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Questions and Answers
What is the purpose of a cash flow statement?
To reveal the flows of cash into and out of the business during the year.
What components are differentiated in a cash flow statement?
True or False: Positive cash flow always indicates a profit.
False
In a balance sheet or statement of financial position, _____ accounts for almost half of the current assets.
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Which assets account for the highest percentage of total assets in the AT&S balance sheet?
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What are Cost of Sales (COS) or Cost of Goods Sold (COGS)?
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What does Gross Profit reveal about a business?
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Expenditures and expenses have the same meaning in accounting.
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Return on Equity (ROE) is calculated as profit before tax and interest (EBIT) divided by __________.
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Match the financial ratio with its definition:
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What is the purpose of keeping accurate records of business transactions?
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What is the definition of assets in accounting?
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What does a balance sheet include?
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Depreciation is a method that increases the value of assets over time.
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Liabilities are __________ that are owed to other persons, businesses, or banks.
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What is the formula for calculating asset turnover?
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How is average assets calculated?
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In the example provided for AT&S, what is the asset turnover ratio when calculated based on average assets?
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How is average net assets calculated?
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What is the asset turnover ratio for AT&S when calculated based on average net assets?
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What is the formula for calculating inventory turnover?
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In the AT&S example, what is the stock turnover ratio?
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Study Notes
Accounting - Keeping Record of Business Transactions
Balance Sheet
- A balance sheet lists a company's assets, liabilities, and equity at a specific point in time.
- Assets include:
- Fixed assets (non-current assets): have a lifespan of more than one year, e.g., property, plant, premises, buildings, machinery, equipment, and financial assets.
- Current assets: have higher liquidity, e.g., inventory, accounts receivables, cash, and bank deposits.
- Liabilities include:
- Non-current liabilities: have a duration of more than one year, e.g., bank loans.
- Current liabilities: due within one year, e.g., trade credit or trade payables.
- Equity (owner's equity): the difference between assets and liabilities, representing the wealth of the company.
Income Statement (Profit and Loss Account)
- An income statement shows the performance of a business over a certain period of time, including:
- Revenues: income generated from selling goods or services to customers.
- Costs: resources consumed to produce the goods or provide the services.
- Expenses: costs incurred during the period, e.g., wages, rent, energy, depreciation.
- Profit is calculated as revenues minus costs and expenses.
Cash Flow Statement
- A cash flow statement reveals the inflow and outflow of cash into and out of a business during a year, including:
- Cash flow from operations: generated from core business activities.
- Cash flow from investments: relates to long-term investments, e.g., purchasing or selling assets.
- Cash flow from financing activities: refers to cash flows from investors or creditors, and cash outflows for paying interest, dividends, or repaying debt.
Analysis of Financial Statements
- Reading a balance sheet and income statement with caution, as asset values can be subjective and depreciation can affect asset values.
- Analyzing financial statements can provide insights into:
- Asset composition and financing structure.
- Revenue and profit development over time.
- Balance between non-current assets and long-term financial resources.
Importance of Accounting
- Keeping accurate records of business transactions is essential for generating information on a company's financial status.
- Financial statements provide stakeholders with a snapshot of a company's financial health and performance.### Balance Sheet/Statement of Financial Position
- As of 31 March 2018, AT&S's total assets are €1,530,439,000, with non-current assets making up 61.7% of total assets.
- Non-current assets are mostly composed of property, plant, and equipment (€766,378,000).
- Current assets are €586,172,000, with cash and cash equivalents making up 46.2% of current assets.
Equity
- Total equity is €711,391,000, consisting of share capital, reserves and other equity, and retained earnings.
- Share capital is €141,846,000, while reserves and other equity are €200,392,000, and retained earnings are €369,153,000.
Liabilities
- Total liabilities are €819,048,000, with non-current liabilities making up 63.1% of total liabilities.
- Non-current liabilities are mostly composed of non-current financial liabilities (€458,359,000).
Profit and Loss Statement
- Revenue for the financial year 2017/18 is €991,843,000, with a gross profit of €162,304,000.
- Operating result is €90,286,000, and profit before tax is €75,511,000.
- Net profit for the year is €56,519,000.
Analysis of Financial Statements
- Liquidity: Working capital is €282,400,000, indicating that the business is able to pay its bills and repay its debts on time.
- Profitability: Return on equity (ROE) is 12.7%, and return on capital employed (ROCE) is 7.3% (or 7.7% using average capital employed).
- Financial efficiency: Asset turnover is 0.67 (or 1.05 using average net assets), indicating that approximately one euro of turnover is generated by each euro invested in net assets.
- Inventory turnover is 6.8 times per year, indicating that inventory is sold or used up almost seven times per year.
Accounting Concepts
- Cost of sales (COGS) includes the costs directly tied to the production of goods, such as materials, labor, and manufacturing overhead.
- Gross profit reveals the earnings of a business after deducting the direct costs of producing goods.
- Expenses are costs that have expired or been used up in producing goods or services.
- Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a metric that analyzes operating performance, including operating expenses.
- Earnings before interest and taxes (EBIT) is a metric that excludes depreciation and amortization.
Use of Financial Statements
- Financial statements are used by various stakeholders, including internal users (managers, owners, employees) and external users (tax authorities, suppliers, competitors, investors, media).
- Managerial accounting provides information for decision-making, while financial accounting provides information for external stakeholders.
- Auditing is the process of verifying the accuracy of financial statements.
- Financial ratios, such as liquidity, profitability, and financial efficiency ratios, can be used to analyze financial performance and make comparisons between businesses.
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Description
Learn about accounting principles and practices in business, including record-keeping, purchases, and sales. This quiz is based on a scenario of a computer business operated by Tina and Steve.