒊𝒕𝒚 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅)
- Measure of ability of company to pay current dividend
Interest Cover
- (𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕)/(𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒄𝒐𝒔𝒕)
- Measure of ability of company to pay current interest
Earnings per share
- (𝑷𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙)/(𝑵𝒐. 𝒐𝒇 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒔)
- Useful for shareholders to evaluate performance over time
Price Earnings Ratio
- (𝑴𝒂𝒓𝒌𝒆𝒕 𝒑𝒓𝒊𝒄𝒆 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆)/𝑬𝑷𝑺
- Reflects risk – effectively number of years taken to cover the cost of buying a share
Cash received from sale of non current assets(NCA)
P/L sale of NCA = sale proceeds - CV
Sale proceeds = CV + profit on sale (Deduct if loss on sale)
Partnership loans
- Rather than injecting money into the partnership through a capital account a partner may make a loan to the partnership at an agreed rate of interest.
- This loan is shown in the balance sheet as a non current liability
Dr Bank Cr Loan to partner (non current liability) - and interest on the loan is allowed as a normal business expense in the income statement.
Dr interest expense Cr Partners Current account
The 5 main BOPE
- Sales Day Book (SDB)
- Record credit sales and returned sales
- Purchase Day Book (PDB)
- Record credit purchases and returns
- Cash Book (CB)
- Recording bank receipts and payments
- Petty Cash Book (PCB)
- Record petty cash transactions
- Journal Book (JB)
- Record unusual and period end adjustments
Potential bookkeeping errors(4/1,2,2,1)
- Errors of omission
- Transaction not recorded (both or one side missing)
- Errors of commission
- Correct theory but error by bookkeeper - Post repairs to rent, addition or transposition error
- Errors of principle
- Dr or Cr to completely wrong account - Drawings to wages, repairs to non current asset additions
- Compensating errors
- Two unrelated errors which balance each other out
Bank reconciliations - process (4)
- Tick off items appearing in cash book and bank statement / transaction listing
- Perform the reconciliation
- Reconcile the balance per the cash book to the balance per the bank statement - Adjust for any errors or omissions
Returns inwards vs Returns outwards
Return inwards:
- Sales returns
- Goods that customers return to the seller
Debit: Sales Returns/Returns inwards Credit: Account Receivable/Cash
Return outwards:
- Purchase returns
- Goods that a company returns to its supplier
Debit: Accounts Payable/Cash Credit: Inventory or Purchases
Preference share capital
Irredeemable (3) vs Redeemable (2)
_Preference share capital_
Irredeemable (no obligation for company to buy back)
- Treat in same way as OSC
- Include in equity in SOFP, include in SOCIE
- Only account for dividends paid in the period, and then only show in
SOCIE
Redeemable (company has an obligation to buy these back)
- Treat as long term liability in SOFP, do not include in SOCIE
- Accrue for dividends in period, show as finance cost in PoL.
Double entry of revaluation reserve
Dr NCA
Cr Revaluation Reserve
What are all the financial statements and how are they titled? (7)
- Statement of financial position as at…
- Statement of profit or loss for the year ended…
- Statement of Changes in Equity for the year ended…
- Statement of cash flow for the year ended…
- Partnership Income Statement for the year ended…
- Appropriation of profit statement for the year ended…
- Partnership balance sheet as at…
