PoA Flashcards
(102 cards)
1
Q
What is Accounting concerned with?
A
collecting, analyzing, and communicating financial information
2
Q
What is the quality concerned with influencing user’s decision using past and future events?
A
relevance
3
Q
2 fundamental qualities of Accounting
A
- faithful representation
- relevance
only they can make information be considered useful
4
Q
Relevance
A
- one of fundamental qualities
- prediction of future events and confirmation of past ones
5
Q
Faithful Representation
A
- one of fundamental qualities
- 3 elements:
completeness
neutrality
freedom from error
6
Q
to be relevant..?
A
must cross a threshold of materiality
7
Q
which quality provides assurance to users that the accounting info faithfully represents what it’s supposed to represent?
A
verifiability
8
Q
is it harder to assess benefits or costs of accounting
A
benefits
9
Q
generally accepted key financial objective of a business is assumed to be
A
Enhancing the wealth of the owners of the business
10
Q
statement of financial position
A
- Balance sheet
- assets and claims (assets and liabilities)
- equity
- at a moment in time
11
Q
profit and loss account
A
- Income statement
- profits and losses
- revenues and costs (expenses)
- over a period of time
- statement of financial performance
12
Q
extended accounting equation
A
assets = equity + profit/loss + liabilities
13
Q
statement of cash flows
A
inflow and outflow of cash
14
Q
gross profit
A
money made from selling products after subtracting costs. Doesn’t take into account taxes, rent, etc
15
Q
overheads
A
operating expenses that are not directly tied to making the product specifically. includes rents, utilities, salaries
cost of keeping the business operating day-to-day
16
Q
operating profit
A
gross profit - overheads
money a business makes from its core operations after deducting direct costs operations and overheads
doesn’t include non-operating costs (e.g.: loan interest)
17
Q
Depreciation
A
- consideration of cost, useful life, residual value, and method of depreciation
- straight-line method - evenly depreciates. likely to maximize profit in short term
- annual depreciation: (cost-residual)/estimated useful life
18
Q
interest payables
A
amount a company owes for interest on loans
unpaid interest
19
Q
carrying amount (depreciation)
A
the cost (fair value) of the asset minus the accumulated depreciation on that asset
20
Q
expanded accounting equation
A
assets (end) = equity (start) + sales revenue - expenses + liabilities
21
Q
asset
A
something the business owns which will bring financial benefits in the future
22
Q
liabilities
A
amount owed by the business. obligation to pay
23
Q
accrual
A
- an expense has been recorded but hasn’t been paid by the time the balance sheet is prepared
trial balance figure + amount of accrual
- report it as current liability (profit is reduced)
24
Q
prepayment
A
payment was made before the statement but the benefit of the expense will be experienced in the following financial year
trial balance figure - amount of prepayment
- report it as current asset (profit increases)
25
trial balance figure
total of all debits and credits
26
income statement structure
(+) sales
(-) cost of sales
= gross profit
(-) different expenses by function/kind
= operating profit
(-) financial income and expenses
= profit and financial items
(-) taxes
= net profit
27
costs of goods sold
costs of sales = opening inventories + purchases - closing inventories
AKA COGS (Cost of Goods Sold)
28
how to account for depreciation?
