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Accounting Grade 11 > Partnerships: Chapter 6-8 > Flashcards

Partnerships: Chapter 6-8 Flashcards

1
Q

Stock turnover rate / stock on hand formula

A

Cost of sales ÷ average trading stock

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2
Q

Cost of sales ÷ average trading stock

A

Stock turnover rate / stock on hand

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3
Q

Average trading stock formula

A

Cost of sales ÷ 2

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4
Q

Cost of sales ÷ 2

A

Average trading stock

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5
Q

Stock holding period formula

A

(Average trading stock ÷ cost of sales) × 365

Or

(Average trading stock ÷ cost of sales) × 12

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6
Q

(Average trading stock ÷ cost of sales) × 365 or (Average trading stock ÷ cost of sales) × 12

A

Stock holding period

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7
Q

Average debtors collection period formula

A

(Average debtors ÷ credit sales) × 365

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8
Q

(Average debtors ÷ credit sales) × 365

A

Average debtors collection period

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9
Q

Average creditors payment period formula

A

(Average creditors ÷ credit purchases) × 365

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10
Q

(Average creditors ÷ credit purchases) × 365

A

Average creditors payment period

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11
Q

Debt : equity ratio formula (gearing)

A

Non-current assets : owner’s equity

Or

Longterm liabilities : owner’s equity

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12
Q

Non-current assets : owner’s equity or long-term liabilities : owner’s equity

A

Debt : equity ratio

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13
Q

Return on partners’ equity formula

A

(Net profit ÷ average owners equity) × 100

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14
Q

(Net profit ÷ average owners equity) × 100

A

Return on partners’ equity

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15
Q

Average owner’s equity formula

A

½ (owner’s equity at beginning of year + owner’s equity at end of year)

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16
Q

% gross profit on cost of sales formula

A

(Gross profit ÷ cost of sales) × 100

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17
Q

(Gross profit ÷ cost of sales) × 100

A

% gross profit on cost of sales

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18
Q

% gross profit on sales (TO) formula

A

(Gross profit ÷ sales) × 100

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19
Q

(Gross profit ÷ sales) × 100

A

% gross profit on sales (TO)

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20
Q

% operating profit on sales formula

A

(Operating profit ÷ sales) × 100

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21
Q

(Operating profit ÷ sales) × 100

A

% operating profit on sales

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22
Q

% net profit on sales formula

A

(Net profit ÷ sales) × 100

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23
Q

(Net profit ÷ sales) × 100

A

% net profit on sales

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24
Q

% operating expenses on sales formula

A

(Operating profit ÷ sales) × 100

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25
Q

(Operating profit ÷ sales) × 100

A

% operating expenses on sales

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26
Q

Current ratio formula

A

Current assets : Current liabilities

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27
Q

Current assets : Current liabilities

A

Current ratio

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28
Q

Acid test ratio formula

A

(Current assets - inventory) : Current liabilities

Or

(Trade and other receivables + cash) : Current liabilities

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29
Q

(Current assets - inventory) : Current liabilities
or
(Trade and other receivables + cash) : Current liabilities

A

Acid test ratio

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30
Q

Inventory formula

A

Trading stock + consumables on hand

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31
Q

Trading stock + consumables on hand =

A

Inventory

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32
Q

Solvency ratio formula

A

Total assets : total liabilities

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33
Q

Total assets : total liabilities

A

Solvency ratio

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34
Q

Capital applied formula

A

Owners equity + long-term liabilities

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35
Q

Owner’s equity + long-term liabilities =

A

Capital applied

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36
Q

Define the analysis and interpretation of financial statements

A

It is an evaluation process, aimed at evaluating the current and previous financial position and results of the business.

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37
Q

What is the primary purpose of the analysis and interpretation of financial statements?

A

To make informed decisions and estimates about the future position and results of the business.

