Week 3&4- Accounting Definitions

Question 1

why would managers use the accounting information

Answer 1

To review the performance of the business, identify areas where there is good performance and where improvements need to be made.

Question 2

why would shareholders use the accounting information

Answer 2

Look at financial performance and prospects possible investment opportunity

Question 3

why would employees use the accounting information

Answer 3

Job security; wage improvements; motivation – future plans of the company

Question 4

why would investors use the accounting information

Answer 4

Review performance of the company look at Investment opportunities – review risk and future returns associated with the company

Question 5

why would suppliers use the accounting information

Answer 5

Risk of trading with the firm, check credit rating, ability to pay debts

Question 6

why would government use the accounting information

Answer 6

Tax liabilities, economic data collection

Question 7

why would banks/leaders use the accounting information

Answer 7

Credit worthiness and ability to repay any loans, future plans, and borrowing requirements.

Question 8

why would competitors use the accounting information

Answer 8

Relative performance of the company, evaluate against its own performance, review future intensions of the company

Question 9

why would Public, Pressure Groups, Local Communities use the accounting information

Answer 9

Public, Pressure Groups, Local Communities

Question 10

why would customers use the accounting information

Answer 10

General interest in the company, possible investment i.e. shares, future product plans, or plans in the long term

Question 11

What is a trading account

Answer 11

A trading account is a statement that calculates the gross profit that a business has made by buying and selling its goods during a particular period of time.

Question 12

What are sales return

Answer 12

Sales returns (Returns In) are goods that have been returned by the customer. They are also known as returns in or returns inwards. These are deducted from the sales figure

Question 13

What are purchase returns

Answer 13

Purchase returns (Returns Out) are goods that the business sends back to the supplier. They are also known as returns out or returns outwards. Purchase returns are deducted from purchases.

Question 14

What are carriage inwards

Answer 14

Carriage inwards is an expense incurred when a supplier charges for delivery on the goods purchases. Carriage inwards makes the goods that are purchased more expensive. It is added to the goods that appear as purchases on the trading account.

Question 15

What are carriage outwards?

Answer 15

Carriage outwards is also an expense which a business incurs when it pays for delivery of goods to a customer. It is sometimes referred to as carriage on sales. Carriage outwards is an expense that will be dealt with later (in the profit and loss account.)

Question 16

What is a profit and loss account

Answer 16

A profit and loss account is a statement that calculates the net profit that a business has made for a period of time (usually a financial year).

Question 17

What is net profit (profit for the year)

Answer 17

Net profit is calculated by deducting all expenses incurred by the business from the gross profit that it has earned through buying and selling its goods.

Question 18

What are trade debtors?

Answer 18

Trade debtors are people (or organisations) that owe money to a business, because they are customers who have not yet paid for the goods or services provided.

Question 19

What are trade creditors ?

Answer 19

Trade creditors are people (or organisations) that the business owes money to, because they have supplied goods and services that the business has received but as yet has not paid for.

Question 20

What are fixed assets

Answer 20

Fixed assets are assets that will be retained by the business for longer than one year. They include Land and buildings, equipment, machinery, fixtures and fittings and motor vehicles.

Question 21

What are current assets

Answer 21

Current Assets are cash or assets that will be changed into cash in the near future. They include stock, debtors, bank and cash.

Question 22

What are long term liabilities

Answer 22

Long Term Liabilities are debts owed by a business which need to be paid after more than one year. They include a bank loan that needs to be paid within five years or a 25 year mortgage on a property.

Question 23

What is capital

Answer 23

Capital is the term used to describe how much a business is worth. It represents how much the owner(s) has/ have invested in the business.

Question 24

What is gross profit

Answer 24

Gross profit is sales, less the cost of those sales.

Question 25

What is a financial statement

Answer 25

The financial statements are usually produced at the financial year end, but they could be produced at any time. They might be required by the owner or managers of a business. The final accounts will consist of an income statement a cash flow statement and a statement of financial position.

Question 26

What is a statement of financial position

Answer 26

The SOFP is a list of all the assets, liabilities and capital and is sometimes called the POSITION STATEMENT, as it sets out the FINANCIAL POSITION of an organisation at a particular date

Question 27

What is revenue

Answer 27

This is the money the business receives from selling goods and services

Question 28

What is cost of sales

Answer 28

This refers to the production costs of a business. It relates to direct costs such as raw materials and labour

Question 29

What is selling expenses

Answer 29

A business is likely to incur a range of expenses that are directly related to the selling of its products

Question 30

What are administrative expenses

Answer 30

These are general overheads or indirect costs of the business

Question 31

What is operating profit

Answer 31

If the selling and administrative costs are substracted from gross profit we get operating profit

Question 32

What are non current assets

Answer 32

Non-current assets are any assets that are not expected to be sold within 12 months

Question 33

What are current assests?

Answer 33

Current assets are the liquid assets that belong to the business. These assets are either cash or are expected to be converted into cash within 12 months

Question 34

What are current liabilities

Answer 34

Any money owed by the business that is expected to be repaid within 12 months .

Question 35

What are non current liabilities

Answer 35

These are long term liabilities of a business. Any amount of money owed for more than one year will appear in this selection of the balance sheet

Question 36

What are net assets

Answer 36

Net assets is simply the value of all assets minus the value of all liabilities

Question 37

Gearing ratios.

Answer 37

Exploration of the capital structure of the business by comparing the proportions of capital raised by debt and equity

Question 38

Profitability or performance ratios

Answer 38

Illustration of the relative profitability of a business

Question 39

Ratio analysis

Answer 39

A numerical approach to investigating accounts by comparing two related figures.

Question 40

Return on capital employed

Answer 40

The profit of a business as a percentage of the total amount of money used to generate it

Question 41

Window Dressing

Answer 41

The legal manipulation of accounts by a business to present a financial picture that is to its benefit

Question 42

Limitations of ratio analysis

Answer 42

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