- income statement as cost
- balance sheet: as asset (net book value = initial value - accumulated depreciation)
29
legal structures of company ownership
- sole proprietorship (or partnership)
- limited company (= limited liability)
- public limited company (Plc)
30
investment ratios
- concerned with returns from, and the performance of shares
- dividend payout ratio
- dividend yield
- earnings per share (EPS)
- cash generated from operations per share
- price/earnings ratio
31
efficiency ratios
- how weak a company uses its assets and manages its operations to generate revenue
- includes calculations of the time taken to pay suppliers
- average inventory turnover
- average settlement period for trade receivables
- average settlement period for trade payables
- sales revenue to capital employed
- sales revenue per employee
32
financial gearing ratios
- proportion of a company's debt to its equity
- help assess financial risk
- shows how much of the company's financing comes from borrowed funds
- gearing ratio
- interest cover ratio
33
liquidity ratios
- concerned with availability of cash to meet maturing obligations (short term)
- how easy it is for the company to turn assets into cash
- current ratio
- acid test ratio
- cash generated from operations to maturing obligation
34
profitability ratios
- returns from long term funds invested in the business
- measures company's ability to generate profit relative to its revenue, assets, or equity
- return on shareholders' funds (ROSF) - ROI
- Return on capital employed (ROCE)
- operating profit margin
- gross profit margin
35
equity
value of ownership after all debts and liabilities are subracted
36
longitudinal/cross sectional
- ratio analysis
longitudinal: one company over many years
cross sectional: as an example, across an industry
37
gross profit margin
gross profit / sales revenue x 100
- profitability
- measures profitability in producing and selling goods before any other expenses are taken into account
- not influenced by how the company is financed
- affected by changes in inventories - impacts cost of sales, thus impacting gross profit values
38
operating profit margin
operating profit / sales revenue x 100
- profitability
- how much money is left after covering operating costs
- not influenced by how the company is financed
- increasing administration expenses. means a falling operating profit
39
capital employed
total amount of money a company uses to run its business
equity + non-current liabilities
or
total assets - current liabilities
40
ROCE
operating profit / (share capital+reserves+non-current liabilities) x 100
- return on capital employed
- how much capital invested has grown during a year
- profitability
profit margin x capital turnover (Hartman's PP)
41
share capital
money a company raises by issuing shares
42
reserves
profits made by the company - part of the ordinary shareholders' claims
43
capital turnover
sales / capital (equity+non-current liabilities)
44
ROSF
profit for the period / (ordinary share capital + reserves) x 100
- profitability
- Return on ordinary shareholders' funds
- how effectively a company is using the money invested by shareholders to generate profit
- influenced by how the company is financed - impacts denominator of ratio
45
gearing ratio
non-current liabilities / equity
- how much of a company's operations are financed by borrowed money
- looks at long-term capital structure
46
current ratio
current assets / current liabilities (:1)
- liquidity
- ability to pay its short-term debts using current assets
47
acid test ratio
(current assets - inventories) / current liabilities (:1)
- liquidity
- ability to pay its short-term debts using liquid assets excluding inventories
- aka as quick ratio
48
interest cover ratio
operating profit / interest expense
- financial gearing
- is the company able to pay interest on loans?
49
Earnings per share (EPS)
profit after interest and taxes / number or ordinary shares
- investment ratio
- how much money the company is making for each outstanding share
50
price to earning ratio (P/E ratio)
market price per share / earnings per share
- investment ratio
- shows the market's expectations of the future earning of a business
51
dividend yield ratio
dividend per share / price per share x 100
- investment ratio
- actual return that shareholders receive
52
dividend cover ratio
profit after interest and tax / dividend paid = EPS / dividend per share
- investment ratio (?)
- portion of profit that is used to pay dividends. how many times a company's earning can cover its dividend payments
53
dividend payout ratio
dividends announced for the year / earnings for the year available for dividends x 100
- investment ratio
- percentage of earnings that is paid out to shareholders as dividends
54
relationship between income statement and balance sheet
assets (end) = equity (start) + profit or loss for the period + liabilities (end)
55
measuring profit
profit (or loss) = revenue - total expenses for the revenue
56
break even point (BEP)
total sales revenue = total expenses
one specific point where no losses or profits are being made
57
BEP extended
total sales revenue = fixed costs + variable costs
58
contribution margin ratio
contribution margin ratio = contribution / sales revenue x 100
helps businesses understand how much money is available to cover fixed costs and contribute to profits
59
contribution
selling price - variable cost
contributes to meeting the fixed costs and if there's any excess it contribute to the profit