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38
Q

Give three limitations of financial impact

A
  • financial statements are historical documents
  • inflation isn’t taken into account
  • other information, such as technological changes, changes in consumer preference, economic environment, tendencies in the business sector and changes in the business, should also be taken into account
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39
Q

List and explain three external users of financial statements

A
  • Investors are interested in the profitability and financial position and stability of the business.
  • Short-term credit providers are interested in the liquidity of the business; in other words, their ability to settle short-term obligations.
  • Long-term credit providers will be interested in the solvency ratio; in other words, whether the business is financially healthy and has enough security.
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40
Q

List and explain two internal users of financial statements

A
  • Management will analyse and interpret financial statements in order to determine if all sections were run effectively. They will also use these figures for future planning.
  • Internal financial analysts provide information to management for decision-making purposes
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41
Q

What is the analysis of financial information?

A

It includes the further investigation and processing of this information to provide specific information to a decision maker

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42
Q

What is the interpretation of financial information?

A

It includes determining the reasons for the financial situation and the results it might imply in the future

43
Q

List and explain four basic measuring standards of financial results

A
  • a target, pre-calculated standard or budget
  • historical information of the business (current figures can be compared to previous years’)
  • figures from similar businesses / businesses in the same business sector
  • empiric accepted standards (include the experience and background of the analyst themself)
44
Q

What is stock turnover rate used for?

A

It is used to determine how often stock is replenished or purchased and will be compared to previous year’s figures as well as to some of the business’s objectives.

45
Q

Why do businesses use the stock turnover rate formula?

A
  • Increase in stock TO rate has a positive effect on the business liquidity
  • It helps to check stock-control policy, operating efficiency and sales volume moving out of the business.
46
Q

What is the stock holding period?

A

The number of days’/months’ stock on hand will vary from one business to the next, depending on the type of business and products they sell

47
Q

What should a business be careful of when holding stock?

A
  • Too much stock on hand can lead to over-investment in stock, which has a negative effect on the liquidity of the business. A business should also be careful of stock becoming obsolete or old
  • Too little stock on hand can have a negative effect on sales, when customers rather purchase from competitors because their stock is more readily available.
48
Q

What is average debtors collection period?

A
  • roughly shows how often debtors are turned into cash
  • how long debtors take to settle their debt
  • a business should try to collect debtors within 30 days
  • figure is compared to the previous financial year
49
Q

How do you improve credit control?

A

A decrease in the debtors collection period

50
Q

List three ways to improve the collection of debtors

A
  • screening new debtors
  • charging interest
  • setting credit limits
51
Q

What is the average creditors payment period?

A
  • shows how long it takes the business to pay creditors
  • a business should negotiate a 60-90 day payment period with creditors
52
Q

Why should a business ensure that creditors are paid on time?

A
  • to prevent interest charged on overdue accounts
  • an increase in the amount of days a business takes to pay creditors could indicate that the business has liquidity problems
53
Q

What is the debt : equity ratio for?

A
  • it gives an indication of how the business is financed
  • a business that relies mainly on own capital is seen as low-risk and obtains loans more easily
  • a business with a ratio under 0.5 : 1 is low-geared and credit worthy, while business with a ratio above 1 : 1 is high-geared
54
Q

What is own capital?

A

Capital provided by the partners

55
Q

What is foreign capital?

A

Funds borrowed from other institutions

56
Q

What is return on owner’s equity formula for?

A
  • gives an indication of how much return the owners earned on the capital they invested in the business
  • allows the owners to compare the rate of return in the business woth the rate of return on alternative investments, such as a fixed deposit
57
Q

List three factors that could influence the return on partners’ equity

A
  • how long the business has been running
  • the current economic climate
  • whether the owner increased their capital during the year
58
Q

State three guidelines that should be followed when commenting on a ratio:

A
  • state whether ratio has increased or decreased in comparison to the previous year and quote figures
  • state the possible reasons for the increase or decrease
  • reach a conclusion on the company’s performance (it’s liquidity, profitability, solvency, gearing, return on investment)
59
Q

What financial indicators are used to interpret profitability?

A
  • % GP on COS
  • % GP on TO
60
Q

What financial indicators are used to indicate efficiency?

A
  • % OP on TO
  • % NP on TO
  • % OE on TO
61
Q

What financial indicators are used to indicate liquidity?

