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PoA Flashcards

1
Q

What is Accounting concerned with?

A

collecting, analyzing, and communicating financial information

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2
Q

What is the quality concerned with influencing user’s decision using past and future events?

A

relevance

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3
Q

2 fundamental qualities of Accounting

A
  • faithful representation
  • relevance

only they can make information be considered useful

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4
Q

Relevance

A
  • one of fundamental qualities
  • prediction of future events and confirmation of past ones
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5
Q

Faithful Representation

A
  • one of fundamental qualities
  • 3 elements:
    completeness
    neutrality
    freedom from error
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6
Q

to be relevant..?

A

must cross a threshold of materiality

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7
Q

which quality provides assurance to users that the accounting info faithfully represents what it’s supposed to represent?

A

verifiability

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8
Q

is it harder to assess benefits or costs of accounting

A

benefits

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9
Q

generally accepted key financial objective of a business is assumed to be

A

Enhancing the wealth of the owners of the business

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10
Q

statement of financial position

A
  • Balance sheet
  • assets and claims (assets and liabilities)
  • equity
  • at a moment in time
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11
Q

profit and loss account

A
  • Income statement
  • profits and losses
  • revenues and costs (expenses)
  • over a period of time
  • statement of financial performance
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12
Q

extended accounting equation

A

assets = equity + profit/loss + liabilities

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13
Q

statement of cash flows

A

inflow and outflow of cash

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14
Q

gross profit

A

money made from selling products after subtracting costs. Doesn’t take into account taxes, rent, etc

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15
Q

overheads

A

operating expenses that are not directly tied to making the product specifically. includes rents, utilities, salaries

cost of keeping the business operating day-to-day

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16
Q

operating profit

A

gross profit - overheads

money a business makes from its core operations after deducting direct costs operations and overheads

doesn’t include non-operating costs (e.g.: loan interest)

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17
Q

Depreciation

A
  • consideration of cost, useful life, residual value, and method of depreciation
  • straight-line method - evenly depreciates. likely to maximize profit in short term
  • annual depreciation: (cost-residual)/estimated useful life
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18
Q

interest payables

A

amount a company owes for interest on loans

unpaid interest

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19
Q

carrying amount (depreciation)

A

the cost (fair value) of the asset minus the accumulated depreciation on that asset

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20
Q

expanded accounting equation

A

assets (end) = equity (start) + sales revenue - expenses + liabilities

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21
Q

asset

A

something the business owns which will bring financial benefits in the future

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22
Q

liabilities

A

amount owed by the business. obligation to pay

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23
Q

accrual

A
  • an expense has been recorded but hasn’t been paid by the time the balance sheet is prepared

trial balance figure + amount of accrual

  • report it as current liability (profit is reduced)
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24
Q

prepayment

A

payment was made before the statement but the benefit of the expense will be experienced in the following financial year

trial balance figure - amount of prepayment

  • report it as current asset (profit increases)
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25
Q

trial balance figure

A

total of all debits and credits

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26
Q

income statement structure

A

(+) sales
(-) cost of sales
= gross profit
(-) different expenses by function/kind
= operating profit
(-) financial income and expenses
= profit and financial items
(-) taxes
= net profit

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27
Q

costs of goods sold

A

costs of sales = opening inventories + purchases - closing inventories

AKA COGS (Cost of Goods Sold)

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28
Q

how to account for depreciation?

A
  • income statement as cost
  • balance sheet: as asset (net book value = initial value - accumulated depreciation)
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29
Q

legal structures of company ownership

A
  • sole proprietorship (or partnership)
  • limited company (= limited liability)
  • public limited company (Plc)
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30
Q

investment ratios

A
  • concerned with returns from, and the performance of shares
  • dividend payout ratio
  • dividend yield
  • earnings per share (EPS)
  • cash generated from operations per share
  • price/earnings ratio
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31
Q

efficiency ratios

A
  • how weak a company uses its assets and manages its operations to generate revenue
  • includes calculations of the time taken to pay suppliers
  • average inventory turnover
  • average settlement period for trade receivables
  • average settlement period for trade payables
  • sales revenue to capital employed
  • sales revenue per employee
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32
Q

financial gearing ratios

A
  • proportion of a company’s debt to its equity
  • help assess financial risk
  • shows how much of the company’s financing comes from borrowed funds
  • gearing ratio
  • interest cover ratio
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33
Q

liquidity ratios

A
  • concerned with availability of cash to meet maturing obligations (short term)
  • how easy it is for the company to turn assets into cash
  • current ratio
  • acid test ratio
  • cash generated from operations to maturing obligation
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34
Q

profitability ratios

A
  • returns from long term funds invested in the business
  • measures company’s ability to generate profit relative to its revenue, assets, or equity
  • return on shareholders’ funds (ROSF) - ROI
  • Return on capital employed (ROCE)
  • operating profit margin
  • gross profit margin
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35
Q

equity

A

value of ownership after all debts and liabilities are subracted

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36
Q

longitudinal/cross sectional

A
  • ratio analysis

longitudinal: one company over many years
cross sectional: as an example, across an industry

