Unit 1, Area of study 2 Flashcards
Credit transaction
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
Credit sales
Create accounts receivable (a customer owes a debt to the business for goods or services sold to them on credit)
Credit purchases
Create accounts payable (a supplier who is owed a debt by the business for goods or services purchased from them on credit)
Impact of credit purchases
A: Increase supplies/materials
(Increase GST receivable)
L: Increase accounts payable
(Decrease GST payable)
OE: no effect
Impact of payment on accounts payable
A: Decrease in bank
L: Decrease in accounts payable
OE: No effect
Formula for determining accounts payable balance at the end of the reporting period
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)
Impact of credit sales
A: decrease in inventory
Increase in accounts receivable
L: increase in GST payable
OE: No effect
Impact of receipt on accounts receivable
A: Bank increase
Accounts receivable decrease
L: No effect
OE: No effect
Formula for determining accounts payable balance at the end of the reporting period
Accounts receivable balance at the start
+ Credit sales incl. GST
– Receipts from accounts receivable
= Accounts receivable balance at end
GST formula
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
Profit equation
Revenue - expenses
Revenue definition and examples
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
Expense definition and examples
Are decreases in assets or increases in liabilities that result in decreases in owner’s equity, other than drawings.
Wages, electricity, interest, rent, advertising
Earning a net profit but a cash deficit
Cash drawings
Loan repayment
Cash purchase of a non-current asset
GST settlement
Earning a net loss but a cash surplus
Capital contribution
GST received
GST refund
Loan received
Net profit VS net cash structure
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.
Benefits of preparing an income statement
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
Profitability
The ability of the business to earn a profit, measured by comparing its profit against the base, such as sales, assets or owners equity
Profitability indicators
Measures that express an element of profit in relation to some other aspects of the business performance
Formula for net profit margin
(Net profit/ net sales) x100
What does net profit margin measure
Assess expense control by calculating the percentage of net sales revenue that is retained as net profit
Expense control
Firm’s ability to manage its expenses so that they are not increasing at a faster rate than revenue is increasing
Benchmark
1) Past performance
2) Budgeted performance (KPIs)
3) Industry averages
Strategies to improve net profit margin
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)
Asset turnover formula
Net sales/ average total assets
What does asset turnover measure
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.
Improving asset turnover
Increase in sales through increase used of effective advertising (so get more out of assets)
Improve customer service
Reduce unproductive and idle assets
Return of assets formula
(Net profit/average total assets) x 100
What does return of assets mesure
A profitability indicator that asses how effectively a business has used its’ assets to earn profit
Strategies to improve return on assets
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
