Term 3- Financial Reports (Theory) Flashcards
State the difference between general-purpose and special-purpose financial reports.
General Purpose Reports are used for Financial Accounting and are published externally. E.g Income Statement. Whereas Special Purpose Financial Reports are internal reports which are used for Managerial Decision Making. E.g Sales Reports
Define financial reports.
The function of financial reports is to communicate information to users in order to facilitate the decision making process.
Define cash flow ratios.
Cash flow ratios focus on the sufficiency of cash to cover cash flow need and the efficiency of the enterprise to generate cash.
State the different ratios for cash flow and a strategy to improve each of these ratios.
Cash flow to revenue ratio
Strategies
Increase the Cash Received from operating activities
Increase cash sales compared with credit sales
Introduce EFTPOS facilities
Improve credit collection
Cash Flow adequacy ratio
Strategies
Increase cash from operations
Investigate any apparent increase in cash for assets PPE, drawings or debt repayment
Long-term debt payment ratio
Strategies
Increase Cash from operations
Decrease Debt
State the cash flow ratios
Cash flow to revenue ratio
Cash Flow adequacy ratio
Long-term debt payment ratio
Strategy for Cash flow to revenue ratio
Increase the Cash Received from operating activities
Increase cash sales compared with credit sales
Introduce EFTPOS facilities
Improve credit collection
Strategy for Cash Flow adequacy ratio
Increase cash from operations
Investigate any apparent increase in cash for assets PPE, drawings or debt repayment
Strategy for Long-term debt payment ratio
Increase Cash from operations
Decrease Debt
State three interested parties of financial reports and state the decision/s which may be made by these interested parties in light of the financial reports.
Investors use financial reports to decide whether to sell, retain or increase their investment.
Lenders use financial reports to decide whether to provide, withdraw or refuse future loan requests.
Suppliers use financial reports to decide whether to stop, continue or expand credit facility.
Why do Investors use Financial Reports?
Investors use financial reports to decide whether to sell, retain or increase their investment.
Why do Lenders use Financial Reports?
Lenders use financial reports to decide whether to provide, withdraw or refuse future loan requests.
Why do Suppliers use Financial Reports?
Suppliers use financial reports to decide whether to stop, continue or expand credit facility.
Name 3 Interest Parties of Financial Reports
Investors
Lenders
Suppliers
State two accounts in the Income Statement which reflects this statement and explain why this is the case.
The accounts of Depreciation and Doubtful Debts in the Income Statement mean that the reported profit is not a true representation.
Depreciation is calculated in order to estimate the cost of a non-current asset that should be allocated to the accounting periods in which it is used to generate revenue. As a result of the accounting period assumption, depreciation is allocated to certain time periods using the matching principle. Furthermore, the value of depreciation is subjective as it varies on the method used: diminishing balance or straight line.
Similarly, Doubtful Debts is subjective. It is dependent on two general factors: perception of current economic climate and the effectiveness of credit policy. The calculation of Doubtful Debts is based on historical records of accounts receivable together with a perception of whether or not the economic climate is favourable or unfavourable. Furthermore, the true values of the debts that are bad will not be known till later.
Depreciation
Depreciation is calculated in order to estimate the cost of a non-current asset that should be allocated to the accounting periods in which it is used to generate revenue. As a result of the accounting period assumption, depreciation is allocated to certain time periods using the matching principle. Furthermore, the value of depreciation is subjective as it varies on the method used: diminishing balance or straight line.