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37
Q

gross profit margin

A

gross profit / sales revenue x 100

  • profitability
  • measures profitability in producing and selling goods before any other expenses are taken into account
  • not influenced by how the company is financed
  • affected by changes in inventories - impacts cost of sales, thus impacting gross profit values
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38
Q

operating profit margin

A

operating profit / sales revenue x 100

  • profitability
  • how much money is left after covering operating costs
  • not influenced by how the company is financed
  • increasing administration expenses. means a falling operating profit
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39
Q

capital employed

A

total amount of money a company uses to run its business

equity + non-current liabilities

or

total assets - current liabilities

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40
Q

ROCE

A

operating profit / (share capital+reserves+non-current liabilities) x 100

  • return on capital employed
  • how much capital invested has grown during a year
  • profitability

profit margin x capital turnover (Hartman’s PP)

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41
Q

share capital

A

money a company raises by issuing shares

42
Q

reserves

A

profits made by the company - part of the ordinary shareholders’ claims

43
Q

capital turnover

A

sales / capital (equity+non-current liabilities)

44
Q

ROSF

A

profit for the period / (ordinary share capital + reserves) x 100

  • profitability
  • Return on ordinary shareholders’ funds
  • how effectively a company is using the money invested by shareholders to generate profit
  • influenced by how the company is financed - impacts denominator of ratio
45
Q

gearing ratio

A

non-current liabilities / equity

  • how much of a company’s operations are financed by borrowed money
  • looks at long-term capital structure
46
Q

current ratio

A

current assets / current liabilities (:1)

  • liquidity
  • ability to pay its short-term debts using current assets
47
Q

acid test ratio

A

(current assets - inventories) / current liabilities (:1)

  • liquidity
  • ability to pay its short-term debts using liquid assets excluding inventories
  • aka as quick ratio
48
Q

interest cover ratio

A

operating profit / interest expense

  • financial gearing
  • is the company able to pay interest on loans?
49
Q

Earnings per share (EPS)

A

profit after interest and taxes / number or ordinary shares

  • investment ratio
  • how much money the company is making for each outstanding share
50
Q

price to earning ratio (P/E ratio)

A

market price per share / earnings per share

  • investment ratio
  • shows the market’s expectations of the future earning of a business
51
Q

dividend yield ratio

A

dividend per share / price per share x 100

  • investment ratio
  • actual return that shareholders receive
52
Q

dividend cover ratio

A

profit after interest and tax / dividend paid = EPS / dividend per share

  • investment ratio (?)
  • portion of profit that is used to pay dividends. how many times a company’s earning can cover its dividend payments
53
Q

dividend payout ratio

A

dividends announced for the year / earnings for the year available for dividends x 100

  • investment ratio
  • percentage of earnings that is paid out to shareholders as dividends
54
Q

relationship between income statement and balance sheet

A

assets (end) = equity (start) + profit or loss for the period + liabilities (end)

55
Q

measuring profit

A

profit (or loss) = revenue - total expenses for the revenue

56
Q

break even point (BEP)

A

total sales revenue = total expenses

one specific point where no losses or profits are being made

57
Q

BEP extended

A

total sales revenue = fixed costs + variable costs

58
Q

contribution margin ratio

A

contribution margin ratio = contribution / sales revenue x 100

helps businesses understand how much money is available to cover fixed costs and contribute to profits

59
Q

contribution

A

selling price - variable cost

contributes to meeting the fixed costs and if there’s any excess it contribute to the profit

or:
fixed costs + profit

60
Q

volume of activity to reach target profit level

A

total sales revenue = fixed cost + variable cost + target profit

61
Q

margin (definition)

