11 Accounting Flashcards

1
Q

What is a P&L account

A

calculates amount of profit/loss that the business makes inna year.

1st part=Trading acc, gross profit
2nd Part=P&L acc, net profit

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2
Q

What is a net profit

A

Money made by the business after all the expenses have been paid

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3
Q

How is a typical P&L acc set out and what do they mean

A

Sales-How much bus sold its stuff for
Cost of Sales- Cost to make/buy product
Gross Profit-Profit made before expenses are paid
Expenses-Total of all the bills that year
Net Profit-Profit after all bills paid

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4
Q

Whats the importance of a P&L acc

A

If gross profit low business prices might be too low. Increase price!!
-Or cost too high, Cheaper supplier!!

Net profit low=Expenses too high, make cutbacks (wage cuts etc)

Size of net profit tells manager how much can spend in dividends/reinvest/savings

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5
Q

What is a balance sheet

A

Purpose is to show businesses financial position

Shows everything the business owns (assets) and all the money it owes (liabilities)

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6
Q

NAME the headings in a balance sheet

A

Fixed assets
Current assets
Current liabilities
Working capital
Financed by
Ordinary share capital
Retained earningss
Preference shares
Long term loans

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7
Q

What is balance sheet 1.Fixed assets

A

Valuable items business owns that itll keep for more than one year

Cars computers buildings

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8
Q

What is balance sheet 2.Current Assets

A

All valuable items business owns that itll keep for less than one year

Stock, debtors,cash

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9
Q

What is balance sheet 3.Current Liabilities

A

Loans the business owes that have to be repaid within a year.

Bank overdraft,creditors,…

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10
Q

What is balance sheet 4.Working Capital

A

Cash left over to pay bills.

Difference between current assets and current liabilities

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11
Q

What is balance sheet 5.Financed by

A

Shows amnt of money invested in business by the investors

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12
Q

What is balance sheet 6.Ordinary Share Capital/Equity share capital

A

Amnt of money that shareholders paid into business by investment

Authorised Share capital=Max no. of shares companys allowed sell

Issued Share Capital=amount sold so far

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13
Q

What is balance sheet 7.Retained earnings/Reserves

A

Total amnt of profits previously made by the business that have been reinvested in the business

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14
Q

What is balance sheet 8.Preference Shares

A

amount of money that another type of shareholder paid into the business by way of investments

This share does not entitle them to have a vote, but it does entitle them to a guaranteed share of company profits which must be paid in preference to the other shareholders 

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15
Q

What is balance sheet 9.Long Term Loan

A

Amounts of money borrowed by the business that it has more than one tear to repay

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16
Q

Whats the importance pf a balance sheet

A

Tells managers amnt of security available to offer banks when applying for loan

Working Capital figure tells managers whether business has enough cash available to pay any bills. If not business is Illiquid

Financed by tells managers whether the business can get another loan (can see how many u alr have)

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17
Q

what is ratio analysis

A

Examining your business under three headings:
Profitability
Liquidity
Gearing or Debt/Equity ratio

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18
Q

What is Profitability ratios

A

Examine whether the profit made by the business id good or bad for the size of the business

3 Ways to measyre:
a) Gross Profit Percentage/GP Margin
b) Net Profit Percentage/NP Margin
c) ROI/Return on Capital Employed

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19
Q

Whats the formula for Gross profit percentage/Gross Profit Margin

A

(Gross Profit➗Sales)x100

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20
Q

What doe sit mean if Gross profit Percentage/Gross Profit Margin is increasing from one year to another

A

Good trend
Making more gross profit than last year
Either increased prices or lowered costs

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21
Q

What doe sit mean if Gross profit Percentage/Gross Profit Margin is decreasing from one year to another

A

Bad trend
Making less grossprofit than last year
Either decreased prices or costs have increased

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22
Q

Whats the formula for Net Profit Percentage/Net Profit Margin

A

(Net profit➗sales)x100

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23
Q

What does it mean if Net Profit %/Margin increased fro one year to next

A

Good trend
Making more Net Profit than last year
Expenses have decreased

24
Q

What does it mean if Net Profit %/Margin decreased fro one year to next

A

Bad trend
Making less Net profit than last yr
Expenses have increased
Business must immediately make cuts

