Test2 Flashcards
Working Captial
It is the excess of Current Assets over Current Liabilities
Represent net resources managers have to work with in day-to-day operations
Not enough working capital = not enough liquidity
Too much working capital = not putting resources to best use
Working Capital Formula
Working Capital = Current Assets - Current Liabilities
Working Capital Cycle
Cash
Suppliers
Inventory
Customers
A Business’ Cash Includes
Money on hand
Deposits in cheque and savings accounts
Cheques and credit card invoices from customers not yet deposited
Controls over cash receipts
Businesses use internal control procedures for cash receipts to ensure that it properly records the amounts of all cash receipts in the accounting system
Why do Business’ use internal control procedures?
Used for cash receipts to ensure that it properly records the amounts of all cash receipts in the accounting system.
Three control procedures for cash sales
- Proper use of a cash register
- Confirming the identity of the customer
- Matching the total amounts collected against the totally cash register tape at the end of each employee shift.
Basic rule for internal control over payments
To have all payments authorised before being made
Petty cash fund
A petty cash fund is a specified amount of money under the control of one employee. Used for making small cash payments for the business
Accounts receivable
Are the amounts owed to a business by a customer from a previous credit sale
Accounts receivable - an allowance for doubtful debts
Internal controls over accounts receivable
Determining that a customer is likely to pay before allowing them to buy on credit.
Monitor the accounts receivable balances of its customers, monitoring its total accounts receivable balances of its customers, monitoring its total accounts receivable balance.
Inventory internal controls
Merchandise being held for resale. Internal controls:
Controlling the ordering and acceptance of inventory deliveries
Establishing physical controls over inventory while the inventory is being held for sale
Periodically taking a physical count of its inventory to ensure its accurate inventory records
Specific identification method
Allocates costs to cost of goods sold and to ending inventory.
It assign to a each unit sold and to each unit in ending inventory the cost to the business of purchasing that particular unit
Other methods include FIFO and Average cost
Accounts payable
Are the amounts a business owes its suppliers for credit purchases of inventory and supplies
Accounts payable controls
Establishing control over who can obligate the business
Establishing controls over payments
Monitoring the total amount of accounts payable
Current Ratio Formula
Current Assets / Current liabilities
Shoes the ability fo the firm to meet obligations in the ordinary course of business
Working Capital Ratios
Need to examine within context asn also make up of working capital
Based on unlikely scenario of liquidation of company
Need to have comparative data
Why is the income statement important?
A business’ income statement plays a key role in the decision making process of the users by communicating the business revenues, expenses and net income (or net loss) for a specific time period
Sales revenue
Whether a customer buys goods on cash or on credit, retail business’ use a Sales Revenue (or sales) account to record the transaction
Sales policies
Business may have serval policies related to the sales of their goods or services:
Discount policies
Sales return policies
Sales allowance policies
Discounts
A quantity (or trade) discount is a reduction in the sales price of a good or service. Given at the point of sale. A sales discount is a percentage reduction of the invoice price if the customer pays the invoice within a specific time period
Sales Returns
A sales return occurs when a customer returns previously purchased merchandise
Sales Allowance
Occurs when a customer agrees to keep the merchandise and the business refunds a portion of the original sales price. This may be granted because of quality issues
Credit Memo
Is a business document that list the information for a sales return or allowance
Cost of Goods Sold
One of the major expenses for a retail business. Classified income statement shows this expense as the COGS
How a retail business calculates the amount depends on the type of inventory system it uses.
Perpetual Inventory system
A perpetual inventory system keeps a continuous record of the cost of inventory on hand and the cost of inventory sold.
Periodic Inventory System
Doesn’t keep a perpetual record of the inventory on hand or sold, but determines the inventory at the end of each accounting period by physically counting it and then putting value on it
Measuring Inventory
Net realisable Value (NRV) is defined as the estimated selling price in the ordinary course of the business less the estimated cost of completion and the estimated cost necessary to make the sale
Operating Expenses
Are the expenses that a business incurs in its day to day operations
Uses of the income statement for evaluation for investors
Investors use the income statement to help judge their return on a investment
Uses of the income statement for evaluation for creditors
Use the income statement to help make a loan decision.
Evaluate business risk, operating capability and financial flexibility
Ratios
Ratio analysis is where an item on the business financial statements is divided by another related item. They are used to compare a business performance with previous periods and with other business
Profit Margin Formula
Profit Margin = Net Income / Net Sales x 100
Profit Margin
Shows the proportion of sales which is left over after deducting all expenses
Indicates how well a business is controlling its expenses in relation to sales
Sales Percentage Formula
Sales Percentage = (net sales current year - net sales last year) / net sales last year x 100
Gross Profit Percentage Formula
Gross Profit % = gross profit / net sales x 100
Indicates how much a trader makes on the goods he buys for resale which shows how efficient the trader is at buying and/or selling
The balance sheet
Helps users understand the financial heath of a business at a specific date. Business prepares a balance sheet at the end of each accounting period
Basic accounting equation
Assets = Liabilities + owners equity
Assets
Are an economic resource that will provide future benefits to the business. Some are physical in nature, eg land, and also include inventory that the business expects to sell to its customers
Current Assets
Assets that the business expects to convert into cash, sell or use up within one year
Liabilities
Are a business’ economic obligation. The external parties to whom a business owes economic obligation are their creditors.