A

proportion of revenue that results in profit

62
Q

ROCE broken down

A

(operating profit/sales revenue) x (sales revenue / capital)

capital = equity + non-current liabilities

63
Q

average settlement period for trade receivables

A

average trade receivables / credit sales revenue x 365

  • efficiency ratio
  • how long credit customers take to pay the amounts they owe to the business
64
Q

average inventories turnover period

A

average inventories held / cost of sales x 365

  • average period for which inventories are being held
65
Q

proportion of current assets financed from short term sources

A

current liabilities / current assets x 100

66
Q

overtrading indicators

A
  • rapid increase in sales revenue
  • increased reliance in short term finance
  • rapid increase in current assets
  • decline in solvency and liquidity ratios
67
Q

opportunity cost

A
  • always relevant
  • normally not recorded in routine accounting processes
68
Q

irrelevant costs

A
  • all commitment costs
  • all non-differential future costs
69
Q

alternative courses of action

A
  • all past costs ignored
  • only relevant future costs taken into account
  • future costs that don’t vary with decision should be ignored
70
Q

relevant range

A

range of output which fixed costs remained fixed costs

71
Q

variable cost per unit (high low method)

A

[total cost (highest output) - total cost (lowest output)] / [units (highest output) - units (lowest output)]

72
Q

fixed cost

A

fixed cost = (Toal cost HO - units HO) x variable cost per unit

73
Q

break-even point

A

fixed costs / (sales revenue per unit - variable cost per unit)

  • graph: where total costs line crosses total sales revenue line
74
Q

margin of safety

A

distance between break-even point and maximum level of activity

expected unit sales - break even unit sales

75
Q

dividend per share

A

EPS x Dividend payout ratio

76
Q

break even sales (% of margin of safety)

A

actual sales x (1 - margin of safety/100)

77
Q

variable cost per unit (through BEP)

A

selling price per unit - contribution per unit

to get contribution per unit, rearrange BEP formula

78
Q

number of units sold (through contribution)

A

(fixed costs + profit) / contribution

79
Q

achieving a target profit

A

total sales revenue = fixed cost + total variable cost + target profit

80
Q

break even revenues

A

break even point x selling price

81
Q

formula to calculate operating profit/loss

A

[units sold x (selling price PU - variable cost PU] - fixed costs

82
Q

target quantity

A

(fixed costs + target profit) / (selling price - variable cost per unit)

83
Q

overhead absorption rate

A

total overhead costs / total output

84
Q

full costing

A
  • useful guide to long-run average costs
  • for income measurement
85
Q

ABC

A
  • activity-based costing
  • costs are allocated into cost pools
  • treats indirect costs
  • doesn’t provide relevant info for decision-makers
86
Q

budget

A
  • first to be prepared: sales budget
  • sales budget and production budget interlinks directly with finished inventories budget in manufacturing businesses
87
Q

incremental budget

A
  • based on previous periods with adjustments for inflation and activity changes.
  • simpler and consistent but can lead to inefficiencies
  • recommended for company’s operating in a stable environment
88
Q

zero based budgeting

A
  • every expense is justified from scratch every single time
  • promotes critical evaluation and eliminates unnecessary spending but it’s time consuming and complex
89
Q

activity-based budgeting (ABB)

A
  • ABC’s principles
  • based on cost-driving activities - activities needed to achieve certain goals
  • more accurate budgets
90
Q

working capital

A

current assets - current liabilities

  • funds available to cover immediate expenses and obligations
  • benefits should be weighed against the costs
91
Q

blanket rate

A

single rate/price that applies across multiple items

92
Q

capital expenditure

A

getting upgrading, or maintaining long-term assets

93
Q

overhead recovery rate

A

total overhead costs / activity level

  • allocate overheads to products
  • total overhead is independent of recovery rate
  • choice of overhead recovery rate can affect the amount of overheads charged to a particular job
94
Q

bottom up budgeting

A

starts at department level. each department creates its own budget based on needs and expectations

95
Q

top down budgeting

A

overall budget is set by top management based on the company’s goals and strategies

96
Q

cash receivable budget

A

cash receivable = opening balance + credit sales - closing balance

97
Q

investment appraisal

A

process of evaluating the profitability or value of an investment to decide if it’s worth pursuing

4 methods:
- ARR: accounting rate of return
- PP: payback period
- NPV: net present value
- IRR: internal rate of return

98
Q

payback period

A

initial investment / annual cash inflows

  • time it takes to recover the initial investment from the cash it generates
  • shorter = better
  • rough measure of risk
  • ignores cash flows AFTER the payback period
99
Q

net present value

A

cash flow x [1/(1+r)^n]

r: discounted rate (table)
n: number of periods

  • total of all future cash flows from an investment, adjusted to their value today
  • greater = better
100
Q

internal rate of return

A

discount rate that makes a project’s NPV equal to zero

greater = better

101
Q

opening cash cycle (OCC)

A

inventories turnover period + trade receivables settlement period - trade payables settlement period

102
Q

weeks OCC

A

everything - credit

everything - payables

PoA (2 decks)

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