Accounting Flashcards
(26 cards)
What is Accounting?
An information science that focuses on the financial recording, reporting and decision making processes of a business which helps them organise, analyse and collect their financial information
What are inflows + example
When a firm receives money
e.g. sales of goods and services (revenue)
What are outflows + Example
when a firm pays money/loses money
e.g. payment of rent
What is Budgeting
the continuous process of estimating the future financial events for a given period of time and can be used for individuals or businesses.
Purpose of Budgeting
Planning- predicts what is likely to occur in the future. Can plan ahead for possible problems and opportunities.
Decision-making- provides a standard against which the actual figures can be compared and can identify areas that are going well and areas that are under performing.
Net profit margin formula
= Net profit/Net sales x 100
Gross Profit formula
=Gross profit/net sales x 100
Profitability indicator: NPM definition
Indicates the businesses financial health through highlighting the % of sales revenue the business keeps once expenses have been paid
e.g how well a business controls its spending/expenses
How to increase NPM
Increasing NPM:
- Reduce staff
- Cheaper suppliers
- Increase selling price (not too much so that you have no customers)
Profitability indicator: GPM definition
-Indicates how much profit a business makes after accounting for the direct costs associated with running a business (producing the goods and services you sell)
e.g. how well a business turns sales into profits and measures adequacy of the mark-up
How to increase GPM
Increasing GPM:
- Buying in bulk
- Reducing cost associated with inventory
- Minimising costs of suppliers
What is Revenue
Income business has earned (e.g sales revenue, interest revenue)
What are expenses?
Cost of business operation (e.g rent, employee wages, electricity)
What are Assets?
Resources that a business owns or controls (e.g. inventory, cash at bank, premises, vehicles)
What are Liabilities?
Debts or obligations a person or company owes to someone else, usually a sum of money (e.g. loans, accounts payable mortgage loan)
What is Owner’s Equity
The portion of a company’s assets that an owner can claim, its what is left after subtracting a company’s liabilities from it assets (e.g. capital contribution, drawings, net profit)
THE ACCOUNTING EQUATION
OWNERS EQUITY= ASSETS – LIABLITIES
ASSETS= LIABLITIES + OWNERS EQUITY
LIABLITIES= ASSETS – OWNER’S EQUITY
Accounting reports: Income statements
report on the financial performance of a firm, comparing revenue and expenses (ONLY) during a reporting period to determine if a profit or loss was made.
Strategies for controlling/ reducing expenses
- Find cheaper suppliers
- Manage staff and their wages e.g by cutting middle management or front line staff
- Strategies such as offshoring (relocating business operations to another country) for lower costs
- Outsourcing non-essential functions of the business to reduce expenses (hiring a party outside of the company to perform services or create goods)
Strategies for improving revenues
- Bring selling price DOWN to INCREASSE sales
- Advertise more effectively
- Get ride of slow moving stock by using promotional methods such as sales, buy one get one free
- Improve customer service repeat sales and increase sales by word of mouth
Accounting reports: Balance sheet
statement of the assets, liabilities, and owner’s equity of a business at a particular point in time.
- The purpose of a balance sheet is to give interested parties an idea of the company’s financial position.
- On a balance sheet total assets must equal (balance) with total equity (liabilities plus owner’s equity)
Why is inventory the most important asset to a firm?
- It is the main source of revenue, therefore key to a business’s ability to earn a profit
- It is one of the significant (major) assets
- It is one of the most vulnerable assets as it is susceptible to damage, spoilage, theft, changes in tastes and fashion e.g. clothing brand no longer being as popular or in fashion
What are the two prices inventory is recorded at?
COST PRICE: the price it cost the firm to buy the inventory from a supplier
SELLING PRICE: the price the firm sold it to a customer
What is the mark-up method?
When a firm receives inventory from a supplier they have paid the cost price. The firm will then add a percentage mark-up to this cost price to determine the selling price to customers (allowing them to make a profit).
