WACE GRIND

Question 1

Importance of cash flow statements

Answer 1

• Can be used to predict future cash flows.
• Checks the accuracy of past assessments of future cash flows.
• Can be used to compare the operating performance of different entities.
• Evaluates changes in net assets, financial structure and the ability of an entity to adapt to changing circumstances and opportunities.

Question 2

Corporations Act 2001

Answer 2

1. Defines and gives legal existence to a company.
2. Sets out the duties of company directors.
3. Sets out external audit requirements of a public company.
4. Sets out and defines different company types permitted to exist under the act.
5. Requires that financial reports for public and large proprietary companies must comply with AASB Accounting Standards.

Question 3

Duties of directors

Answer 3

1. Must carry out their duties with reasonable care and diligence.
2. Must act in the best interest of the company.
3. Must not make improper use of their position/information to gain an advantage for themselves or others.
4. Must ensure that the company don’t trade while insolvent.

Question 4

Stability ratios

Answer 4

Measure the long term survival prospects of a business based on the extent of borrowings of a business.
Highly geared = higher interest rates and repayments = higher risk.

Question 5

Times interest earned

Answer 5

The number of times interest can be covered by profit before tax.
Between 3 and 4 is a good safety margin.

Question 6

Profit margin

Answer 6

Shows the percentage of profit after income tax contained in each dollar of sales.
An increase: decrease in expenses, increase in selling price or found a cheaper supplier.
A decrease: increased expenses not being passed onto consumers, increased competition.

Question 7

Earnings per share

Answer 7

Measures the amount of profit available to shareholders expressed as an amount per share. Determines the likelihood of a higher payout.
Shareholders want to see an increase.

Question 8

Price-earnings ratio

Answer 8

Measures the amount investors are willing to pay for every dollar of profit to own ordinary shares.
An increase = shareholders believe there is good future profit growth or are overconfident.
A decrease = shareholders believe there is poor future profit growth or are underconfident.

Question 9

Dividend yield

Answer 9

Measures the current returns to an investor on buying a share on the stock exchange.
Ignores capital growth or capital loss.

Question 10

Limitations on ratio analysis

Answer 10

1. Do not identify the cause of the problems.
2. Are of limited value on their own.
3. Limited disclosure of information makes it impossible to calculate some ratios.
4. Not always possible to compare ratios as different companies have different accounting policies.

Question 11

Corporate social disclosure

Answer 11

The process of communicating the social and environmental effects of an organisation’s economic actions to particular interest groups within society and to society at whole.

Question 12

Purpose of general purpose financial reporting

Answer 12

Provides financial information about a reporting entity that is useful to potential investors, lenders and other users in making decisions relating to providing resources to that entity.

Question 13

Fundamental and enhancing qualitative characteristics

Answer 13

Fundamental: relevance, materiality, faithful representation.
Enhancing: comparability, understandability, verifiability, timeliness.

Question 14

Financial reporting council

Answer 14

Supervises the work of the AASB.
- Monitors the process of adopting international accounting standards.
- Gives advice to the federal treasurer on the standard setting process.
- Gives advice to the AASB.

Question 15

Australian Accounting Standards Board

Answer 15

1. Develops accounting standards.
2. Assists in the development of international accounting standards.

Question 16

Australian Securities and Investments Commission

Answer 16

1. Administers Corporations Act and other las
2. Enforces AASB standards.

Question 17

Australian Securities Exchange

Answer 17

Ensures that companies listed on ASX follow Listing Rules.

Question 18

How does break even analysis assist businesses in making decisions?

Answer 18

• Allows managers to ascertain at what volume of production it will cover all its fixed and variable costs.
• Can assist managers to make informed decisions when evaluating short term alternatives and plans.

Question 19

Limitations of break-even analysis

Answer 19

1. Fixed expenses are not fixed forever, will increase overtime.
2. Variable costs may decrease as a business expands.
3. When a business buys bulk, may get discounts which lower variable costs.

Question 20

Costs based on behaviour

Answer 20

Variable, fixed, mixed.

Question 21

Costs based on relationship to cost objects

Answer 21

Direct, indirect.

Question 22

Costs based on treatment

Answer 22

Product, period.

Question 23

Product cost types

Answer 23

Direct material, indirect material, direct labour, indirect labour, factory overheads.

Question 24

Costs based on time

Answer 24

Sunk, relevant.

Question 25

Budget advantages

Answer 25

1. Provides a set of objectives to be met.
2. Helps identify short-term potential problems.
3. Helps co-ordinate business activites.
4. Can motivate employees to achieve the objectives set.
5. Helps a business evaluate its performance.

Question 26

Appropriate cash management

Answer 26

• Cash payments should be authorised by a senior person.
• Employees responsible for handling cash should not be responsible for recording cash entries.
• Cash should be stored in a secure location and banked daily.
• Staff should be trained in appropriate cash handling controls.

Question 27

Capital investing

Answer 27

• Measuring the returns from an investment in capital in terms of time and value of return.
• Important as involves large amounts of money, so they want to make the right decisions for the business.