Week 2 Flashcards
Assets =
Liability + Equity
What is Double-entry bookkeeping?
Enter each transaction twice as a credit and then debit
Financial Accounting
EXTERNAL
- Annual reports of the company’s situation
- Publichsed to shareholders and the public
- Must be audited
- Used by investors to make investment decisions
Management Accounting
INTERNAL
- More up to date information
- Typically has company confidential information
- Used to monitor and measure performance
- Supports decision making
IFRS
International Financial Reporting Standard
Market Capitalisation
Share price X number of shares
Earnings Per Share
Profit divided by number of shares
Prices Earnings Ratio
Profit divided by Market Cap
Beta
Volatility compared to rest of market
What should financial information be?
Relevant and a faithful representation
-Comparibility, verifiability, timeliness and understandability
What is management accounting used for?
Analyzing information to advise business strategy and drive sustainable business success
When does management accounting focus on?
Present
Comparison of mangement accounting reports compared to financial reports
Management accounting reports are finer grained than financial reports and include analysis of costs,profitability, optimisations,risk management
Process of planning and control
Objectives -> Strategic Decisions -> Operating Decisions
Three methods of budgeting for operating decisions
Top-down approach, participatory approach, bottom-up approach
Top-down Approach
Senior-managers tell lower levels what is expected
Strategy over operations
Participatory Approach
Budget negotiated between different units
Compromise between strategy and operations
Bottom-up approach
Lower levels tell senior managers what they need
Operations over strategy
5 reasons to budget?
Promotes forward thinking Motivate managers to perform better Provide a basis for a system of control Help co-ordinate parts of the business Provied a system of authorisation
Avoidable costs
Costs an organisation could eliminate by choosing an alternative
Sunk costs
Costs that are unavoidable: In effect already incurred, no matter what a manager does
Cost centre definition
Identifiable part of an organisation to which costs can be assigned and aggregated
How are costs aggregated?
Group of inviduals, element, nature, function or behaviour
What are the different types of costs?
Fixed, variable (proportional to activity), semi-variable or semi-fixed
Total Cost
Fixed Cost + Variable Cost
Profit formula
π = pq - (F+wq)
- π = profit
- p is sales price
- F is fixed costs
- w is variable costs per unit sold
- q is quantity sold
Break-even point
Uses internal measures such that companies keep looking and moving forward
Net positive profit
p > w + (F divided by q)
Break-even point
p = w + (F divided by q)
