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28 Cards in this Set
- Front
- Back
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How do we calculate Net Profit using an income statement? |
Sales Less: Cost of Goods Sold => Gross profit Less: Selling, general and admin expenses => Operating Profit (earnings before taxes) Less: Interest expense Add: interest income => Earnings before taxes Less: taxes => Net profit |
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When do we update cost of goods sold? How does paying debt affect income statement? |
Upon sale of an item No effect on income statement |
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When do we need to adjust entries? When do we accrue expenses? |
Whenever revenue or expenses affect more than one accounting period. Involves a change in either revenue/expense AND asset/liability We accrue expenses when despite payment being due after a current period, part of payment is due for current period. We add payment to liabilities and - from expenses (also part of non-current liabilities) |
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Where is accumulated depreciation logged? |
It is logged in the balance sheet as accum. depr. It is also logged in the income statement |
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How do we calculate straight-line depreciation and rate? What is the book value of an asset? How do we calculate double-declining-balance depreciation? |
SL - (Acq. cost – Residual value) / Useful life | Above answer / (acq. cost-residual value) = rate The book value of an asset is the asset's cost minus the asset's accumulated depreciation DDB - computed by doubling the straight-line rate and multiplying the resulting DDB rate by the beginning book value |
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What is the formula for profit wrt: opening capital, closing capital, drawings, capital introduced? |
Closing capital + drawings – capital introduced – opening capital = profit |
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How do we calculate unit depreciation? |
1. Divide depreciable value (cost less residual value) by useful life in units for depreciation rate 2. To determine expense, actual usage of the asset is multiplied by the depreciation rate |
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What is the rearranged formula for cash? |
Cash = Current liabilities + Non-current liabilities + Equity - Accounts receivables - Inventory - Non-current Assets |
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For financial statement analysis: What types of Profitability Ratio are there? |
One focuses on measuring return on capital The other is concerned with return on sales |
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What formulas are used for measuring return on capital? |
Return on Total Assets (ROTA) = operating profit / total assets Return on Capital Employed (ROCE) = operating profit / (equity + non-current liabilities) Return on Equity (ROE) = profit for year / equity |
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How do the formulas mentioned differ/how are they used? |
ROTA/ROCE - two alternative ways of looking at how well a business has done in generating profits from operating assets ROE - concerned with measurement of performance solely from the shareholders perspective |
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What formulas are used to measure return on sales? |
Gross margin ratio = gross profit/sales Operating profit margin ratio = operating profit/sales |
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How are these formulas react to accounting decisions? |
Affected by both changes in selling price of output and changes in its cost. If they fall, may be due to lower selling prices/higher costs. If they rise, opposite. |
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Define solvency? What are the solvency ratios used for and elements involved? |
Tell us about ability of a firm to pay off liabilities/interest obligations. Short-term solvency ratios - liquidity ratios Long-term solvency ratios - gearing ratios |
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Formulas for liquidity ratios? |
Current ratio = current assets/current liabilities Acid-test ratio = current assets - inventories / current liabilities |
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Formulas for gearing ratios? |
Debt-equity ratio = total debt / total equity Interest cover ratio = profit before interest / interest expense Cash interest cover ratio = cash flow from operations / interest paid |
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What would low debt-equity ratio and high cover ratios entail? What would high debt-equity ratio and low interest cover entail? |
A) lower risk of firm failing to make interest payments of fail to repay their debts B) greater volatility of profits generated by the firm and greater risk of business going bankrupt |
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Define: Share face value Premium value Stock premium Depreciable value Amortization |
Value immediately visible to buyer Raising capital by selling shares > face value Premium paid in excess of stock value Initial cost - residual value Disposal of non-current assets with no physical substance |
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Formula for equity? Define FIFO, LIFO, AVCO? |
Assets - Liabilities First in First out Last in First out Weighted average cost |
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What effect do the following have on cash|profit: - Repayment of borrowings - Making a profitable sale on credit - Buying a current asset on credit - Receiving cash from a credit customer - Depreciating a non-current asset - Buying some inventories for cash - Making a share issue for cash |
On Profit | On Cash none decrease increase none none none none increase decrease none none decrease none increase |
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Bad debts should be provided at a level of 2 per cent ofreceivables at the year end. Wages of 10k were charged. How would the previous statements affect statements of financial position? |
Bad debts are debited from the income statement as expense. The 2% reduction is made from the accounts receivable in the balance sheet. Wages added to balance sheet under current liabilities and debited from income statement expenses. |
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Define cash flows from operating activities, how its calculated including features and elements? |
Net inflow/outflow from trading operations, after tax payments and cash paid to meet financing costs. Equal to the sum of cash receipts from trade receivables and cash receipts from cash sales, less the sums paid to inventories, to pay rent, to pay wages, payments for interests on borrowings, corporation tax and dividends paid. It is basically the amounts of cash received and paid during the period. |
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Define cash flows from investing activities, how its calculated including features and elements? |
Cash payments made to acquire additional non-current assets and with cash receipts from the disposal of non-current assets. These might be PPE, loans made by the business or shares in other companies. Also includes cash receipts arising from financial investments (loans and equities) made outside the business - interest on loans made by the business and dividends from shares in other companies owned by the business. |
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Define cash flows from financing activities, how its calculated including features and elements? |
Concerned with long-term financing of the business. Consider borrowings and finance from share issues. Concerned with repayment/redemption of finance as well as with the raising of it. Includes dividend payments made by the business. |
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What is the direct method and indirect method for calculating cash flow from operating activities? |
The direct method involves an analysis of the cash records of the business for the period, picking out all payments relating to operating activities. The more popular indirect method relies on fact that sales revenue gives rise to cash inflows, and expenses gives rise to cash outflows. So figure for profit for the year will be closely linked to net cash flows from operating activities - then deduce which are cash or not and + or - them. |
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Where are the following recorded in the statement of cash flows: - Tax payments - Dividend received - Interest on loans - Repayment of loans |
Operating - Tax payments/Dividends paid Investing - Dividends received/interest on loans |
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How would repayment of dividends using shares affect financial statements? |
Would affect cash flow statement - financing Would also affect income statement But not balance sheet |
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How does selling PPE affect financial statements? |
PPE sold has direct affect on cash in balance sheet. Any gain/loss is expensed in income statement. Finally it also affects investing part of cash flow statement. |
