Financial Accounting Flashcards

Flashcards generated from lecture notes on financial accounting.

What is Horizontal Analysis?

Evaluates a series of financial statement data over time, highlighting magnitude and significance of changes across periods.

What is Trend Analysis?

Forecasts future trends from at least three years of data, indexed to a base year of 100.

What is Vertical Analysis?

Shows financial items as percentages for company comparisons and trend analysis.

What is Ratio Analysis?

Analyzes relationships between financial statement amounts as ratios or percentages.

What do Profitability ratios measure?

Profit relative to resources.

What do Efficiency ratios measure?

Sales per $1 of assets.

What do Liquidity ratios measure?

Ability to pay short-term obligations.

What do Capital structure ratios measure?

Long-term stability and financing.

What do Market performance ratios measure?

Link financials to share price.

What is Trend analysis in terms of benchmarks?

Ratio stability or changes over time.

What is Intra-industry comparison in terms of benchmarks?

Compare to competitors.

What is Inter-industry comparison in terms of benchmarks?

Affected by industry structures.

What does Return on Equity (ROE) capture?

Profitability, efficiency, capital structure.

What does Return on Assets (ROA) reflect?

Ability to turn revenue into profit and generate income from assets.

How to calculate Gross Profit?

Sales - Cost of sales

What does Gross Profit Margin indicate?

Indicates mark-up on goods, must cover all other expenses.

What does Net Profit Margin (Profit Margin) show?

Shows profit per $1 of sales after all expenses.

What does Asset Turnover Ratio measure?

Measures efficiency in generating sales from assets.

What does Days Inventory show?

Shows average days to sell inventory.

What does Inventory Turnover indicate?

Indicates number of times inventory is sold per year.

What does Days Debtors show?

Shows average days to collect receivables.

What does Debtors Turnover indicate?

Indicates how often receivables are collected per year.

How is Activity Cycle calculated?

Days inventory + Days debtors

What does Cash Cycle represent?

Time from paying for inventory to selling and receiving payment

What are the Financial statements limitations regarding ratio analysis?

Historic, not forward-looking and Prone to accounting manipulation

What Non-financial factors matter in ratio analysis?

ESG (Environmental, Social, Governance) performance, Strategic position, market changes, operational efficiency

What does Liquidity refer to?

Ability to meet short-term obligations as they fall due

How is Working capital calculated?

Current assets – Current liabilities

What does Current Ratio (Working Capital Ratio) measure?

Measures how many dollars of current assets are available per dollar of current liabilities

How is Current ratio calculated?

Current assets ÷ Current liabilities

What are the characteristics of Debt?

Debt must be repaid and Requires regular interest payments and Higher financial risk

What are the characteristics of Equity?

No repayment obligation and Dividends are discretionary and Lower financial risk

What does Interest Coverage Ratio measure?

Measures ability to meet interest payments using operating profits

What does Net Tangible Asset Backing (NTAB) per Share show?

Shows book value of tangible assets per ordinary share

What does Earnings per Share (EPS) measure?

Measures portion of profit attributable to each ordinary share

What does Dividend per Share (DPS) measure?

Measures amount of dividend declared per ordinary share

What does Price–Earnings Ratio (PER) indicate?

Indicates how much investors are willing to pay per dollar of earnings

What is Management Accounting?

Focuses on internal decision-making.

What does Management Accounting include?

Strategic management, Operational control, Planning and decision-making, Preparation of internal financial reports

What does Planning involve?

Involves setting short- and long-term goals

What is Budgeting?

The short-term (typically 1 year) financial expression of those plans

What is a budget?

A budget is a financial plan with targets for planning and control.

What are the 7 Steps in the Budgeting Process?

Review past, assess future, estimate, adjust, compile, monitor, revise.

What is a Sales Budget?

Forecasts sales volume and price

What is a Cash Budget?

Projects cash inflows and outflows

What is a Production Budget?

Plans output to meet forecasted sales

What is a Direct Labour Budget?

Estimates labour hours and costs

What is a Overheads Budget?

Estimates indirect production costs

What is a Selling & Administrative Budget?

Estimates marketing, admin, etc. costs

What is a Master Budget?

A master budget is a comprehensive financial plan comprising interrelated budgets for sales, production, and cash flow, aligned with the chart of accounts.

What does Overheads Budget do?

Estimates indirect costs (utilities, maintenance, admin)

What are the Behavioural Aspects of Budgeting?

Focus on how the budgeting process affects manager behaviour and motivation.

What is the Authoritarian Style in Budgeting?

Top-down, senior managers set all targets, Low participation from unit managers

What is the Participative Style in Budgeting?

Collaborative target setting between managers and staff, Can improve motivation and ownership

What are Fixed costs?

Do not change with activity level (e.g., rent, depreciation).

What are Variable costs?

Change directly with activity level (e.g., materials, fuel).

What are Mixed costs?

Contain both fixed and variable elements.

What is the Break-even point?

Where total revenue = total costs, zero profit.

How is calculated the Contribution margin (CM)?

Revenue – Variable Costs

What are Relevant costs/income?

Vary between alternatives

What are Incremental costs/income?

Additional amounts from decisions.

What are Opportunity cost?

Benefit forgone from the next best option

What is a Cost object?

Anything measurable separately (e.g., product, department, customer)

What are Direct costs?

Traced directly to cost objects

What are Indirect costs?

Shared across multiple cost objects, require allocation

What is the Value chain?

Activities adding customer-perceived value (R&D → Service)

What is Cost-based pricing?

Mark-up on cost; simple but may not reflect demand

What is Market-based pricing?

Reflects customer demand; supports strategy

What is Peak-load pricing?

Prices vary by demand (e.g., peak times)

What is Price skimming?

High price at launch to maximise early profit

What is Penetration pricing?

Low intro prices to gain market share

What are Avoidable costs?

Eliminated if decision changes (e.g., stopping a product)

What are Unavoidable costs?

Will occur regardless of the decision (e.g., sunk costs)