Accounting Principles (Level 1) Flashcards
Using examples, could you please explain your understanding of SWOT analysis?
This is a business tool used to gain a focused understanding, at a given point in time, of the strengths and weaknesses in an organisation and external opportunities and threats – hence SWOT. These factors can help shape the business strategy, highlighting areas of concern or advantage for the business.
Please tell me about cash-flow statements, with some examples of the factors that may affect cash flow.
A cash-flow statement shows the actual cash flow for the business. It reconciles the income with the business expenditure to give a cash flow for the business over a set period, usually on a monthly basis for the year ahead. My organisation revises this on an ongoing basis so it is more accurate for the forthcoming month and quarter, and may be reviewed against actual cash flow and business needs.
It is an essential business tool for decision-making as it predicts any negative cash flow – when reserves or loans may be needed – and also positive cash flow. This enables my organisation to be proactive in managing cash. Factors that affect income or expenditure will affect cash flow, and can include: finishing a project early so it can be invoiced and paid, or delays in a payment point that delay an invoice; and winning more work at the same or a greater fee rate to increase income, or being unsuccessful in winning fees, thus reducing income.
Factors affecting expenditure can include: increases in staffing that put up costs, or reductions in staff that bring savings; increases in salaries and bonuses at a set pay review being larger than forecast and increasing expenditure, or smaller than expected and thus reducing expenditure.
What is a balance sheet?
This is one of three key financial statements, alongside those for cash flow and for profit and loss. A balance sheet shows a company’s assets, liabilities and equity at a specific point in time. It can be used to assess its financial position or health, and be compared with previous balance sheets to identify trends.
What is a cash flow statement?
This shows cash moving into and out of a company for a specific period, and is generally broken down into cash relating to operations, to investment and to financing. The statement will show the net cash-flow position, which helps assess liquidity and shows changes in assets, liabilities and equity.
What is a profit and loss statement?
Also known as the income statement, this is the third of the three key financial statements. It shows the income and expenditure of the company over a specific period, culminating in the net profit or loss made. The profit and loss statement can be used to calculate the company’s profit margin; that is, how efficiently the company is converting revenue into profit.
