Unit 1, Area of study 2

Question 1

Credit transaction

Answer 1

When a service is performed, or goods are exchanged by the cash relating to the transaction is not exchanged until some later date, meaning the customer owes a debt to the seller/provider

Question 2

Credit sales

Answer 2

Create accounts receivable (a customer owes a debt to the business for goods or services sold to them on credit)

Question 3

Credit purchases

Answer 3

Create accounts payable (a supplier who is owed a debt by the business for goods or services purchased from them on credit)

Question 4

Impact of credit purchases

Answer 4

A: Increase supplies/materials
(Increase GST receivable)

L: Increase accounts payable
(Decrease GST payable)

OE: no effect

Question 5

Impact of payment on accounts payable

Answer 5

A: Decrease in bank

L: Decrease in accounts payable

OE: No effect

Question 6

Formula for determining accounts payable balance at the end of the reporting period

Answer 6

Accounts payable balance at the start (from the previous balance sheet)

+ Credit purchases incl. GST (from purchase journal

– Payments to accounts payable (from cash payments journal

= Accounts payable balance at end (goes to the next balance sheet as a CL)

Question 7

Impact of credit sales

Answer 7

A: decrease in inventory
Increase in accounts receivable

L: increase in GST payable

OE: No effect

Question 8

Impact of receipt on accounts receivable

Answer 8

A: Bank increase
Accounts receivable decrease

L: No effect

OE: No effect

Question 9

Formula for determining accounts payable balance at the end of the reporting period

Answer 9

Accounts receivable balance at the start

+ Credit sales incl. GST

– Receipts from accounts receivable

= Accounts receivable balance at end

Question 10

GST formula

Answer 10

GST balance at start (+GST payable)

+ GST received
+ GST on credit sales/fees

– GST paid
– GST on credit purchases

+GST refund
OR
– GST settlement

= GST balance at end

Question 11

Profit equation

Answer 11

Revenue - expenses

Question 12

Revenue definition and examples

Answer 12

Are increases in assets or decreases in liabilities that result in increases in owner’s equity other than those relating to capital contributions.

Sales, fees, interest, dividends, rent, royalties

Question 13

Expense definition and examples

Answer 13

Are decreases in assets or increases in liabilities that result in decreases in owner’s equity, other than drawings.

Wages, electricity, interest, rent, advertising

Question 14

Earning a net profit but a cash deficit

Answer 14

Cash drawings
Loan repayment
Cash purchase of a non-current asset
GST settlement

Question 15

Earning a net loss but a cash surplus

Answer 15

Capital contribution
GST received
GST refund
Loan received

Question 16

Net profit VS net cash structure

Answer 16

Net profit and net cash are 2 different measures of performance. The net cash position is the result of subtracting cash outflows from cash inflows. Whereas, under accrual accounting, net profit is the result of revenue earned less expenses incurred. Some items impact one but not the other, and there are some items that can impact on both, however by differing amounts.

Question 17

Benefits of preparing an income statement

Answer 17

1) Aids decision-making about the firm’s operations
2) Assess whether the business is meeting revenue and expense targets/ KPIs
3) Assist in planning for future service activities, including budgeting
4) Assess the performance of management

Question 18

Profitability

Answer 18

The ability of the business to earn a profit, measured by comparing its profit against the base, such as sales, assets or owners equity

Question 19

Profitability indicators

Answer 19

Measures that express an element of profit in relation to some other aspects of the business performance

Question 20

Formula for net profit margin

Answer 20

(Net profit/ net sales) x100

Question 21

What does net profit margin measure

Answer 21

Assess expense control by calculating the percentage of net sales revenue that is retained as net profit

Question 22

Expense control

Answer 22

Firm’s ability to manage its expenses so that they are not increasing at a faster rate than revenue is increasing

Question 23

Benchmark

Answer 23

1) Past performance

2) Budgeted performance (KPIs)

3) Industry averages

Question 24

Strategies to improve net profit margin

Answer 24

1) Change suppliers (access cheaper suppliers)

2) Buy material in bulk (access lower price via discounts)

3) Review staff rostering (ensure appropriate staffing level to minimise wage expense)

4) Effective marketing (maximise sales by attracting new clients from target market)

5) Improve service delivery (improve business reputation and increase sales)

Question 25

Asset turnover formula

Answer 25

Net sales/ average total assets

Question 26

What does asset turnover measure

Answer 26

An efficiency indicator which measures how productively a business has used its assets in the generation of sales revenue

Measure the number of times in the period the value of assets is earned as sales revenue.

Question 27

Improving asset turnover

Answer 27

Increase in sales through increase used of effective advertising (so get more out of assets)

Improve customer service

Reduce unproductive and idle assets

Question 28

Return of assets formula

Answer 28

(Net profit/average total assets) x 100

Question 29

What does return of assets mesure

Answer 29

A profitability indicator that asses how effectively a business has used its’ assets to earn profit

Question 30

Strategies to improve return on assets

Answer 30

Increase net profit:
1) Review distribution channels (invest in a more effective website to boost online sales)
2) Use of more effective advertising
3) Maintain expense control
4) Reduce expense

Recuse assets by selling off idle or obsolete assets