Theory Flashcards
Explain the term Capital Expenditure and give an example
Explanation:
Money spent on acquiring, improving and installing non-current assets
Example:
Purchase of premises
Explain Revenue Expenditure and give an example
Explanation:
Money spent on running the business on a day-to-day basis
Example:
Payment of wages
Explain Revenue receipts and give an example
Explanation:
Amounts received in the day-to-day trading activities from revenue and other items of income
Example:
Rent received
Suggest 2 reasons why it is possible to have a debit balance on a purchases ledger control account
- payment made in advance
- overpayment of the amount owing
Formula of the rate of inventory turnover
Cost of sales / average inventory
Suggest 2 problems when working capital inadequate
- unable to pay debts when they fall due
- unable to take advantage of cash discount (prompt payment)
Explain why the outstanding loan interest should not be credited to the loan account
- loan interest is an expense account / accrued interest is a current liability
- loan is a non current liability
Suggest 2 reason why the rate of inventory turnover decreased
- higher inventory levels
- lower sales activity
State the meaning of a contra entry in connection with control accounts and the reason such an entry is made
Meaning:
A contra entry is one which appears on the debit side of the purchases ledger control account and the credit side of the sales ledger control account
Reason: the entry is made when a sales ledger account is set off against a purchases ledger account of the same person/ business
Give 2 reasons why the sales ledger control account has a credit balance
- overpayment by customer
- payment made by customer without deducting cash discount
- goods returned by customer after payment of balance due
- payment made in advance by customer
States 1 disadvantage to the supplier when the trade payable payment period exceeds the payment period
- adversely affects liquidity position
- increase risk of bad debt
State 1 advantage to the supplier when the trade receivables collection period exceeds the payment period
- may charge interest on overdue account
- do not have to allow the customer cash discount
Formula for mark up
Gross profit / cost of sales X 100
Explain 2 factors to consider before comparing financial statements with other business’
(1 mark for point and 1 mark for development)
- business in the same trade
- business of approximately the same size
- business of the same type(eg: sole trader)
- businesses may operate different accounting policies
- statements do not show non-monetary factors
Explain why a business should consider historical cost before comparing financial statements with others
- the financial transactions are recorded at the actual cost
- because of this it is difficult to compare transactions taking place at different times
Name 4 objectives a business should consider when selecting accounting policies
- relevance
- comparability
- reliability
- understandability
Explain why the partners calculated the quick ratio as well as the current ratio
- inventory is not included in the calculation of quick ratio
- quick ratio shows the ability of the business to current liabilities from liquid assets
Suggest 2 ways in which the profit for the year could be increased
- control expenses
- increase other income
- reduce cost of manufacturing
- increase sales activity
Explain what is meant by income statement
A statement in which the profit or loss for the year is calculated
Explain the term statement of financial position
A statement showing the assets and liabilities of a business on a certain date
Explain the term non-current assets
- assets which are purchased not for resale
- assets which will be kept by the business for more than 12 months
Explain the term non-current liabilities
Liabilities which are not due for repayment within 12 months
Explain the term capital
- the amount the business owes the owner of the business
OR
- any resources provided for a business by the owner of that business
Give one example of an intangible asset
- goodwill
- patents
- trademarks
Comment on the current ratio
3.62 : 1
(CA more than CL)
- it is much higher than the “benchmark” of 2:1
- current liabilities can easily be paid from current assets
- funds are not being used very effectively
Explain why quick ratio is a better measurement of liquidity than the current ratio (2)
- inventory is excluded from the calculation of quick ratio
- inventory is not regarded as a liquid asset
Suggest 2 ways in which the rate of inventory turn over can be improved
Cost of sales / average inventory
- reduce inventory levels
- increase sales activity
Suggest 2 ways to increase gross profit margin (gross profit / revenue x 100)
- increasing selling price
- reduce trade discount allowed to customers
- find cheaper supplier
- obtain better trade discount
State why it is not possible to have a credit balance in the cash column of the cash book
It is not possible to take out more cash than is in the cash box
State 2 reasons for maintaining a petty cash book
- reduce the number of entries in the main cash book
- reduces the number of entries in the ledger
- allows the chief cashier to delegate some of the work
Explain the importance of return on capital employed
- shows the profit earned for each $100 used in the business
- the higher the percentage, the more efficiently the capital is being employed
Define cost (inventory)
Cost is the purchase of the goods plus any additional costs incurred in bringing the inventory to its present condition and position
Define net realisable value (inventory)
It is the estimated receipts from the sale of the inventory less any costs of completing or selling the goods
