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Accounting Unit 3 Mega Quizlet
Terms in this set (64)
What is the definition of long term sources of finance and what are some examples?
Long term is financing used for the funding of the purchase of assets that are used to generate returns over a long period of time.
Examples include: shares, debentures and unsecured notes RECHECK
What are the short term investment options? (3)
1. Cash Management Trusts
2. Money Market
3. Term Deposits
What are the long term investment options? (5)
3. Unsecured notes
5. Term deposits
What are cash management trusts?
Cash management trusts pools money for investment into the short term money market such as, treasury notes, commercial bills and bank bills.
What is the money market?
A marketplace where banks and other financial institutions buy and sell debt instruments such as promissory notes, bank bills and commercial bills.
What is a term deposit?
An amount of money that has been invested with a financial institution, for a fixed period of time at a fixed interest rate.
What are debentures?
A loan made to a company at a fixed interest rate with the right to sell the company's assets if the loan is not repaid on time.
What are unsecured notes?
A loan made to a company at a fixed rate, typically higher than debentures, with no right to sell any property if the loan is not repaid on time.
What are unit trusts?
Where money is pooled together and invested in short and long term assets such as fixed interest bank deposits, land or shares.
What are the short term sources of finance? (4)
1. Bank overdraft
2. Credit terms
3. Factoring of debtors
4. Commercial bill
What are the long term sources of finance? (5)
1. Share capital
2. Bank loan
3. Lease finance
5. Unsecured notes
What is management accounting?
Management accounting is the production of financial reports for internal users for the day-to-day management of its operations. Reports are informal, detailed and frequent and compare actual with budgeted performance.
What is financial accounting?
Financial accounting is the process of producing general purpose financial reports used by external users such as shareholders, investors, creditors, suppliers, customers, employees and the government.
What is a sunk cost?
A cost that has already occurred and is irrelevant in future business decisions.
What is a relevant cost?
A cost that relates direct to a business decision.
What is a master budget?
A master budget is the name given to the full set of budgets prepared by a business for a period of time. The master budget contains interrelated financial plans to achieve strategic financial goals of a business.
Master budget is divided into two sections, the operating budget and financial budget.
What is an operating budget?
Operating budget are the set of budgets that provide the information required to prepare a budgeted income statement.
What is the finance budget?
The financial budgets are the remaining budgets prepared by a business and include a cash budget, capital expenditure budget and budgeted balance sheet
What is a capital expenditure budget?
Component of the finance budget. A capital expenditure budget sets out the type and cost of the non-current assets that must be purchased, and how it will be financed.
What are some internal controls for an appropriate level of investment in non-current assets? (4)
1. Must not be excessive - too much could require unsustainable levels of financing
2. Assets should be safeguarded from loss, theft or damage - should be monitors
3. Must be sufficient - business should invest to continue to maintain marketshare with competitors
4. Large capital investments should be carefully planned to ensure it will benefit the business.
What are some internal controls for the appropriate management of cash? (4)
1. Separation of duties - handling of cash should be separate from the recording of cash.
2. All cash receipts should be banked daily.
3. Large payments should be checked by two senior employees.
4. Cash budgets should be prepared on a continuing basis.
What are some internal controls over accountant s receivable? (4)
1. Business should conduct credit checks before issuing credit
2. Monthly statement should be sent to debtors outlining their transactions and the amount owing
3. Follow of overdue accounts, contacting and reminding of amounts owing
4. Separation of duties
What are some internal controls over inventory? (4)
1. Separation of duties - recording of inventory should be separate from handling of inventory
2. Inventory should be stored in a secure location, with limited access and video surveillance
3. Inventory should be maintained using a perpetual inventory system to identify slow moving lines of stock and possibly of running out of inventory
4. Business should hold an appropriate level of inventory - too little inventory and the business risks running out of stock - too much and the business risks spending more on storage space and obsolete inventory (which will need to be discounted)
What are some internal controls over accounts payable (debt)? (4)
1. Short term debt is paid within 12 months - or earlier to receive discounts
2. Financial planning needs to account for the repayment of debt
3. Business should never increase borrowings to finance debt repayments.
4. Debt should never exceed liquidity. The lowering the gearing the better.
What is the appropriate level of equity capital?
1. Business should not undercapitalise - underestimating initial capital or expanding too quickly.
2. Business should not overcapitalise - resulting from too much equity which could lower shareholder returns, increase dividends payments and make it difficult to finance from additional share issues.
