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Y11 TERM 2 Flashcards

Manufacturing - Incomplete record (49 cards)

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1
Q

Prime cost

A

Prime cost is all costs directly attributed to the production of each product.
Prime cost is a direct cost, so it includes the costs of direct materials consumed plus direct wages plus direct expenses involved in manufacturing an item.

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2
Q

Manufacturing account - application of prudence principle

Give an example to illustrate your answer.

A

Profit should not be overstated. / All possible losses should be provided for.

  • Inventories were valued at the lowest figure
  • Depreciation of the factory machinery was included
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3
Q

Manufacturing account - application of accruals (matching) principle
Give an example to illustrate your answer.

A

Revenue of the accounting period must be matched against the cost of the same period.

  • Direct wages ACCRUED at YEAR END were ADDED
  • General expenses PREPAID at YEAR END were DEDUCTED
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4
Q

Income statement - application of BUSINESS ENTITY PRINCIPLE

Give an example to illustrate your answer.

A

The business is treated as being separate from the owner of the business.
- Goods taken by the owner were deducted

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5
Q

3 disadvantages of raising funds by means of a bank loan

A
  1. Loan interest to be paid every year
  2. Loan interest to be paid irrespective of profits
  3. Loan to be repaid by given date
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6
Q

5 ways of raising long-term funds

A
  1. Obtain a bank loan
  2. Introduce additional capital
  3. Take a partner to raise more capital
  4. Convert to a limited company
  5. Mortgage the premises
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7
Q

7 interested parties who might want to see a company’s financial statements

A 
1. Owners
\+ Potential business partners
2. Banks
3. Investors
4. Trade payables
5. Managers
6. Club members
7. Governments, tax authorities
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8
Q

5 reasons a business has the better rate of inventory turnover compared to another business

A
  1. Higher sales
  2. More demand for the product
  3. Reasonable selling price
  4. Business efficiency
  5. Inventory was not over-purchased
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9
Q

Profitability ratio
Percentage of gross profit to revenue (gross profit margin)
Mark up

A

Gross profit margin: (Gross profit / Revenue) x 100

Mark up: (Gross profit / Cost of sales) x 100

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10
Q

Profitability ratio

Percentage of profit to revenue (net profit margin)

A

(Profit for the year / Revenue) x 100

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11
Q

Profitability ratio
Return on Capital Employed (ROCE)
Capital employed

A

ROCE: (Profit for the year / Capital employed) x 100

Capital employed = Owner’s capital + long term liabilities

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12
Q 
Liquidity
Current ratio (aka working capital ratio)
A

Current assets / Current liabilities

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13
Q 
Liquidity
Quick ratio (aka 'Acid Test' or 'Liquid ratio')
A

(Current assets - Inventory) / Current liabilities

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14
Q

Liquidity

Trade receivables collection period

A

(Trade receivables / Credit sales) x 365 days

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15
Q

Liquidity

Trade payables payment period

A

(Trade payables / Credit purchases) x 365 days

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16
Q

Liquidity
Rate of inventory turnover
OR Inventory turnover

A

Rate of Inventory turnover: Cost of goods sold / Average inventory (answer given in times)
Inventory turnover: (Average inventory / Cost of goods sold ) x 365 days

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17
Q

Importance of Percentage of gross profit to revenue (gross profit margin)

A
  1. Measures the success in selling goods
  2. Shows the gross profit earned per $100 sales
  3. Can make comparison with previous years
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18
Q

Importance of Percentage of profit to revenue (net profit margin)

A
  1. Measures the overall success of the business
  2. Shows net profit earned per $100 sales
  3. Indicates how well the business controls its expenses
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19
Q

Importance of Return on Capital Employed (ROCE)

A
  1. Measures the profitability of the investment in the business
  2. Shows the profit earned per $100 employed in the business
  3. Shows how efficient the capital is being employed
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20
Q

4 effects if a business does not have enough working capital

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A
  1. Cannot meet liabilities when they are due
  2. Difficulties in obtaining further supplies/services on credit
  3. Cannot take advantage of business opportunities when they arise
  4. Cannot take advantage of cash discounts
21
Q