A
  • current ratio
  • acid test ratio
  • rate of stock turnover
  • no. of days’/months’ stock on hand
  • debtors collection period
  • creditors payment period
62
Q

What financial indicators are used to indicate solvency?

A

Solvency ratio

63
Q

What financial indicator is used to indicate risk?

A

Debt : equity ratio

64
Q

What financial indicators are used to indicate return?

A
  • return on owner’s equity
  • % earnings by partner
65
Q

Reasons for profitability being below the expected profit margin

A
  • discount was allowed on sales to increase TO
  • mistakes were made calculating prices in source documents or entries in the books
  • strong competition pushed SP down
  • suppliers increased prices, thereby increasing CP
  • normal stock losses were incurred, including theft (periodic stock system)
66
Q

Define entity

A

An entity is any business that does transactions and runs a business. They can buy and sell goods/deliver services and aim to either make a profit or serve the community but not make a profit

67
Q

Define sole trader

A

A business run by only one owner; no strict laws on how the accounting records should be presented

68
Q

Define partnership

A

Similar to sole trader except run by more than one owner; profits and losses are shared according to partnership agreement

69
Q

Define close corporation

A

CC is a legal entity and regulated by law on Close Corporations. Profits are distributed to members as profit sharing and is run by its members

70
Q

Define company

A

A company has strict regulations on how financial statements should be presented according to the Companies Act and is a legal entity. According to law, a company should be audited annually by an external auditor and can be private or public. The shareholders receive dividends and the business is run by directors

71
Q

Define not-for-profit organizations

A

Clubs are not-for-profit organizations and provide facilities and enable members to take part in sport or other community recreation activities

72
Q

Characteristics of a sole trader

A
  • one owner
  • one capital account
  • one drawings account
  • NP is posted from Profit and Loss account to Capital account
  • drawings account is closed off to Capital account at end of financial year
  • Capital account balance will vary each year as NP is added and drawings deducted
73
Q

Characteristics of partnership

A
  • minimum of 2 partners
  • Capital account for each partner
  • drawings and current account for each partner
  • NP is posted from Profit and Loss account to Appropriation account, where it’s shared amongst partners according to partnership agreement
  • drawings account is closed off to current account of each partner at end of financial year
  • balance of Capital account will only vary/change if partner increases or decreases their capital
74
Q

What is a partnership agreement?

A

A partnership is a legal relationship, arising from an agreement between two or more people. Agreement between partners can be verbal, but should preferably be in written form, known as partnership agreement.

75
Q

Partnership agreement should contain:

A
  • names of partnership and partners involved
  • business aim and product/service provided
  • amount of capital, work, labour, knowledge, skills, goodwill each partner will contribute to business
  • each partner’s portfolio; in other words, a specific job description for each partner
  • to which extent the partners will be liable for debts or losses
  • ratio according to which NP is shared among partners
  • any other stipulations with regards to changes in capital, drawings, retirement, withdrawal from the partnership
76
Q

Meaning of an active partner

A
  • makes contribution in the form of capital, labour, skills
  • physically works for partnership
  • is known to public
  • is fully liable for debts or losses
77
Q

Meaning of a sleeping partner

A
  • makes contribution in the form of capital, labour, skills
  • no longer physically works for business (often retired)
  • is known to public
  • is fully liable for debts or losses
78
Q

Meaning of anonymous partner

A
  • makes contribution in form of capital, labour, skills
  • doesn’t physically work for business
  • isn’t known to public
  • is fully liable for debts or losses
79
Q

Meaning of Commanditarian partner

A
  • makes contribution in form of capital
  • doesn’t physically work for business
  • isn’t known to public
  • liability is limited to amount invested by partner
80
Q

Meaning of limited partner

A
  • makes contribution in form of capital
  • physically works for business
  • is known to public
  • liability is limited to amount invested by partner
81
Q

Meaning of Quasi-partner

A
  • has provided capital to business in form of loan, on which business pays interest at rate that varies according to NP generated
  • doesn’t physically work for business
  • isn’t known to public
  • liability is limited to amount invested by partner
82
Q

Advantages of partnership

A
  • relatively easy to form
  • bigger capital amount
  • more talent
  • competition is limited
83
Q

Disadvantages of partnership

A
  • unlimited liability
  • lack of continuity
  • behaviour and attitude of 1 partner could negatively influence entire business
  • each partner had power to bind business contractually but partnership is liable for any contracts signed as a whole
  • arguments could affect trust relationship and smooth running of business
84
Q

Why does each partner have their own Capital account?

