Unit 2 Chapter 15: Reporting for trading firms and managing accounts payable and accounts receivable Flashcards
Accrual accounting
Calculating profit by comparing revenue earned against expenses incurred in a particular reporting period
Accounts Payable turnover
An efficiency indicator that measures the average number of days it takes for a business to pay its Accounts Payable
Accounts receivable turnover
An efficiency indicator that measures the average number of days it takes for a business to collect cash from its accounts receivable
Formula for accounts payable turnover
Average accounts payable/Net credit purchases(plus GST) X 365 = Average number of days
Formula for accounts receivable turnover
Average accounts receivable/Net credit Sales(plus GST) x365 = Average number of days
Uses of the income statement
Assess the firm’s performance
Plan for future trading activities by helping to set targets for the future
Strategies to earn more revenue
Change selling prices to generate a higher volume of sales (by decreasing prices)
Market strategically and effectively (by increasing or targeting advertising more accurately
Strategies for controlling expenses
Change inventory management practices to find a cheaper supplier/better quality inventory
Change staff management practices such as incentives to generate greater efficiency
Non financial information to consider when choosing between options for improvement
Competitors in the area
Number of sales returns
Number of customer complaints
What is accounts payable/receivable turnover compared against
Performance in previous periods
Competitors/industry average
Strategies for managing accounts payable
Develop strong relationship with supplier to access better prices
Pay early to earn discount revenue (if possible)
Strategies for managing accounts receivable
Offer discounts for quick settlement
Employ debt collection agency
