Learning Unit 2 Flashcards
(57 cards)
What does net profit indicate?
Net profit indicates the amount of money a business earns after accounting for all expenses.
What are the elements of financial statements?
- Statement of Financial Position
- Statement of Profit and Loss and other Comprehensive Income
- Statement of Changes in Equity
- Statement of Cash Flow
- Explanatory Notes
What is the definition of an asset according to the Conceptual Framework?
A resource controlled by the entity as a result of a past event, from which future economic benefits are expected to flow.
What is the definition of a liability according to the Conceptual Framework?
A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.
What is the definition of equity according to the Conceptual Framework?
The residual interest in the assets of the entity after deducting all its liabilities.
What is shrinkage in the context of inventory?
Shrinkage is the loss of stock/inventory attributed to factors such as employee theft, shoplifting, administrative error, vendor fraud, damage, and cashier error.
How can businesses prevent shrinkage?
- Conduct inventory audits
- Install surveillance cameras
- Thoroughly review vendors
- Set up theft prevention training for employees
What is the purpose of fundamental analysis?
To evaluate a company’s worth and growth prospects by looking at financial statements, news stories, economic reports, and other publicly available data.
What does technical analysis focus on?
Price movements and patterns that result from them to forecast future price movements.
Why do we analyze financial statements?
To examine a firm’s financial performance in relation to risk, make forecasts, enhance decision-making, and identify and correct problem areas.
Who are the users of financial statements?
- Shareholders
- Credit suppliers
- Employees
- Management
- Auditors
- SARS
What is ratio analysis?
A technique used to analyze financial information by expressing the relationship between one variable and another.
What do profitability ratios indicate?
A company’s ability to generate profits from its operations.
What are some examples of profitability ratios?
- Gross profit margin
- Net profit margin
- Return on total assets
- Return on equity
What do asset management ratios measure?
How well companies utilize their assets to generate income.
What are some examples of asset management ratios?
- Inventory turnover
- Average collection period
- Fixed asset turnover
- Total asset turnover
What do liquidity ratios analyze?
A company’s ability to pay its current liabilities as they become due.
What are examples of liquidity ratios?
- Current ratio
- Quick ratio (Acid test ratio)
- Creditors payment period
What do debt management ratios measure?
A company’s ability to sustain operations indefinitely by comparing debt levels with equity, assets, and earnings.
What are examples of debt management ratios?
- Debt ratio
- Times interest earned
- Debt/Equity ratio
- Interest cover
What is the accounting equation?
Assets = Liabilities + Equity
Fill in the blank: _______ is the loss of inventory attributed to theft or error.
Shrinkage
True or False: The financial performance is shown in the Statement of Profit and Loss.
True
What is the relationship between operating expenses and profits?
Any increase in operating costs reduces profits.
