Flashcards
ACC1200
Cards in this deck (51)
- 1Financial accountingProvides information for external parties to make economic decisions regarding the entity
- 2Management accountingCreation of reports for use of management in. Internal planning and decision making
- 3The process of accountingIdentify - Transactions that affect the entity’s financial position are considered
Measure -Analysis, recording and classifying business transactions
Communicate - Through various reports - 4Conceptual framework definitions and recognitions ASSETSDefinition: A resource controlled by the entity as a result of a past event and from which economic benefit is expected
Recognition: Future economic benefit should be probable and reliably measured - 5Conceptual framework definition and recognition LIABILTYDefinition: A present obligation of the entity arising from past event which results in the outflow of entity resources
Recognition: Outflow of ressources should be probable and reliably measured - 6Conceptual framework definition and recognition EQUITYDefinition: The residual interest in assets after deducing its liability. Is increased through capital contribution and excess income
- 7Business transactionsExchange of resources between two entities
- 8Entity conceptMust keep business transactions seperate from personal ones
- 9Business eventOccurrence that may have potential to affect the entity in some way. It will nit be recorded as a transaction until an exchange occurs
- 10Accounting equationAssets = Liability + equity
Or a more dynamic: Assets - liability + equity - expenses +income + capital - 11Concept of dualityEvery business transaction must have a dual effect
- 12Rules of debit and creditDEAR - debit defaults (increases) expenses and assets
However debit would be a decrease for equity,income and liability accounts
Opposite goes for credit - 13Accounting errors Single entryArises when only one part of transaction was entered (ignoring rule of duality)
- 14Accounting errors Transposition errorOccurs when two digits recorded are transposed
- 15Accounting errors Incorrect entryRecording a transaction as two increases or decreases to one side of the equation
- 16Income statementOne of the general purpose financial statements which reflects the entity’s profit or loss for a period
- 17Income definitionIncome encompasses both
- Revenue arising in ordinary course of activities
- Gains on disposal of non current assets and unrealised gains on revaluing assets - 18Accrual accountingSystem of accounting in which transactions are recorded in the period to which they relate, rather than the period to which the entity receives/gives cash
Accrual accounting better reflects entity performance so accounting standards are that all accounting reports should be accrual - 19Cash accountingAccounting system that simply records transactions at the time cash exchange occurs
- 20DepreciationAre recognised as expenses in the income statement that do not involve outflow of cash. All PPE assets must be depreciated
- 21Straight line depreciation(Asset cost price - residual value)/useful life
- 22Diminishing balanceFor assets which contribute more initially and less later (machinery)
Calculated by applying a constant percentage to assets carrying value at start of each reporting period - 23Units of productionDepreciates depending on activity or output in the reporting period
(Cost of asset - expected residual value) * (number of units produced/ life in number of units) - 24Balance sheetAlso known as statement of financial position, details the entity’s assets, liabilities and equity
- 25Formats of balance sheetT format : Assets = liabilities + Equity
Narrative format: Assets - liabilities = equity - 26Current and non currentDepends on the timing of economic benefit
Current: Expecting increase(assets)/decrease(liability) in the next period (year)
Noncurrent: Anything beyond the next reporting period - 27Statement of cash flowSummarises the cash and types of cash flows coming in to and flowing out of an entity
Important for external users to see where money comes from and goes and also how this money came about - 28Operating, financing and investing cash flowsOperating: Cash received from company’s business activities
Financing: activities that change the size/composition of financial structure
Investing: Relates to acquisition and or disposal of non current assets - 29Examples of operating cash flows-Cash received from customers
-cash paid to suppliers
-cash paid to employees
-cash paid for tax and interest - 30Examples of investing cash flows-Selling old equipment
-loaning money to company
-buying land for new factory - 31Examples of financing cash flows-Drawings and contributions of capital
Negative financing is not necessarily a bad sign as it shows ability of business to pay off loan or paying owners - 32Analysing cash flow statementWarning signs