A
  • amount of capital contributed by each partner could have an effect on profit sharing
  • partners won’t be able to change Capital contributions at will, partnership agreement will stipulate capital provided by each partner
  • if partners want to increase or decrease their capital contribution, partnership agreement will be redrafted
  • not possible to close off NP and Drawings to Capital accounts, so for a partnership we use a current account to close off net profit and drawings
85
Q

What are the two steps used in the distribution of net profit?

A
  • primary distribution
  • final/secondary distribution
86
Q

How to calculate primary distribution

A

Salary + bonuses + interest on capital

87
Q

How to calculate final distribution

A

Profit and loss (NP) - primary distribution

88
Q

List the accounting cycle

A
  1. Source documents
  2. Supplementary journals
  3. Posting to ledgers
  4. Pre-adjustment trial balance
  5. End-of-year adjustments
  6. Post-adjustment trial balance
  7. Closing transfers and final accounts
  8. Post-closing trial balance
  9. Financial statements
89
Q

What is a prepaid expense?

A

An amount that has already been paid in the current financial year, but the expense relates to the next financial year; in other words, an expense that is paid in advance

90
Q

What is an accrued expense?

A

An amount that relates to the current financial year, but will only be paid in the next financial year, the expense is accrued using a journal entry. This entry is reversed in the next financial year when the expense is actually paid

91
Q

What is accrued income?

A

An amount that was earned in the current financial year but has not yet been received. To show this income in the correct financial year, the income is accrued using a journal entry. This entry is then reversed in the next financial year when the income is actually received

92
Q

What is Income received in advance?

A

An amount that has already been received during the current financial year, but relates to an income that’s only going to be earned during the next financial year

93
Q

What is provision for bad debts?

A

A negative asset

94
Q

Simple interest formula

A

A = P (1 + i.n)

Final amount = original amount (1 + interest rate . number of periods)

95
Q

Compound interest formula

A

A = P (1 + i)^n

96
Q

Steps included in final accounts

A
  1. Closing transfers
  2. Trading account (TO-COS=GP)
  3. Profit and Loss account (GP+other income-expenses=NP)
  4. Appropriation account
97
Q

Steps in closing transfers

A
  1. Close off debtors allowances to Sales
  2. Close off sales and COS to trading account
  3. Calculate GP in trading account
  4. Transfer GP from trading account to Profit and Loss account
  5. Close off all income to credit side of Profit and Loss account
  6. Close off all expenses to debit side of Profit and Loss account
  7. Calculate NP in Profit and Loss account
  8. Transfer NP to Profit and Loss account to Appropriation account
  9. Close off Drawings accounts to Current accounts
98
Q

Qualitative properties of financial statements

A
  • intelligibility (information should be intelligible to users)
  • applicability (users should be able to use information for decision-making purposes)
  • reliability (information is reliable if it’s free from mistakes and is unbiased, prudent and complete)
  • compatibility (business should be able to compare statements from 1 year to the next. Similar entities should be able to compare statements to evaluate performance)
99
Q

Reasons financial statements are used

A
  • partners use it to see how the business has fared and what the business status is
  • credit providers and the bank use it to see whether the business will be able to repay a loan and whether it’s creditworthy to grant overdraft facilities
  • SARS use it for tax purposes
  • auditor uses financial statements to ensure sound GAAP is applied
  • possible buyer will want to see statements to determine whether its a good buyer and to find out whether SP is justified
100
Q

List three components of financial statements

A
  • income statement
  • balance sheet
  • statement of change in owner’s equity
101
Q

Equity formula

A

Assets - liabilities

102
Q

Equity formula

A

Assets - liabilities

103
Q

Subcategories of equity

A
  • drawings
  • income
  • capital
  • expenses

(DICE affects owner’s equity)

Accounting Grade 11 (4 decks)

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