Ratios And Definitions

Question 0

Net current ratio / current ratio

Answer 0

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

Question 1

Gearing

Answer 1

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

Question 2

Retained earnings

Answer 2

• from normal activities ploughed back into the company

- revenue reserve

Question 3

Materiality

Answer 3

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.

Question 4

Bonus issue

Answer 4

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.

Question 5

Return on capital employed

Answer 5

The return in relation to the total amount of money invested in the business by all providers of long term finance

OP/capital employed

Question 6

Net profit margin

Answer 6

Np in relation to revenue
For every $1 how much is kept as NP

NP/sales x 100

Question 7

Rate of stock turnover

Answer 7

On average, the number of times per annum stock is sold and replaced

COGS/ave.stock = times
Ave.stock/COGS x 365 = days

Question 8

Rights issue

Answer 8

Offered to existing shareholders at a price lower than stock market
To raise long term finance

Question 9

Profit

Answer 9

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

Question 10

Liquid capital ratio

acid test ratio

Answer 10

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

Question 11

Business entity

Answer 11

Transactions relating to the owner’s private affairs are to be kept separate from those of the business

Question 12

Debtors collection period

Answer 12

The average amount of days it takes for our TR to pay for their debts

TR/sales x 365

Question 13

GP margin

Answer 13

For expresses GP in relation to sales as a %. For every amount of sales, how much is kept as profit

GP/ sales x100

Question 14

Limited liabilty

Answer 14

Where the liability of the shareholder is limited to the value of their shares held in the company

Question 15

Matching/accruals

Answer 15

Revenue earned during an accounting period must be matched with the expenses associated with earning that revenue

Question 16

Creditors payment period

Answer 16

On average, the number of days it takes for the company to pay their creditors

Creditors/credit purchases x 365

Question 17

Overheads in relation to turnover

Answer 17

Overheads expressed as a % of revenue. For every dollar of sales, how much is paid out as expenses

Expenses/ sales x 1006

Question 18

Cash

Answer 18

The actual amount held in the bank or cash in hand

• records ALL cash transactions
• affects the balance sheet, CA/CL

Question 19

Prudence

Answer 19

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

Question 20

Monetary measurement

Answer 20

We can only record transactions is we can attach a monetary value to it

Question 21

Going concern

Answer 21

To assume that the business will continue to trade for the forseeable future

Question 22

GP mark up

Answer 22

GP expressed as a % in relation to COGS. The percentage added to the cost price to get the selling price

GP/ COGS x 100

Question 23

Revenue expenditure

Answer 23

• charged as expenses
• used up in the current acc period
• includes costs that simply maintains the assets value
• affects IS and therefore NP

Question 24

Objectivity

Answer 24

Accounting information should be factual rather than someones opinion. To use source documents as a evidences

Question 25

Consistency

Answer 25

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

Question 26

Share premium

Answer 26

A capital reserve that arises when the company issues shares at a price higher than the nominal value

Question 27

Capital reserve

Answer 27

Arises from non trading activities of the business, cannot be used for dividend purposes

SP and revaluation

Question 28

Historical cost

Answer 28

Assets should be value at cost because this is an objective valuation rather than a matter of opinion

Question 29

Capital expenditure

Answer 29

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

Question 30

Realisation

Answer 30

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

Question 31

Revenue reserve

Answer 31

Arises from normal trading activities. Can be used for dividends.

Retained earnings, general reserves