-cash received is less than cash paid
- net cash flow from operating is negative
-Receipts from customers is less than cash paid to suppliers
- Overtime procès from loans are greater than loan repayments - 33Cash flow ratio Debt coverage ratioCF ration - Net cash flow from operating/current liabilities
The higher the ratio the better, shows ability to settle current liabilities
DC ratio - net cash flow from operating activities/ non current liabilities
Indicates how long it would take to pay off debt with excess cash from operating activities - 34Sole traderFinancing: Through owners contribution
Extent of owners involvement: 100% involved
Tax: individual profit rates
Owners liability: Fully liable
Government involvement: Minimal
+ quick and easy to set up, owner claims all profits
- Full liability, tax could be higher, limited by skill/time of owner - 35PartnershipAssociation of two or more people or entity’s that carry out business as partners
Financing: Owner contribution
Owner involvement: Can vary 0-100% depending on type of partner
Tax: individual marginal tax rates
Owner liability: Jointly fully liable
Government regulation: Minimal
Partnership agreement - Important to have to outline contributions (assets, time, skills etc)and profit division - 36Public companyFinancing: Through public shares
Owner involvement: Minimal as board of director runs the business
Tax: Company tax rates
Owner liability: Depends on shares, mostly limited to amount of unpaid shared
Gov. Regulation: Highly regulated (Accounting standards, laws etc)
+ contributions from shares, limited liability, ability to expand
- Expensive and time consuming to set up, must comply with legal requirements, must prepare financial statements - 37Private companyOnly differences from a public company is shares are only issued to select individuals and regulation isn’t as high as public company’s
- 38TrustFinancing: Settlor transfers property/cash to trustee for benefit of beneficiary
Owners involvement: Trustee has control on behalf of beneficiary
Tax: taxed at marginal rate of beneficiary to whom profit is given
Liability: Trustee holds unlimited liability for all debts of the trust
Regulation: Minimal apart from tax
+Minimise tax payments, Simple to form
- additional laws apply, need qualified accountant to administer - 39Business planA written document that outlines the future activity for an existing or proposed business entity
+ Provides a clear statement of direction and purpose which allows everyone to work towards, plans provide suitable means for evaluating performance, encourage managers and owners to review aspects of their operations
- high level of planning may reduce flexibility, does not eliminate uncertainty, not a guarantee of success, may use inaccurate/bias information - 40Balanced scorecardProvides a set of performance measures that reflect the entity’s goals and strategy’s.
Measures from 4 perspectives
- Financial: creating value for shareholders
-Customer: What new and existing customers value
-Internal operations: What process must we excel at to achieve financial and customer objectives
-Innovation: How to continue to improve and create value - 41Return on investmentROI - Way of measuring performance
Profit/Divisional investment
Important that this be higher than the required rate of return - 42Residual incomeProfit before tax-(required rate of return*investment)
Positive RI is good performance - 43Break even calculations Contribution marginRevenue - variable expenses
- 44Break even (in units)Fixed cost/(sales price per unit-variable cost per unit)
= fixed cost/contribution margin per unit - 45Break even (in dollars)Fixed cost/contribution margin ratio
Contribution margin ratio =
total revenue - variable costs/total revenue - 46Operating leverageEntity’s with higher proportion of fixed costs than variable within cost structure are said to have high operating leverage.
They are more risky since harder to reach break even however once you do profits are large - 47Product costsProduct costs relate directly to the product
Example: materials, labour, factory rent, machinery depreciation, insurance - 48Period costsPeriod costs are costs not necessary in the manufacturing process
Example: Administration, admin cleaning, tax, interest on loan - 49Direct and indirect costsDirect - material, wages,
Indirect - rent,utility bills, owner salary, insurance,depreciation - 50Cost based pricingBased off cost of making + a markup
- Is easy but ignores customer demand - 51PricingMarket based pricing: What customers are willing to pay. Responds to market however this information,action can be hard to estimate
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- Flashcards on ACC1200, created by Katherine Moffat on 27/05/2018.
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- Katherine Moffat
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