25
What is the formula for Return On Investment/Capital employed
(Net profit➗Capital Employed)x100
26
What happens if the ROI/ROCapital Employed decreases from one yr to the next
Bad trend Making lower return than last yr Managers performed badly,less money Need to reduce capital employed or increase net profit
27
What happens if the ROI/ROCapital Employed increases from one yr to the next
Good trend Making better return than last yr Managers improved their performance,made more money
28
Who is interested in a Businesses Profitability Ratios
Investors/Shareholders -Ratios improving=better profits=good dividends=more likely to invest Employees -Ratios improving=secure jobs=possible pay raise Lenders/Bankers -Ratios improving=more likely able to repay loan interest Government -Ratios improving=more tax revenues from the business Competition -Ratios improving=threat to others
29
What are liquidity ratios
examines, whether the business has enough cash available to pay short-term bills when they’re due 2 ratios: Working Capital/Current ratio Acid test ratio 
30
what is the formula for working capital/current ratio
current assets ➗ current liabilities
31
Whats the ideal Working capital/Current ratio
2:1 Meaning business should have twice the ammount that it owes If ratio less=doesn’t have enough to pay its bills If ratio much higher=Too mych spare cash lying around
32
what does it mean when working capital/current ratio is increasing from one year to the next
Good trend Business has more cash than last yr Maybe it paid off some bank overdraft
33
what does it mean when working capital/current ratio is decreasing from one year to the next
Bad trend Less cash than last year Wil have difficulty paying bills on time Creditors will then cut off businesses credit Maybe increased bank overdraft and spent all the borrowed money Should sell any investments to inc cash
34
Whats the formula for Acid Test Ratio
(Current assets-Closing stock)➗Current liabilities Ideal ratio 1:1 Less ghen this =illiquid Higher business is liquid and has no difficulty pauong bills on time
35
What does it mean if Acid test ratio is increasing from one year to next
good trend more cash than last year maybe paid off its overdraft 
36
What does it mean if Acid test ratio is decreasing from one year to next
Bad trend less cash than last year. Difficulty paying bills on time could lead to creditors cutting off businesss credit, maybe bought large amount of stock which remains unsold business should have a sale. 
37
Who is interested in a Businesses Liquidity Ratios
suppliers-improving means more likely to be able, pay invoice in full and on time Employees-job is more secure, more likely to be paid on time Lenders/bankers- more likely to repay a loan and interest in full and on time Governments- more likely to pay taxes in full on time 
38
Explain the debt/equity ratio
examines the **capital structure** of the business (how its financed) shows **how much of the Capital** has come from **long-term loans**, and how much has come from **shareholders** indicates **how much long-term debt** the business is carrying, whether it’s too much or not Too much long term debt is bad
39
Whats the formula. for debt/equity ratio
Long term debt. ➕ Equity shares +preference shares. +Retained Ernings
40
What is the ideal Debt/Equity ratio
There is no ideal ratio
41
Explain the debt/equity ratio
how much money it has borrowed in long-term loans relative to the amount owners of the business invested in it
42
What is equity capital
**total** amount of **money invested by owners of business** consist of **original amount** of money owners put in (issued ordinary/equity share capital) and all **profits** that owners **reinvested** (retained earnings)
43
What is low gearing Debt/Equity ratio
Debt
44
What is high gearing Debt/Equity ratio
Debt>Equity >1:1 Business has borrowed more money than the shareholders have invested
45
What is neutral gearing Debt/Equity ratio
Debt=Equity =1:1 Borrowed exactly same amount as shareholders have invested
46
What 4 thinfs does Debt/Equity ratio tell a buiness
1.How much the business has borrowed relative to how much owners have invested -low,high,neutral gearing 2.How much interest she can expect business will have to pay back. -High geared =more interest to pay back 3.If business is in danger of going bankrupt. -High geared=lots of loans to pay back 4.If business able to take out more loans or not -High geared=lots of loans so hard to convince bank to get another
47
What does it mean if Debt/Equity ratio is increasing from one year to next?
Bad trend More long term loans outstanding than last yr Maybe took out another one? Should sell more shares to reduce ratio
48
What does it mean if Debt/Equity ratio is decreasing from one year to next?
Good trend Less long term loans outstanding than last yr Maybe paid back long term loan/sold some shares? Should continue with this strategy
49
Whos interested in a Businesss Debt/Equity ratio?
Shareholders/Investors: -Increasing=more profits being used to pay interest=fewer dividends=less likely to buy shares. Employees: -Increasing=less secure jobs as risk of bankruptcy=less likely pay raise Bankers: -Increasing=less likely to repay loan+interest in full on time Suppliers: -Increasing=more likely to go bankrupt,less likely pay invoice Government: -Increasing=More likely to go bankrupt and not pay tax
50
Limitations of ratios
Only analyse historical figures. Mightnt be true indicators of whatll happen in the future May calculate accounting figures differently. Change calculation method from one year to next=inaccurate Limited picture of a businesss. Only show financial info. No insight to important aspects of business such as staff morale.
51
Explain a Gross Profit Percentage/Gross Profit margin
How good the gross profit number is by judging it against the size of the business’s sales figures
52
Explain a NET PROFIT PERCENTAGE/MARGIN
Look at how good net profit number is by judging it against the size of the business sales figures. 6% net profit percentage means that cor every 100€ product the business sells, it gets to keep 6€
53
Explain a Return on Investment/Capital Employed
How good net profit number is by judging it against total amnt of money invested. Less than 2%=bad
54
Explain a Working Capital/Current ratio
See if business has enough cash by comparing its current assets with its current liabilities
55
Explain Acid Test Ratio
How much cash business has in an emergency situation. When we exclude stock, business shiuld have exactly the amount that it owes Lets a business know its liquidity position in an emergency We exclude stock as stock is hard to turn into cash very quickly