Why are capital investment decisions important? (4)
1. Involves large sums of money
2. Long term
3. Difficult to reverse
4. High risk
What is 'time value of money'?
Time value of money states that money today does not have the same value in the future due to its potential earning capacity from interest and inflation. A dollar owned (owed) today is worth more than a dollar in the future.
What are the qualitative factors factors affecting capital investment decisions?
1. Consumer preferences
3. Government regulations
Why do capital investment decisions need to consider consumer preferences?
Exclusion of a low margin product may affect the sales of other products.Capital investment could result in a decline of the quality of products/service.
The business will need to consider whether the capital investment will produce goods/services that are in line with current and future customer demands and preferences. For example, there are changing fashion habits and social values - eg consumer preferences towards environmentally friendly or animal welfare products.
Why do capital investment decisions need to consider competition?
The business will need to consider the actions of competitors in response to the capital investment. Could a competitor easily adopt the capital investment result in no gain in market share? Capital investments need to ensure the business keeps up or gets ahead of competitors.
Why do capital investment decisions need to consider government regulations?
A business must operate within the grounds of the law and must consider the impact of existing and pending legislation. For example, a carbon tax could limit production of polluting plant and equipment.
What is discounted cash flows/net present value?
The NPV is the difference between the market value of a project and its cost.
What are the advantages of a NPV method?
1. Considers the time value of money
2. Takes into account all cash flows over the life of the asset
What are the disadvantages of a NPV methods? (3)
1. Does not account risk and liquidity
2. More complicated to work out than the payback method
3. Assumptions of future cash flows and rate of returns may not be realised
What is the payback period?
The number of periods (perhaps years) required to recover a project's initial cost.
What are the advantages of the payback period? (4 but 2 req)
1. simple to calculate
2. easily understood
3. a target rate of return or discount rate does not need to be determined
4. it is a good indicator of risk
What are the disadvantages of payback period? (4 but 2 req)
1. it does not take into account the time value of money
2. it is less accurate a measure than the NPV method
3. it does not directly measure if a target return/investment yield is achieved
4. Cash received after the payback period is not measured
What are some external users of accounting reports? (5)
2. Potential investors
5. Australian Tax Office
What is an internal audit? (2)
An internal audit is the checking of the business procedures and policies to ensure they are working properly and efficiently.
Internal auditors detect and correct any errors and deficiencies.
What is the role of accountant in managing a business? (7 req 4)
They have many roles, including:
1. Preparation of financial statements
2. Preparation of budgets
3. Calculation of a cost of a new product
4. Calculation of a breakeven point of a product
5. Preparation of payroll
6. Periodic review of internal control systems of a business
7. Preparation of individual and company income tax returns.
What is the purpose of cash budgets?
Planning - Budgets set the financial targets of the business and the direction of the business.
Co-ordinating - Budgets are integrated between departments/functions and force all sections of a business to work together to implement a budget.
Controlling - Budgets force managers/owners to look ahead in meeting both its short term and long term financial targets. Budgeting allows managers/owners to anticipate and prepare for any problems that may occur in the future.
Authorising of Expenditure - Future expenditures included in the budget can be assumed to have management approval once the budget has been approved.
Communicating - Budgets provide a medium to which senior management/owners can communicate financial objectives and strategies for the forthcoming period.
Motivating employees - Budgets can be used to motivate employees by setting targets for employees to strive for hence, improving their performance.
Why is cash important to business viability?
If a business cannot generate enough to cash to meet its debts as they fall due, it may result in the business going bankrupt. Eg Dick Smith.
What is the purpose of a budgeted income statement?
The purpose of the budgeted income statement is to set out the expected income, expenses and profit or loss for a future period of time.
What is the purpose of performance reports? (6 but req 4)
1. Identifies favourable and unfavourable variances
2. Identifies variances within the business's control
3. Identifies variances outside the business's control
4. Allows for action to correct unfavourable variances
5. Future budgets can be modified
6. Indicates the cash balance available for future planning
Why is business planning important?
1. Planning allows the allocation of scarce resources amongst competing uses.
2. Cost leadership vs product differentiation strategies requires business to make a choice about the product that they will provide that will give them a competitive advantage and improved market recognition.
3. Performance management reduces costs and risks by reviewing performance reports and determining where future improvements can be made.
