Accounting Principles and Ratios

What are the four qualitative characteristics that enhance the usefulness of accounting information?

Comparability, Timeliness, Verifiability, and Understandability

What are the two fundamental qualities that determine the usefulness of accounting information?

Relevance and Faithful representation

What does the cost constraint dictate in financial reporting?

The benefits of providing the information should outweigh the costs

What is the concept of duality in accounting?

Every transaction must be recorded at least twice to keep the accounting equation in balance (Assets = Liabilities + Equity)

What is an accounting business event?

An occurrence that will probably affect the entity in some way, but is not recorded until an exchange of goods occurs with an outside entity

What does the expanded accounting equation include?

Assets = Liabilities + Equity + Income - Expenses

What are the rules of debit and credit for Assets and Expenses?

Increase = Debit (Dr), Decrease = Credit (Cr)

What are the rules of debit and credit for Liabilities, Equity, and Income/Revenue?

Increase = Credit (Cr), Decrease = Debit (Dr)

What are the three main asset measurement rules for current assets (Cash, Inventory, Accounts Receivable)?

Cash is measured at face value; Inventory at lower of cost and net realizable value; Accounts Receivable at face value less allowance for doubtful debts

How are Property, Plant, and Equipment (PPE) measured on the balance sheet?

At cost or fair value

What is the difference between General Purpose (GPFS) and Special Purpose Financial Statements (SPFS)?

GPFS must be prepared in accordance with GAAP, whereas SPFS can be prepared without adhering to GAAP

What are the two main presentation formats for the Statement of Financial Position (Balance Sheet)?

T-format (assets on LHS, liabilities/equity on RHS) and Narrative format (down the page)

What is net realisable value?

Expected sales price less related costs

What is historical cost?

Entry value reflecting the market price in which the entity acquires the asset or incurs the liability

What is fair value?

The price at which the asset would be sold at the measurement date under current market conditions

What is present value?

The value of a future amount of money or stream of payments in today's dollars, adjusted for interest and inflation

What is accrued income?

Income that has been earned (service provided) but not yet paid for / received in cash

What is income received in advance?

Cash is received but income is not yet earned, so it remains a liability until earned

What is an accrued expense?

An expense that has been consumed or used, but not yet paid for in cash

What is a prepaid expense?

An expense paid in advance; it is only recorded as an expense when consumed or used up

What is accumulated depreciation?

The total depreciation that has been charged to the statement of profit or loss in relation to an asset over its life

What does depreciation represent?

The systematic allocation of the cost of a tangible asset over its useful life (it does NOT represent physical loss in value or involve cash flows)

What is the formula for the Cash Adequacy Ratio?

Cash from Operating Activities / (Capital expenditure + Dividends)

What is the formula for the Cash Flow Ratio?

Net cash flows from operating activities / Current liabilities

What is the formula for the Debt Coverage Ratio?

Non-Current Liabilities / Cash flow from operating activities

What is the formula for the Cash Flow to Sales Ratio?

(Cash flow from operating activities / Sales revenue) × 100

What is the formula for the Debt Ratio (Debt to Assets)?

(Total liabilities / Total assets) × 100

What is the formula for the Equity Ratio?

(Total equity / Total assets) × 100

What is Net Tangible Asset Backing per share (NTBP)?

(Ordinary shareholders' equity - Intangible assets) / Number of ordinary shares on issue at year end

What is the Price Earnings Ratio (PER)?

Current market price / Earnings per share (EPS)

What is the formula for Earnings per Share (EPS)?

Profit available to ordinary shareholders / Weighted number of ordinary shares on issue

What is the formula for Operating Cash Flow per Share?

(Net cash flows from operating activities - Preference dividends) / Weighted number of ordinary shares on issue

What is the formula for Dividend per Share (DPS)?

Dividends paid or provided to ordinary shareholders / Weighted number of ordinary shares on issue

What is the Quick (Acid-Test) Ratio formula?

(Current Assets - Inventory) / Current Liabilities

What is the Asset Turnover Ratio formula?

Sales revenue / Average total assets

What is the formula for Times Inventory Turnover?

Cost of sales / Average inventory