Week 2.2 Flashcards
Fundamental accounting equation
Assets = liabilities + equity
Borrowing money increases your liability
Selling shares increases your equity
Double-entry bookkeeping
Enter each transaction twice
Once as a credit
Once as a debit
Bookkeeping and Company Accounts
Companies must maintain accurate accounts
Poor bookkeeping can result in unpaid taxes, fines etc
Can be delegated to specialist firms (for small firms)
Larger companies tend to employ their own staff
Financial Accounting
External
Annual reports of the company’s situation
Published 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
Financial reports should contain
Balance sheet (assets, liability and equity at defined moment)
Equity statement (retained earnings)
Cashflow statement (operating costs, investing & finances)
Financial review/Management discussion
Profit & loss report (income and expenses)
Financial reports assumption
Company is a “going concern”
They can pay their debts
Shareholders have lower priority than loan providers in case of insolvency
Assets have lower value if they have to be liquidated quickly
IFRS
International Financial Reporting Standard
Financial information should be relevant and faithfully represent the company
Enhancing qualitative characteristics (comparability, verifiability, timeliness, understandability)
4 metrics to consider before investing in a company
Market capitalisation
Earnings per share
Price earnings ratio
Beta
Consider how metrics have changed over time and compare to those of competitors
Market Capitalisation
Share price x number of shares
Earnings per share (EPS)
Profit / number of shares
Price Earnings (PE)
Profit / Market cap
Beta
Measure of volatility compared with the rest of the market
Management accounting definition
Analysing information to advise business strategy and drive sustainable business success
Focusses on present and future cf financial accounting
Rely on predictive models. Nowadays, data is available on demand via dashboards
Finer grained than financial reports (Analysis of costs, profitability, optimisations, risk management et al.
Planning and control involves
Objectives -> Strategic decisions -> Operating decisions
Three methods of budgeting
Top-down approach (Senior managers tell lower levels what is expected) Strategy over operations
Participatory approach (Budget is negotiated between different units) Compromise
Bottom-up approach (Lower levels tell senior managers what they need) Operations over strategy
5 reasons for budgeting
Promotes forward thinking
Motivates managers to perform better
Provides a basis for a system of control
Helps co-ordinate parts of the business
Provides a system of authorisation
Avoidable costs (relevant)
Costs an organisation could eliminate by choosing an alternative
Unavoidable costs
Sunk (They’re, in-effect, already incurred, no matter what a manager does)
Cost centre
Identifiable part of an organisation to which costs can be assigned and aggregated.
Can be a group of individuals, machines, departments, a single factory
Aggregate costs by element, nature, function or behaviour
Identified where many costs can be allocated to specific parts of an organisation where someone has responsibility for that part of the organisation
Total costs equation
Total Cost = Fixed Cost + Variable Cost
Important to measure cost because it helps determine the selling price of a product, helps plan production, maintain management control and supports management decision making
4 types of cost
FIxed
Variable (proportional to activity)
Semi-fixed (or stepped cost)
Semi-variable
π = pq - (F + wq)
For a business that sells only one product
π is profit
p is sales price
F is fixed costs
w is variable costs per unit sold
q is quantity sold
Break even point vs net (positive) profit
p = w + (F/q)
p > w + (F/q)
