Finance Flashcards
What is Depreciation?
Depreciation is an accounting practice used to spread the cost of a tangible or physical asset over its useful life.
What are the pros and cons of government subsidy to CalMac?
Increased revenue because they have more money to invest in more ferry roots to increase demand.
Government support for CalMac protects their monopoly over the private companies, western ferries etc.
CalMac has gone over budget on their 2 new ferries leaving tax payers outraged as government gives yet more money to an already high budget project.
What is a cashflow and why is it important to a business?
The net amount of cash and cash equivalents being transferred in and out of a company.
If cash is not coming into the business in time then it is not possible to pay creditors. There must be a balance between money coming in and money coming out or creditors could cause the company to go into liquidation.
Is depreciation a cashflow item?
Depreciation is not a cash flow item as it is not bought or sold as a transaction.
It is a notional concept where capital payments for items such as buildings or machinery are allowed against profits over a number of years in a phase way, which effectively allows for the depreciation in value of these items in the businesses balance sheet.
Explain the difference between fixed and variable costs and give CalMac examples?
Fixed costs remain the same regardless of output whereas variable costs vary with output.
Fixed costs - salaries and insurance
Variable costs - fuel and raw materials
Who uses financial information?
• Managers
• Owners
• Lenders
• Customers
• Suppliers
• Employees
• Government
• Competitors
Why do we need accounts?
Control cashflow
Make business decisions
Government:
• Assessing income tax due
• Assessing VAT due
• Measure of output or GDP
• Fraud prevention
What is the purpose of depreciation?
Depreciation helps to tie the cost of an asset with the benefit of its use over time.
What is a good liquidity ratio benchmark?
The current ratio should be 2:1 which means that there are twice as many current assets as current liabilities so there should be no problem paying debts.
Alternatively, the acid test ratio should be 1:1 which excludes stock and so there are enough liquid assets to pay debts.
What type of ratio is Fixed Asset Turnover ratio? Who would use these ratios and why?
It is an efficiency ratio. Investors would use this ratio to compare similar companies and establish which is best to invest.
What is meant by the phrase “Proof of Capital” for a set of accounts?
The Net Worth calculated on the Balance Sheet = the Net Worth calculated on the Capital Account.
Name two accounts which would state the Net Worth of the business on the bottom line?
- The Balance Sheet.
- The Capital account.
State the percentage depreciation rate which would normally be used for machinery depreciation values in a business?
20%
Explain why it is necessary to have opening and closing valuations for a business each year?
To allow for increase or decrease in value of stocks held which are not sold within the year.
Discuss why profitability is more important than turnover.
Turnover refers to the level of sales that are made by a business and profit refers to the difference between revenue and costs. It is possible to have a very high turnover but be making little if any profit.
