Financial and Management Accounting Review

Flashcards generated from lecture notes on financial and management accounting, covering topics such as financial statement analysis, ratio analysis, budgeting, cost-volume-profit analysis, and corporate social responsibility.

What is Horizontal Analysis?

Evaluates a series of financial data over time.

What is Vertical Analysis?

Evaluates financial items in relation to a base amount, expressing each item as a percentage of the base.

What is Ratio Analysis?

Evaluates a comprehensive range of financial relationships representing different aspects of an organisation's activities.

How is Dollar change calculated in Horizontal Analysis?

Current period's number - Previous period's number.

What does Trend Analysis involve?

Expressing an item in subsequent years relative to a selected base year, usually given a value of 100.

What is the common base for the statement of profit or loss in Vertical Analysis?

% of Sales Revenue.

What is the common base for the statement of financial position in Vertical Analysis?

% of Total Assets.

What are the categories of ratios used in financial analysis?

Profitability, Efficiency, Liquidity, Capital Structure, and Market Performance.

What are Profitability ratios?

A measure of the profit relative to the resources available to generate the profit.

What are Efficiency ratios?

The sales generated per dollar invested in assets.

What are Liquidity ratios?

A measure of the short-term ability of the entity to pay its maturing obligations and meet unexpected needs for cash.

What are Capital Structure ratios?

An entity's ability to meet its long-term stability and financing.

What are Market Performance ratios?

Relevant to companies listed on an organised stock exchange and generally relate the entity's financial numbers to the entity's share price.

Why is it important to identify trends in an entity's ratios over time?

Used to assess the stability and/or directional changes in ratios over time.

What is Intra-industry analysis?

Comparisons with other entities in the same industry to compare respective returns and risks.

What is Inter-industry analysis?

Comparing the entity's ratios with those of entities operating in different industry structures.

What is the focus for ratio analysis?

Calculations, interpretation and analysis to answer 'why' questions.

What does Return on Equity (ROE) capture?

Captures profitability, efficiency, and capital structure.

How is Return on Equity (ROE) calculated?

Profit available to owners / average equity x 100.

What does Return on Assets (ROA) reflect?

Reflects the results of entity's ability to convert sales revenue into profit and generate income from its asset investments.

How is Return on Assets (ROA) calculated?

Profit or loss / average total assets x 100.

How is Gross Profit calculated?

Sales - Cost of Sales

How is Gross Profit Margin calculated?

Gross profit / sales revenue x 100.

How is Profit Margin (Net Profit Margin) calculated?

Profit or loss / sales revenue x 100.

How is Cash Flow to Sales Ratio calculated?

Cash flow from operating activities / sales revenue x 100.

How is Asset Turnover Ratio calculated?

Sales revenue / average total assets= x times or can be shown as a %.

How is Days Inventory calculated?

average inventory / cost of sales x 365 days = x days.

How is Days Debtors calculated?

average trade debtors / sales revenue x 365 days

How is Inventory Turnover calculated?

cost of sales / average inventory = x times

How is Debtors Turnover calculated?

Sales revenue / average trade debtors = x times

What is a Cash Cycle?

The period of time between an entity paying for the inventory, selling the inventory, and receiving cash for the inventory

What is a Limitation of Ratio Analysis?

Effective financial analysis requires information beyond financial numbers, including non-financial aspects like ESG performance.

Define Liquidity ratios

A measure of the short-term ability of the entity to pay its maturing obligations and meet unexpected needs for cash

Define Capital structure ratios

An entity's ability to meet its long-term stability and financing decisions

Define Market performance ratios

Ratios that connect a company's financials to its share price, showing market sentiment.

How is Working Capital calculated?

Current assets - current liabilities

How is Current Ratio calculated?

current assets / current liabilities

How is Quick Ratio calculated?

(Current assets - Inventory) / Current liabilities

How is Cash Flow Ratio calculated?

net cash flows operating activities / current liabilities

What is the accounting equation?

Assets = Liabilities + Equity

What does Interest Coverage indicate?

Indicates entity's ability to sustain debt by measuring its ability to meet interest payments from operating profit

What is Authoritarian style of budgeting

Senior management sets the targets and the budget for unit managers and unit managers have little say in the targets that are set

What is Participative style of budgeting:

Targets and budgets are arrived at by a process of discussion and negotiation between senior management and unit managers

What is Direct materials (DM)

acquisition costs of all materials traced to a product which one sale of the product become part of COGS

What is Direct labour (DL)

compensation of all manufacturing labour that can be traced to a product and which on sale of the product become part of COGS

What is Manufacturing overhead (OH)

indirect manufacturing costs related to the manufacture of the product but cannot be traced to it

What is CVP analysis?

CVP analysis is concerned with the change in profits in response to changes in sales volumes, costs and prices

Define Fixed Costs

Total Fixed Costs remain constant regardless of activity level, however, Fixed Costs per unit decrease as production increases.

Define Variable costs

Variable costs changes in total as the level of activity changes but Variable costs per unit remain the same

When does Break-even occurs?

Total revenue = fixed costs + variable costs

Contribution Margin Formula

Revenue - Variable Costs

Margin of safety (units) Formula:

actual or estimated units - units at break-even point

Margin of safety (revenues) Formula:

actual or estimated revenues - revenues at break- even point

Relevant costs and income:

Costs and income that differ among alternative courses of action

Define Incremental costs and income:

The additional costs or income from alternative courses of action

Define Opportunity cost:

The cost of forgoing benefits that would be available if the resources had been used in the next best alternative

Define Avoidable costs:

Costs that will be avoided if an alternative source of action is accepted

Define Unavoidable costs:

Costs that will be incurred regardless of the decision taken regarding possible alternative sources of action

Define Direct costs

costs that can be traced directly to the cost object

Indirect costs

those costs that are used for the benefit of multiple cost objects and must be assigned to cost objects

What does the Value Chain transforms raw materials and resources into good and services?

Research and development, Design of products and processes, Production, Marketing, Distribution and Customer service

What is Cost-based pricing

Simple and applies a mark-up to some calculations of product or services cost

What is Market-based pricing:

Based on some measure of customer demand

What is Peak load pricing

different prices are charged at different times to reduce capacity restraints

What is Price skimming

a higher price is charged for a product or service when it is first introduced

What is Penetration pricing

prices are set low when new products are introduced to increase market share

What is Price discrimination

setting different prices for different customers

What is Predatory pricing

the act of setting prices low to drive competitors out of the market, then raising prices once competition is removed

What is Collusive pricing

two or more organisations conspire to set prices above a competitive price

What is Dumping

a foreign-based entity sells products cheaper in Australian than where produced and the price could harm an Australian industry

What is Triple bottom line reporting (TBLR)

Economic + Social + Environment performance reporting

Corporate Social Responsibility (CSR)

Generally viewed as impact of a company's activities on the welfare of society

Meaning of social reporting

Provides information about an organisation's impacts upon particular people and societies

Meaning of environmental reporting

Reports on an organization's impact on natural systems (land, air, water, ecosystems).

What is Greenwashing?

Providing the public or investors with misleading or false information about the environmental impact of a company's products or operations

Key performance indicators (KPIs)

Are performance measures that are critical for the success of the entity

what are the set performance measures that reflect entity’s goals and strategies from four perspectives

1. financial

2. customer

3. internal operations

4. innovation and improvement activites

performance measurement

at the individual level should highlight to the employees what tasks are important

the reward system

also part of the performance measurement system