Processes Flashcards

Question

Financial Ratios Effiency **Expense ratio**

Answer 1

**Expense ratio indicates the amount of sales that are allocated to expenses** Expense Ratio = Total Expenses x 100 / Sales * Indicates the day-to-day efficiency of the business in keeping expenses at a reasonable level. * Can be used to see whether selling, administrative or financial expenses are the highest _Aim:_ Less than previous years and/or industry average * However - Increase in expense ratio is not always bad as it might just mean more spending on marketing or R&D * Lower expense ratio = More efficient

Answer 2

**Accounts receivable turnover ratio measures the effectiveness of a firm’s credit policy and how efficiently it collects its debts.** A/RT = Sales / Accounts Receivable It measures how many times the accounts receivable balance is converted into cash or how quickly debtors pay their accounts over a financial period (Usually a year). * For times (Per year), A higher number is better * For days (Per year), A lower number is better * Ideal: \< 30 days (Unless a comparative figure is provided) * Affects cash flow (Liquidity)

Answer 3

**Ratios are often not that useful by themselves;** So, How can you tell if the value you calculated for gearing is good or not? This is usually done by comparing the results to different time periods, against standards or with similar businesses. 1. **Over** dif TIME periods. 2. **Against** INDUSTRY Standards. 3. **With** similar businesses BENCHMARK * Individual percentages/Ratios do not provide a complete picture of a business’ financial performance/position. * Can identify a benchmark on performance. * Identify trends within financial statements. * Identify concerns and take corrective action. * Assists with financial forecasting. * Assist with planning, implementing, monitoring and controlling. * Assist with setting SMART financial objectives. PEGSL

Answer 4

**Business records an expense as an asset on the balance sheet rather than as an expense on the income statement.** * Balance Sheet - Added as a non-current asset * Research & Development - R&D _WHY IS IT A LIMITATION?_ * The limitation is understating expenses (Thus overstating profit) * May mislead investors on business performance

Answer 5

**Notes with important information that are left out of the main reporting documents.** * Balance sheet, Income statement & Cashflow statement. _Information may include:_ * Important information relevant to stakeholders. Such as normalised earnings. * How calculations have been made and procedures used to produce the financial statements. **WHY/HOW IS IT A LIMITATION?** * The extent of information included or explained within the notes may be limited or confusing

Answer 6

**Earnings that have been adjusted to take into account removing one-off items that will give a false impression of profitability.** * Recorded in the Notes to the Financial Statement * EG - Removal of a land sale, which achieves a large capital gain. 1. Makes it easier to compare profitability and liquidity figures for a business from one year to the next (YOY), and against other businesses 2. By normalising earnings, it gives a more accurate depiction of the true earnings and financial health of the business.

Answer 7

**Refers to either money owed to the business or by the business.** The details of the debt may NOT be disclosed in the financial reports. * Financial reports may NOT contain specific information about the debt repayments, such as; 1. When are the debts due? 2. How long is the recovery period to pay the loan? 3. Does the business or its debtor have the capacity to repay the amount owed? 4. What if the debtor is close to bankruptcy and will not be able to repay the debt? * Reports can be misleading when interpreting financial info, such as the gearing ratio (Solvency) * Highly geared companies may be able to achieve higher levels of profit - If the debt is manageable.

Answer 8

**Financial reports usually cover a set period of time (1 Financial Yr)** * Businesses may choose to wait until after the end of financial year to make costly purchases, so that in the current year that expense won’t negatively impact profitability. **WHY/HOW IS IT A LIMITATION?** * Businesses will sometimes try to understate their profits to avoid paying tax or they will overstate profits to attract investors or a better takeover or sale bid. **HOW TO ADDRESS THIS LIMITATION** * When an accountant records revenue, they should also record at the same time any expenses that were directly related to that revenue.

Answer 9

**Estimating the value of assets when recording them on a balance sheet** _Original/Historical cost (Value that they were purchased)_ * **Advantage:** Cost can be verified * **Disadvantage:** Distorts balance sheet * **Limitation:** It may not reflect the true market value of the asset _Manager can choose a rate of depreciation for NCA._ * Used for assets that Depreciate - Motor vehicles, Machinery... * Limitation: It is an estimate and may give a false impression of the value of the business _Market value: Which is more accurate_. * Intangibles such as goodwill, patents and trademarks. * **Limitation**: Hard to value or provide an accurate estimate of the value. **Overvalued/Undervalued** assets provide a false impression of a business’s true value to investors.

Answer 10

1. **Legal Compliance** Refers to businesses complying with the laws in relation to the preparation and presentation of financial statements under the Corporations Act. 2. **Ethical considerations** Refers to businesses going beyond the legal requirements/ accounting standards. It refers to businesses doing the right thing – What is considered fair and honest. **How can a business ensure it is meeting it ethical commitments?** * Following best practice and accounting conventions in the preparation of accounts (Use the International Financial Reporting Standards – IFRS) * Full transparency to stakeholders of all relevant information * Truly independent audit beyond the mandatory audit required by public companies, such as internal audits and management audits * Social responsibility regarding financial returns This relates to the idea that the cost to society and to the environment should also be factored into the accounting framework EG Report on the triple bottom line.

Answer 11

**Refers to recording all transactions, both cash inflows and outflows within the business.** * It’s important that firms keep all records of cash inflows and outflows * Needs to be accurate and honest Comply with the Australian Taxation Office (ATO) - Must keep financial records for 5 yearas to assist in data collection and business investigation.

Answer 12

**An audit is an independent check of the accuracy of financial records and accounting procedures.** **Internal audit** - Internal auditors work with management to systematically review systems and operations. These reviews are aimed at identifying how well risks are managed including whether the right processes are in place, and whether agreed procedures are being adhered to. Audits can also identify areas where efficiencies or innovations might be made. **External audit** – Periodic or specific purpose audit conducted by external accountants such as CPAs. Its objective is to determine whether: 1. The accounting records are accurate and complete, 2. Prepared in accordance with the provision of GAAP and IFRS, and 3. The statements prepared from the accounts present fairly the firm’s financial position , and the results of its financial operations. **Management audit** - Establish the current level of effectiveness, suggest improvements, and lay down standards for future performance. Management auditors do not appraise individual performance but critically evaluate the senior executives as a management and the firm’s strategic plans.

Answer 13

**Needs to be accurate for taxation purposes (Ethical & legal)** * Public and private companies need to provide financial reports to shareholders and the general public in the case of public companies (Legal obligation) * Other stakeholders will use this information make decisions about the business (When considering to buy a business, lending money to the business, invest in the business)

Processes Flashcards

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