4. Sets short term and long term goals for the development of the business.
What are the business planning considerations?
1. Goals, objectives and generic business business strategies - cost leadership vs product differentiation
2. Strategic initiatives
3. Performance management
4. Reducing costs and risks
What is cost leadership? (2)
A business strategy that involves selling products/services at a lower cost than its competitors.
It is typically achieved by reducing waste and inefficiencies and driving costs to a bare minimum. Cost leadership is often used by large, high volume companies where fixed costs can be spread over a greater output.
What is product differentiation?
A business strategy that involves offering customers a product/services with superior benefits than its competing products/services.
As product uniqueness or difference is valued by its customers in the target market, the business is able to charge prices higher than those of its competitors.
What is a strategic initiative?
A major plan of a business that will likely have a significant impact on the future of the business.
What is performance management?
Performance management is where employees are made aware of the level of performance that is expected of them and periodic review of that performance.
What is insolvency?
Insolvency is where a person or entity cannot pay its debts as they fall due.
What are the ways to test insolvency?
1. Balance sheet test - is there is a positive net asset position?
2. Balance sheet test - do current assets exceed current liabilities?
3. Current ratio?
4. Liquidity ratio? - Quick asset ratio?
5. Cash flow - how is the company financing its operating activities?
What is voluntary administration? (3)
Voluntary administration is where a company heading towards insolvency or a secured creditor who has not been paid may appoint an external administrator known as a voluntary administrator to:
1. Assess the health of the company
2. Report to creditors
3. Recommend whether the company should be liquidated or return to the control of the directors.
During voluntary administration, creditors cannot take action unless they go to court or seek approval from the administrators.
What is liquidation? (4)
Liquidation occurs when it is not financially viable to continue business operations. A liquidator will be appointed to:
1. Collect and sell off assets of an insolvent company
2. Distribute the money to creditors
3. Investigate the conduct of the directors and other company officeholders
4. Close the company
What is receivership?
Receivership is a position of a company where a secured creditor, who may not be paid, applies to court for a receiver to be appointed and repay secure creditor debts.
What is the order of priority of the distribution of funds when insolvent? (7)
1. Trustee/liquidator is paid fees and costs of conducting the liquidation.
2. Secured creditors ranked based on their debt instrument.
3. All outstanding employee entitlements including wages, superannuation, leave entitlements and redundancy pay.
6. Unsecured creditors
Shareholder usually receive nothing, while unsecured creditors receive very little or nothing as the value of liabilities would exceed assets, otherwise it would not be insolvent.
If the residual amount is insufficient to meet all debts, it will divided at that stage by pro rata (proportion).
What are the costs of engaging in CSR?
1. Potential higher operating costs - additional running costs of plant, more staff to run equipment and produce reports
2. Initial cash outlay required for investments in CSR
What are the benefits of CSR?
1. Improves the chance of a employing a high quality employee
2. Increased competitiveness with product differentiation
3. Assists in complying with some regulation requirements
4. Improves employee morale which could increase productivity
5. Improves credibility of the company with greater transparency
6. Reduces risks in the company, increasing investor interests in the company.
What are some ethical issues between business owners/managers and employees? (2)
1. Expectation of employees to work excess hours of unpaid overtime or be expected to find a new job.
2. Exploitation of overseas workers - paying low wages and requiring to them to work in dangerous conditions
What are some ethical issues between business owners/managers and clients? (3)
1. Acceptance of gifts from suppliers - may distort the business's ability to select suppliers
2. Breaches of confidentiality - senior managers may pass confidential information to a competitor
3. Conflict of interest
What are some ethical issues between business owners/managers and investors? (3)
1. Investing in high risk ventures.
What is the margin of safety? (2)
The margin of safety is the % or units by which budgeted/actual sales exceeded budgeted/actual breakeven sales.
XYZ limited actual sales would have to decrease by... before it will incur a loss.
What is the difference between cash and accrual accounting?
Cash basis of accounting records a transaction at the time cash is either received or paid (example)
The accrual basis of accounting records a transaction at the time income is earned or expenses incurred which could be on credit.
Cash budgets are prepared on a cash basis where only cash received and paid is recorded.
Budgeted income statements are prepared on an accrual basis where income or expenses are recorded when they are incurred.
What is CVP analysis?
CVP analysis looks at the relationship between costs (fixed and variable), selling price, volume and profit at different activity levels.
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