Financial Accounting

Question 1

Describe the difference between a private and public company

Answer 1

Private- minimum one director and shareholder, described as ltd.
Public (plc)- must have min share capital of £50,000 and can be listed on stock exchange.

Question 2

What is the financial conduct authority?

Answer 2

the FCA is the listing authority in the UK and imposes additional rules on stock exchange listed companies

Question 3

What are the duties of an auditor?

Answer 3

report on the financial performance, position and cash flow. Opinion must accompany the financial statements sent to shareholders

Question 4

What is the objective of an annual finance report?

Answer 4

Provide financial information about the reporting entity - useful to present to potential equity investors, leaders, and other creditors in making decisions about providing resources to the entity

Question 5

What are the assumptions for a company submitting a financial statement?

Answer 5

1. Economic entity
2. Going concern
3. Monetary unit
4. Periodicity
5. Accrual basis of accounting

Question 6

What are the three type of financial statements?

Answer 6

1. Statement of financial position
2. Income statement
3. Statement of cash flow

Question 7

Describe a statement of financial position

Answer 7

balance sheet that shows a companies worth.
Assets = Liabilities + Equity
A - resources the company owns
L - amounts owed by company to third party
E - amounts owed by company to shareholders

Question 8

What are current assets?

Answer 8

cash and other assets a company expects to convert into cash in one year (or one operating cycle, whichever is longer)

Question 9

Describe an Income Statement

Answer 9

income includes revenues and gains.
R - ordinary activity (sales, rent)
G - not ordinary (long-term sale, trading security)

Question 10

What is gross profit?

Answer 10

gross profit = net sales - cost of goods

Question 11

What is operating income?

Answer 11

OI = gross profit - (income and expense)

Question 12

What is gross profit percentage?

Answer 12

GPP = gross profit / sale

Question 13

Describe a statement of cash flows

Answer 13

Includes operations, financing and investing activities. Purposed to provide information about cash payments (where?what?)

Question 14

How do you calculate return on capital employed

Answer 14

ROCE = (operating profit) / (equity finds + non-current liabilities)
ROCE = operating profit margin x net asset turnover

Question 15

How do you calculate gross profit margin?

Answer 15

GPM = gross profit / revenue

Question 16

How do you calculate operating profit margin?

Answer 16

OPM = operating profit / revenue

Question 17

How do you calculate net asset turnover?

Answer 17

NAT = revenue / (equity + non-current liabilities)

Question 18

What are the three main efficiency ratios?

Answer 18

1. Inventory holding period
2. Trade receivables collection period
3. Trade payables payment period

Question 19

How do you calculate inventory holding period?

Answer 19

IHP = 365 * closing inventory / cost of sales

Question 20

How do you calculate collection period?

Answer 20

365 * trade receivables / revenue

Question 21

How do you calculate payment period?

Answer 21

365 * trade payables / cos of sales

Question 22

What is a current ratio?

Answer 22

CR = current assets / current liabilities
approx. = 2 indicates debts could be met when they fall due

Question 23

What is the acid test ratio?

Answer 23

ATR = (current assets - inventory) / current liabilities
measure of immediate short term liquidity.

Question 24

What is financial gearing (leverage)?

Answer 24

assesses mid-term capital structure by looking at its solvency.
G = debt / equity
G = (non-current liabilities + overdraft + preference shares) / (share capital + retained earnings)

Question 25

What is an interest cover?

Answer 25

IC = operating profit / interest payable
to assess the risk of not being able to meet interest payments

Question 26

What is likely to occur if a company is highly geared?

Answer 26

1. gives rise to a low interest cover ratio
2. returns to shareholders are likely to be more volatile

Question 27

Describe a stewardship

Answer 27

a person accountable to shareholders for managing the company’s resources. Must provide financial accounting information to shareholders to demonstrate accountability