or:
fixed costs + profit
60
volume of activity to reach target profit level
total sales revenue = fixed cost + variable cost + target profit
61
margin (definition)
proportion of revenue that results in profit
62
ROCE broken down
(operating profit/sales revenue) x (sales revenue / capital)
capital = equity + non-current liabilities
63
average settlement period for trade receivables
average trade receivables / credit sales revenue x 365
- efficiency ratio
- how long credit customers take to pay the amounts they owe to the business
64
average inventories turnover period
average inventories held / cost of sales x 365
- average period for which inventories are being held
65
proportion of current assets financed from short term sources
current liabilities / current assets x 100
66
overtrading indicators
- rapid increase in sales revenue
- increased reliance in short term finance
- rapid increase in current assets
- decline in solvency and liquidity ratios
67
opportunity cost
- always relevant
- normally not recorded in routine accounting processes
68
irrelevant costs
- all commitment costs
- all non-differential future costs
69
alternative courses of action
- all past costs ignored
- only relevant future costs taken into account
- future costs that don't vary with decision should be ignored
70
relevant range
range of output which fixed costs remained fixed costs
71
variable cost per unit (high low method)
[total cost (highest output) - total cost (lowest output)] / [units (highest output) - units (lowest output)]
72
fixed cost
fixed cost = (Toal cost HO - units HO) x variable cost per unit
73
break-even point
fixed costs / (sales revenue per unit - variable cost per unit)
- graph: where total costs line crosses total sales revenue line
74
margin of safety
distance between break-even point and maximum level of activity
expected unit sales - break even unit sales
75
dividend per share
EPS x Dividend payout ratio
76
break even sales (% of margin of safety)
actual sales x (1 - margin of safety/100)
77
variable cost per unit (through BEP)
selling price per unit - contribution per unit
to get contribution per unit, rearrange BEP formula
78
number of units sold (through contribution)
(fixed costs + profit) / contribution
79
achieving a target profit
total sales revenue = fixed cost + total variable cost + target profit
80
break even revenues
break even point x selling price
81
formula to calculate operating profit/loss
[units sold x (selling price PU - variable cost PU] - fixed costs
82
target quantity
(fixed costs + target profit) / (selling price - variable cost per unit)
83
overhead absorption rate
total overhead costs / total output
84
full costing
- useful guide to long-run average costs
- for income measurement
85
ABC
- activity-based costing
- costs are allocated into cost pools
- treats indirect costs
- doesn't provide relevant info for decision-makers
86
budget
- first to be prepared: sales budget
- sales budget and production budget interlinks directly with finished inventories budget in manufacturing businesses
87
incremental budget
- based on previous periods with adjustments for inflation and activity changes.
- simpler and consistent but can lead to inefficiencies
- recommended for company's operating in a stable environment
88
zero based budgeting
- every expense is justified from scratch every single time
- promotes critical evaluation and eliminates unnecessary spending but it's time consuming and complex
89
activity-based budgeting (ABB)
- ABC's principles
- based on cost-driving activities - activities needed to achieve certain goals
- more accurate budgets
90
working capital
current assets - current liabilities
- funds available to cover immediate expenses and obligations
- benefits should be weighed against the costs
91
blanket rate
single rate/price that applies across multiple items
92
capital expenditure
getting upgrading, or maintaining long-term assets
93
overhead recovery rate
total overhead costs / activity level
- allocate overheads to products
- total overhead is independent of recovery rate
- choice of overhead recovery rate can affect the amount of overheads charged to a particular job
94
bottom up budgeting
starts at department level. each department creates its own budget based on needs and expectations
95
top down budgeting
overall budget is set by top management based on the company's goals and strategies
96
cash receivable budget
cash receivable = opening balance + credit sales - closing balance
97
investment appraisal
process of evaluating the profitability or value of an investment to decide if it's worth pursuing
4 methods:
- ARR: accounting rate of return
- PP: payback period
- NPV: net present value
- IRR: internal rate of return
98
payback period
initial investment / annual cash inflows
- time it takes to recover the initial investment from the cash it generates
- shorter = better
- rough measure of risk
- ignores cash flows AFTER the payback period
99
net present value
cash flow x [1/(1+r)^n]
r: discounted rate (table)
n: number of periods
- total of all future cash flows from an investment, adjusted to their value today
- greater = better
100
internal rate of return
discount rate that makes a project's NPV equal to zero
greater = better
101
opening cash cycle (OCC)
inventories turnover period + trade receivables settlement period - trade payables settlement period
102
weeks OCC
everything - credit
everything - payables
