Accounting 3/4 SAC 3

Question 1

Types of entries

Answer 1

Closing→ R, E
Transferring → Profit/Loss, Drawings
Balancing → A, L, Capital

Question 2

Gross Profit Margin

Answer 2

%GPM = (GP/NS)*100

*Difference between GP and NS is Cost of Goods Sold
*Measures the % of Net Sales we retain as Gross Profit
*Measures out markup (not perfect as it includes period cost)
*If there are changes in to SP and/or CP, it is reflected in GPM
*Profitability in regards to sale of inventory

A change in gross profit indicates one of the following

Increase:
Increase in selling prince or decrease in cost price
Decrease:
Decrease in selling price, or increase in cost price
NOT VOLUME

Question 3

Net Profit Margin

Answer 3

%NPM = (NP/NS)*100
→ Difference is COGS, other revenues and other expenses
measures the % of net sales we retain as net profit
measures out OVERALL level of expense control
High NPM = low expenses and good expense control
Low NPM = high expenses and poor expense control

Question 4

Skeleton Answer (NPM)

Answer 4

The Net Profit Margin has increased/decreased from (2029-2030). This reveals that the business is retaining (%) less Net Sales as Net profit. Even though our Net Sales have increased from (2029-2030), our overall expenses have increased by a greater rate/proportion. Therefore, our ability to control our expenses has worsened.

Question 5

Cash Flow Cover

Answer 5

CFC = Net cash flows from operating activities/average liabilities

Assesses liquidity

Number of times average current liabilities can be met (covered) by Net Cash Flows for Operations

The higher the number of times, the better the liquidity.

Question 6

Uses of the cash flow statement

Answer 6

• asses firms performance against cash targets
• plans for future cash activities
  -calculate financial indicators to support analysis and interpretation

Question 7

Stategies to generate cash

Answer 7

• increase sales revenue (selling prices, inventory mix, advertising, customer service)
• strategies to manage AR (credit checks, discounts, reminders)
• loans and capital contributions to finance purchases of NC assets which can help generate more sales and thus cash
• reduce expenses
• utilise credit terms offered by suppliers
• reduce cash drawings/loan repayments
• defer purchases of NC assets
• organise bank overdraft

Question 8

important non-financial info for cash

Answer 8

the number of expected sales in the next period might affect whether the business is adventurous or cautious with the amount of cash it keeps on hand

the credit rating of a particular Account Receivable might affect the credit terms offered and the

strictness and speed with which they are enforced

the length and strength of a relationship with a particular Account Payable might affect how

quickly debts are paid

the age of existing assets might affect how quickly a new asset is purchased.

Question 9

income statement (affect profit)

Answer 9

Credit Sales (R)
Sales Return (-R)
Cost of Sales (E)
Inventory Write-down (E)
Inventory Gain (R)
Inventory Loss (E)
Discount Revenue (R)
Discount Expense (E)

Question 9

cash flow statement (affect cash)

Answer 9

GST Received (O)
GST Paid (O)
GST Refund (O)
GST Settlement (O)
Receipts from Accounts Receivable (O)
Payments to Accounts Payable (O)
Cash purchase of Inventory (O)
Purchase of a Non-Current Asset (I)
Proceeds from sale of a Non-Current Asset (I)
Receipt of Loan (F)
Loan Repayment (F)
Capital Contribution (F)
Cash Drawings (F)

Note 1: Both Loans and GST will ONLY ever appear in the Cash Flow Statement alone.

Question 10

affect both

Answer 10

Cash Sales (R) (O)
Wages (E) (O)
Advertising Expense (E) (O)
Insurance Expense (E) (O)
Rent Expense (E) (O)
Interest Expense (E) (O)
Stationary Expense (E) (O)
Period Cost I.e. Cartage In (E) (O)

Question 11

qualitative characteristics, element definitions, accounting assumptions

Answer 11

go notes

Question 12

Cash flow statement

Answer 12

cash flows from operating/investing/financing activities
net cash flows from operating/investing/financing activities
Net Increase (Decrease) in cash position
Bank Balance at start
Bank Balance at end

Question 13

income statement

Answer 13

Revenues
(sales, sales returns)
less Cost of Goods Sold
(cost of sales, period costs, buying expenses, freight in)
Gross Profit
(inventory writedowns, inventory loss/gain)
Adjusted gross profit
Add other revenues
(discount, commission revenue, etc.)
less other expenses
net profit

Question 14

Investing

Answer 14

outflows
cash received from sales of a NC asset

inflows
cash paid for the purchase of a non-current asset

Question 15

financial

Answer 15

inflow
receiving loan principles
capital contirbution

outflow
loan repayment (no interest)
cash drawings

Question 16

cash flow category definitions

Answer 16

operating - cash flows related to day-today trading
investing - cash flows related to the purchase and sales fo a NC asset (never on credit)
financnig - cash flows related to change in firm’s financial structure (OE)

Question 17

cash flow statement

Answer 17

categorises the inflows and outflows and finnal cash balance

Question 18

GST paid

Answer 18

10% of cash purchases and cash purchases of NCA’s

Question 19

GST receievd

Answer 19

10% of cash sales, cash sales of NCA
if only on credit, may not be present

Question 20

Income statement

Answer 20

an accounting report used to show a business’ revenue, expenses and net profit or loss for a period of time

Question 21

Cost of goods sold

Answer 21

the total cost incurred in turning the asser of inventory into an expense of cost of sales and other costs gettuing the inventory ready for sale

Question 22

gross profit

Answer 22

the first indication the business selling a price high enough to cover cost of goods sold. amount needs to be sufficient to cover other inventory expenses to ensure a net profit

Question 23

djusted gross profit

Answer 23

calculated by deducting/adding inventory losses/gains to gross profit
a good indicator of inventory management strategies on profit

Question 24

other revenues

Answer 24

recognises the contribution of other soiurces of income not related to sales

Question 25

other expenses

Answer 25

other expenses that the business incurs as a result of trading

Question 26

net profit

Answer 26

final calculation after other revenue is added to adjusted gross profit and otehr expenses are deducted

Question 27

liquidity

Answer 27

refers to the business's ability to generate cash so that it can meet its short term debts as they fall due

Question 28

profitability

Answer 28

Profitability - the ability of a business to earn profit expressed as a comparison with a base, such as sales, assets or owner's equity.

Question 29

income statement - QCs and AA

Answer 29

Accounting Assumptions? Accrual Basis Assumption – We must include revenues which have been earned and expenses which have been incurred. Period Assumption - The Income Statement will summarise revenues and expenses recorded during a reporting period. Qualitative Characteristics. Relevance - The Income Statement will provide the owners useful information on which they can base decisions on. Understandability - The Income Statement presents financial information in a simple and clear format that non-accountants can easily understand.

Question 30

Explain why business is able to receive a negative cash flows from operations but also a Net Profit.

Answer 30

Negtaive net cash flows BUT net profit from Operations decrease cash but not profit - payment to AP, GST paid increase profit but not cash - credit sales, discount revenue increase profit by more than cash - credit sales 30 000 vs. receipts from AR 27720 Firstly, GST Paid is a cash outflow that reduces net cash flows from operating activities however it is not an expense. (Cash vs. Profit) Therefore, it can contribute to having a net outflow from operating activities whilst not decreasing Net Profit to continue earning a profit. (scenario) credit sales can increase profit but its not guaranteed to affect cash in the same way (same number for cash) because of bad debts for e.g.