Summary Flashcards
What is liquidity (solvency)?
The ABILITY of an entity to SATISFY its SHORT-TERM financial obligations.
What does RETURN ON ASSETS measures?
Measures entity’s RETURN EARNED THROUGH ITS TOTAL ASSETS
What does RETURN ON ORDINARY EQUITY measures?
Measures RETURN ON ASSETS PROVIDED BY OWNERS.
What is PROFIT MARGIN?
Measures NET PROFITABILITY for each $1 of sales
A ratio that represents the portion of sales that ends up as profit.
What is GROSS PROFIT MARGIN?
Measures GROSS PROFIT generated for each $1 of sales
A ratio that represents the portion of sales reflected in gross profit.
What is EXPENSE RATIO?
Measures the EXPENSES for each $1 of sales
What is CURRENT RATIO?
A measure of SHORT TERM LIQUIDITY; indicates an entity’s ABILITY to MEET its SHORT-TERM DEBTS from its CURRENT ASSETS.
What is QUICK RATIO?
A measure of SHORT TERM LIQUIDITY; indicates an entity’s ABILITY to MEET UNEXPECTED DEMANDS from its LIQUID ASSETS.
The ACCOUNTING ENTITY assumption is the assumption that:
a BUSINESS ENTITY IS SEPERATE/DISTINCT FROM ITS OWNERS/OTHER BUSINESSES
The ACCRUAL BASIS assumption is the assumption that:
the EFFECTS of TRANSACTIONS/events are RECOGNISED when the OCCUR
The GOING CONCERN assumption is the assumption that:
a BUSINESS will CONTINUE TO OPERATE INDEFINITELY
The PERIOD assumption is the assumption that:
the ECONOMIC LIFE of an entity can be DIVIDED into ARBITARY EQUAL TIME PERIODS.
What is CURRENT COST?
For an asset: the cash (equivalent) that would be paid for the same item today
What is a CURRENT COST?
For an asset: the cash (equivalent) that would be paid for the same item today
What is HISTORICAL COST?
An asset is recorded at the cash (equivalent) paid, or fair value of the consideration given, at the acquisition date.
What is REALISABLE VALUE?
The amount of cash (equivalent) that could be obtained currently by selling an asset in an orderly disposal.
What are the components of RECOGNITION CRITERIA?
- FINANCIAL ELEMENT’
- MEASUREMENT
- PROBABILITY
What does MEASUREMENT require?
For the AMOUNT to be RELIABLY MEASURED
What is PROBABILITY?
It is PROBABLE that the associated BENEFITS/SACRIFICE will flow INTO or OUT of the entity.
What is VERIFIABLITY?
The quality of information whereby DIFFERENT INDEPENDENT OBSERVERS would REACH CONSENSUS that a particular piece of information REPRESENTS the ECONOMIC PHENOMENA that it PURPORTS to REPRESENT.
What is an ASSET?
- a RESOURCE CONTROLLED by an entity
- resulting from a PAST EVENT
- from which FUTURE ECONOMIC BENEFITS are expected to FLOW INTO the entity
What is a LIABILITY?
- a PRESENT OBLIGATION of an entity
- arising from a PAST EVENT
- the settlement of which is expected to result in an OUTFLOW of resources embodying economic benefit
What is INCOME?
- INCREASES in ECONOMIC BENEFIT during an accounting period
- in the form of INFLOWS/ENHANCEMENTS OF ASSETS or DECREASES OF LIABILITIES
- resulting in INCREASES in EQUITY
What are EXPENSES?
- DECREASES in ECONOMIC BENEFIT during an accounting period
- in the form of OUTFLOWS/DEPLETIONSOF ASSETS or INCURRENCES OF LIABILITIES
- resulting in DECREASES in EQUITY
What is DEPRECIATION?
An ALLOCATION of a DEPRECIABLE ASSET’s DEPRECIABLE AMOUNT to reflect the CONSUMPTION/LOSS of its FUTURE ECONOMIC BENEFITS thought wear and tear/obslence
What is COMPARABILITY?
The quality of financial information that enables users to DISCERN & EVALUATE SIMILARITIES & DIFFERENCES between transactions/events, at one time/over time, for one entity/many entitities.
What is CONSISTENCY?
The notion that once a PARTICULAR ACC. POLICY/PROCEDURE has been adopted, it should NOT BE CHANGED from period to period (unless a different method provides more useful info)
What is FAITHFUL REPRESENTATION?
To be useful the information must be a FAITHFUL REPRESENTATION of the REAL WORLD PHENOMENA that it purports to REPRESENT…. the information, therefore, needs to be VERIFIABLE, NEUTRAL and COMPLETE.
What is MATERIALITY?
The extent to which information can be OMITTED/MISTATED WITHOUT MISLEADING the users.
What is RECOGNITION?
The PROCESS of INCORPORATING an item that meets the CRITERIA in financial statements
What is RELEVANCE?
The quality of financial information that INFLUENCES economic decisions by helping users to FORM PREDICTIONS, to CONFIRM/CORRECT PAST EVALUATIONS and to ASSESS the rendering accountability.