Current Liabilities
Are obligations that business expects to pay within one year
Owners equity
Owners equity is the owners current investment in the assets of the business
Internal users using balance sheet for evaluation
CEO—— divisional managers
External users using balance sheet for evaluation
Creditors.
Short term creditors
Short term liquidity
Long term creditors
Investors using balance sheet for evaluation
Institutional investors
Pension fund
Stable earnings, stable dividend
Hedge fund
Governments using balance sheet for evaluation
Tax
Property plant and equipment
Evaluating liquidity
Liquidity is a measure of how quickly a business can convert its assets into cash to pay their bills
Return on total assets ratio
Assets = (net income +interest expense) / average total assets
Inventory turnover formula
Inventory turnover = Cost of goods sold / average inventory
Accounts receivable turnover Formula
Accounts receivable turnover = net credit sales / average accounts receiveable
Limitations on income statement and the balance sheet
Historical cost concept
Valuable employees
Environment/nature
Shop equipment (NET)
Shown at cost (or fair value) less accumulated depreciation
Why is the cash flow statement important
It shows the changes in cash during an accounting period
It primary provides information about a business ability to remain solvent and grow
Analysing the cashflow statement provides answers to:
How much cash was provided or used by the business operating system
How much cash did the business receive or spend in investing activities
Understanding cashflow transactions
A business cash flow statement shows the inflows (receipts) and outflows (payments) during an accounting period
What would happen without a cashflow statement
All that external users would know about a business cash would be the beginning and ending cash balances.
Inflow of cash occurs when
A business receives cash from selling inventory
Receive cash from issuing a note
When an owner invests cash in the business
Outflows of cash occur
When a business pays cash to purchase inventory
Pays cash to reduce a note payable
When the owner withdraws cash from the business
The organisation of cash flow statement
Shows cash flow in three areas of operating, investing and financing activities
Cash flow direct method
The operating cash flow is subtracted from the operating cash inflow to determine the net cash
Indirect method
A business adjusts its net income to calculate the net cash flow from operating activities
Why do Businesses become more environmentally susatainable?
Improving a business reputation
Reducing costs
Strengthening communications
Improving profitability
Corporate Social Responsibility.
Calls into question the role of business in facilitating sustainable environmental and social change.
Also incorporates the public interest into business planning and decision making.
The Triple Bottom Line
TBL is a framework for measuring and reporting corporate performance against economic, social and environmental parameters.
TBL consists of economic, social and environmental impacts of business activities
TBL Economic performance
Reported in its financial report
- cash flow statement, income statement and balance sheet.
Debt to equity, return on equity, ratio of market capitalisation to book value, return on assets
TBL Environmental Performance
The amount of energy consumed Type of energy consumed Raw material usage Greenhouse gas emissions Effluent and waste Land use and management of ecosystems
TBL Social Performance
Addresses interactions between business and the community.
HRM, workplace health and safety.
Businesses don’t want to be associated with child labour etc.
The Global Reporting Initiative
The GRI is a generally accepted framework for reporting an organisation’s economic, environmental and social performance.
Three stages, Beginners, advanced and somewhere in between.
Life Cycle Analysis
LCA assess the potential and real environmental impacts during all stages of a products life.
Goal of LCA is to facilitate the design of products and services to minimise their environmental impacts.
LCA key issues
Efficiency in manufacture
Minimising use of energy
Minimising packaging
Using higher proportions of recyclable materials
Incremental Costs
Are costs increases resulting from a higher volume of activity or from the performance of an additional activity.
Capital expenditure decisions
It is a long term decision.
Whether or not to make an investment (cash payment) at the time of the decision in order to obtain future net cash receipts totalling more than the investment, return on the investment
Estimating Future cash flows
Future cash receipts only (stock, dividends etc)
Future cash receipts in excess of future cash payments
Reducing future cash payments
Estimating relevant cash flows
Relevant cash flows are future cash flows that differ, either in amount or in timing as a result of accepting a capital expenditure proposal.
Definition of Present Value
Present value is the value today of a certain amount of dollars paid or received in the future. Underlying concept is compound interest.
Present Value Formula
PV = FA / (1+i)^n PV = present value FA= future amount i= interest rate n = number of periods
Net present value method
This method considers the time value of money and involves a three step process:
- Determine the initial expected cash payment
- Determine the present value of the expected future net cash receipts.
- Determine the net present value by subtracting the amount of step 1 by step 2