2 ways in which the profit for the year as a % of revenue may be increased

Study These Flashcards
A
  1. Reduce expenses

2. Increase other income

22
Q

Meaning of capital employed

Study These Flashcards
A

Total funds being used by a business

23
Q

Reason why the ROCE increased even though the profit for the year reduced

Study These Flashcards
A

Decrease in capital employed

24
Q

3 reasons in which the % of gross profit to revenue may be increased

Study These Flashcards
A
  1. Increase in selling price
  2. Reduction in trade discount allowed to customers
  3. Take advantage of bulk buying
25
3 examples of businesses with a high rate of inventory turnover
1. Restaurant 2. Newspaper agent 3. Petrol station
26
3 examples of businesses with a low rate of inventory turnover
1. Furniture shop 2. Jewellery shop 3. Luxury car shop
27
Explain why the quick ratio is more reliable than the current ratio as an indicator of liquidity
Quick ratio does not include inventory in the calculation. Inventory is not regarded as a liquid asset, a buyer has to be found and money to be collected.
28
Reason why the current ratio would decrease
Increase in current liabilities is greater than the increase in current assets
29
Explain how the change (increase) in the trade receivables' collection period may have affected the payment period for trade payables
The business may not have enough liquid fund to pay the trade payables until money is collected from the trade receivables
30
6 problems of inter-firm comparison
1. The businesses may apply different operating policies eg. renting premises or purchasing premises 2. The accounts may not be for a typical year (eg. bad economy that year) 3. The businesses may operate on different accounting policies eg. depreciation 4. The accounts do not show non-monetary items but they are important in the success of the business (eg. experienced manager) 5. It may be difficult to obtain all the information about another business which is needed to make a true comparison 6. The businesses may have different year ends (which can make comparison difficult), eg. year end for one business may be at a time when inventories are particularly low, and year end for the other may be when inventories are particularly high
31
State what is measured by the rate of inventory turnover.
The number of times inventories are sold and replaced in a year
32
Duality principle
Every transaction has two aspects (a giving and a receiving) leading to the making of two entries for each transaction in the accounting system
33
Money measurement principle
In accounting, only information that have a definite monetary value is recorded
34
Going concern principle
It is assumed that the business will continue to operate for an indefinite period of time. While a business continues to trade, assets are valued at cost less depreciation. When a business ceases to trade, assets are valued at their realisable value.
35
Realisation principle
Profits are only regarded as being earned when the ownership of goods or services passes from the seller to the buyer, who then has an obligation (liability) to pay for those goods
36
Objectives in selecting accounting policies - Comparability
A financial report can only be compared with reports for other periods if similarities and differences can be identified
37
Objectives in selecting accounting policies - Relevance
Financial information is relevant only if it affects the business decisions
38
Objectives in selecting accounting policies - Reliability
Financial information is reliable only if it can be depended upon to represent actual events and is free from error and bias
39
Objectives in selecting accounting policies - Understandability
A financial report must be capable of being understood by the users of that report
40
3 reasons why the gross profit margin for one business is higher than for another business
1. Higher mark up 2. Lower cost price of goods (took advantage of bulk buying) 3. Allowed a lower trade discount to customers
41
2 reasons why the net profit margin for one business is higher than for another business
1. More other income | 2. Lower expenses
42
Limitations of accounting statements | Historic cost
Transactions are recorded at the actual cost. Because of inflation, it is difficult to compare transactions which have taken place at different times.
43
Limitations of accounting statements | Non-financial aspects
Accounts only record information that can be expressed in monetary terms. Many important factors which affect the business are not recorded.
44
Cost of production
Cost of production is the total cost of manufacturing goods. | The prime cost plus factory overheads, plus opening work in progress less closing work in progress
45
Meaning of margin
Margin is the gross profit measured as a percentage of the selling price
46
Meaning of mark-up
Mark-up is the gross profit measured as a percentage of the cost price
47
Cost of materials consumed
Cost of materials consumed is the cost of raw materials actually used in production. Opening inventory of raw materials plus purchases of raw materials less closing inventory of raw materials, plus carriage on raw materials
48
Intangible assets
Assets that have a monetary value but which do not have a physical presence
49
Goodwill
The additional value of an established and successful business, above the value of its tangible assets. Goodwill is an intangible asset.

IG Accounting (5 decks)

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