What is TIMELINESS?
The information must be AVAILABLE to the decision maker BEFORE IT loses ITS CAPACITY TO INFLUENCE decsions.
What is UNDERSTANDABILTY?
It does not mean simplicity; it is assumed that report users will have reasonable knowledge of business/economic activities & accounting.
What is DEBT RATIO?
Measures % of assets provided by creditors (and extent of gearing)
What is EQUITY RATIO?
Measures % of assets provided by shareholders (and extent of gearing)
What is CAPITALISATION RATIO?
The reciprocal of the Equity Ratio
What is TIMES INTEREST EARNED?
Measures the effectiveness of an entity to meet its interest payments on borrowings out of its current profits.
What is RECEIVABLES TURNOVER?
Measures effectiveness of collections; used to evaluate if receivables balance is excessive.
What is AVG COLLECTION TURNOVER?
Measures average number of days for an entity to collect its receivables.
What is INVENTORY TURNOVER?
Indicates the liquidity of inventory; measures the number of times inventory is sold on average during an accounting period.
Indicates the number of times average inventory has been sold during a period.
What is INSOLVENT?
Unable to pay debts when they fall due.
What is a STATEMENT OF CASHFLOWS?
A financial statement that reports the CASH FLOWS IN and OUT of an entity. Classified into operating, investing and financing activities/
What are OPERATING ACTIVITIES?
Activities associated with the provision of an entity’s goods/services.
What are INVESTING ACTIVITIES?
Activities associated with the acquisition and sale of an entity’s non-current assets and purchasing/selling of investments (that are not cash)
What are FINANCING ACTIVITIES?
Activities relating to the raising of funds for an entity to carry out its operating and investing activities (i.e. equity borrowings)
What is EQUITY?
The residual in the assets of the entity after deducting all its liabilities.
What is a STATEMENT OF FINANCIAL POSITION?
Aka: Balance Sheet - a financial statement listing assets, liabilities and equity at a specific date.
What is a TRIAL BALANCE?
A listing of all accounts in the general ledger and their debit/credit balance prepared to verify the equality of debits and credits.
What is USEFUL LIFE?
The estimated time period over which the future economic benefits embodied in a depreciable asset is expected to be consumed.
What is UNEXPIRED COST?
A cost that has not been used to produce revenue and has future economic benefits; recorded initially as an asset.
What is an EXPIRED COST?
The cost of an asset used up in producing revenue; and expense.
What are DEFERRALS?
- Assets that represent expenses paid in advance,
2. Revenues received in advance (that represent liabilities until the revenues can be recognised as earned)
What is a CARRYING AMOUNT?
Aka BOOK VALUE - the amount at which an asset is recorded in the accounts at a particular date.
What is ACCUMULATED DEPRECIATION?
The amount of depreciation that has been recorded and accumulated on the asset since it was acquired.
What are ACCRUALS?
- Expenses that have been incurred but not recorded.
2. Revenues that have been earned but not recorded.
What are ADMINISTRATIVE EXPENSES?
Expenses associated with the operations of general, accounting and personnel offices.
What is DISCOUNT ALLOWED?
An expense that represents cash discounts taken by customers on the sale of inventory. Reflected below Sales.
What is DISCOUNT RECEIVED?
Income that results from cash discounts taken by an entity on goods purchased for resale.
What are FINANCE EXPENSES?
Expenses incurred in relation to the financing of the entity, collecting debts and running credit department.
What is FREIGHT INWARDS?
A cost incurred by the buyer in transporting inventory purchases. Recorded as OPEX.
What is FREIGHT OUTWARDS?
Transport expense incurred by the seller to deliver the goods to customers. Recorded as part of COS.
What is the PERIODIC INVENTORY SYSTEM?
A system of accounting for inventory in which:
- the goods on hand are determined by a physical count, and
- the cost of sales is equal to the beginning inventory plus net purchases less ending inventory.
What is the PERPETUAL INVENTORY SYSTEM?
A system of accounting for inventory that provides a continuous and detailed record of the goods on hand and the cost of sales.
What are SELLING AND DISTRIBUTION EXPENSES?
Expenses that result from efforts to store, sell and deliver goods to customers.
What is FAIR VALUE?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction.
What is SOLVENCY?
The ability to pay debts as and when they fall due.
What is the LOWER OF COST AND NET REALISABLE VALUE?
Inventory valuation method where inventory is valued at lower of the original cost and net realisable value.
What is NET REALISABLE VALUE?
The market value based on estimated proceeds of sales less costs of production/selling/distribution.
What are DEBENTURES?
A liability representing a written promise to pay a principal amount at a specified time as well as interest at a specified rate per period/
FINANCIAL STABILITY RATIOS are a measure of
the ability to:
- continue operations in the long term, and
- satisfy long term commitments
LIQUIDITY RATIOS are a measure of
the ablity to:
- pay short term obligations
- meet unexpected demands on cash resources
What is GEARING?
The use of borrowed funds to earn a return greater than interest/dividends
