Ratios And Definitions Flashcards
Net current ratio / current ratio
The ability for the company to pay for their debts within the next year
(To pay its short term liabilities with current assets)
CA/CL
Gearing
A measure of financial risk of the company to potential lenders. Of the total funds available, how much is financed from external source.
LTL/capital+LTL
Retained earnings
- from normal activities ploughed back into the company
- revenue reserve
Materiality
The ensure that all information provided is significant to the users of the statements.
Some items have such low monetary value that its not worth recording.
Bonus issue
Shares issued free of charge to existing shareholders because the company does not have sufficient funds to pay dividends.
Uses up reserves that have built up and capitalises them. Uses capital reserves.
Return on capital employed
The return in relation to the total amount of money invested in the business by all providers of long term finance
OP/capital employed
Net profit margin
Np in relation to revenue
For every $1 how much is kept as NP
NP/sales x 100
Rate of stock turnover
On average, the number of times per annum stock is sold and replaced
COGS/ave.stock = times
Ave.stock/COGS x 365 = days
Rights issue
Offered to existing shareholders at a price lower than stock market
To raise long term finance
Profit
A calculated figure which shows excess of income over expenditure
- records ONLY revenue expenditure and revenue receipts
- included non cash items and is adjusted by BDAs
Liquid capital ratio
acid test ratio
The ability if the company to pay for their debts within the next month
(To pay ST liabilities using liquid assets eg CA-stock)
(CA - stock)/CL
Business entity
Transactions relating to the owner’s private affairs are to be kept separate from those of the business
Debtors collection period
The average amount of days it takes for our TR to pay for their debts
TR/sales x 365
GP margin
For expresses GP in relation to sales as a %. For every amount of sales, how much is kept as profit
GP/ sales x100
Limited liabilty
Where the liability of the shareholder is limited to the value of their shares held in the company
Matching/accruals
Revenue earned during an accounting period must be matched with the expenses associated with earning that revenue
Creditors payment period
On average, the number of days it takes for the company to pay their creditors
Creditors/credit purchases x 365
Overheads in relation to turnover
Overheads expressed as a % of revenue. For every dollar of sales, how much is paid out as expenses
Expenses/ sales x 1006
Cash
The actual amount held in the bank or cash in hand
- records ALL cash transactions
- affects the balance sheet, CA/CL
Prudence
To not overstate profits and overvalue assets
To recognise anticipated expense but not recognice anticipated revenue
Ensure that those who have a stake in the business are not misled into thinking that the business is doing better than it really is, so drawings and dividends are not overly distributed
Monetary measurement
We can only record transactions is we can attach a monetary value to it
Going concern
To assume that the business will continue to trade for the forseeable future
GP mark up
GP expressed as a % in relation to COGS. The percentage added to the cost price to get the selling price
GP/ COGS x 100
Revenue expenditure
- charged as expenses
- used up in the current acc period
- includes costs that simply maintains the assets value
- affects IS and therefore NP
Objectivity
Accounting information should be factual rather than someones opinion. To use source documents as a evidences
Consistency
Requires a business to apply the same accounting policies and procedures from one accounting period to another
To ensure that financial statements are prepared in the same way each year and the users of the statements can feel confident that comparisons made will
Be valid
Share premium
A capital reserve that arises when the company issues shares at a price higher than the nominal value
Capital reserve
Arises from non trading activities of the business, cannot be used for dividend purposes
SP and revaluation
Historical cost
Assets should be value at cost because this is an objective valuation rather than a matter of opinion
Capital expenditure
A resource held for more than one accounting period, so creates an NCA
- includes all costs that improve the asset and costs of buying it - transit, freight charges, wages for installing asset, legal fees, trial runs
Realisation
Revenue should only be recognised when it is certain, a sale is regarded as certain when cash has been paid or an invoice has been issued.
To record only when goods have been exchanged, so profits are not overstated
Revenue reserve
Arises from normal trading activities. Can be used for dividends.
Retained earnings, general reserves
