Accounting for Business Transactions
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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?

  • Investments (correct)
  • Operations (correct)
  • Financing activities (correct)

    • 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.

    <p>cash and cash equivalents</p> Signup and view all the answers

    Which assets account for the highest percentage of total assets in the AT&S balance sheet?

    <p>Property, plant, and equipment</p> Signup and view all the answers

    What are Cost of Sales (COS) or Cost of Goods Sold (COGS)?

    <p>Costs directly tied to the production of products like labor, materials, and manufacturing overhead.</p> Signup and view all the answers

    What does Gross Profit reveal about a business?

    <p>Earnings after deducting direct costs of producing goods</p> Signup and view all the answers

    Expenditures and expenses have the same meaning in accounting.

    <p>False</p> Signup and view all the answers

    Return on Equity (ROE) is calculated as profit before tax and interest (EBIT) divided by __________.

    <p>equity</p> Signup and view all the answers

    Match the financial ratio with its definition:

    <p>Return on Capital Employed (ROCE) = Profit before tax and interest (EBIT) divided by capital employed Working Capital ratio = Current assets divided by current liabilities Acid Test ratio = Current assets minus inventory divided by current liabilities Asset Turnover = Measures how efficiently a business utilizes its assets Inventory (Stock) Turnover = Measures how quickly inventory is sold</p> Signup and view all the answers

    What is the purpose of keeping accurate records of business transactions?

    <p>To generate information on the financial status of the business.</p> Signup and view all the answers

    What is the definition of assets in accounting?

    <p>Assets are 'things' that the business owns and that are used for the business.</p> Signup and view all the answers

    What does a balance sheet include?

    <p>Assets, liabilities, and equity</p> Signup and view all the answers

    Depreciation is a method that increases the value of assets over time.

    <p>False</p> Signup and view all the answers

    Liabilities are __________ that are owed to other persons, businesses, or banks.

    <p>debts</p> Signup and view all the answers

    What is the formula for calculating asset turnover?

    <p>Asset turnover = turnover / average assets OR asset turnover = turnover / average net assets.</p> Signup and view all the answers

    How is average assets calculated?

    <p>Average assets = (assets at the beginning of the year + assets at the end of the year) / 2.</p> Signup and view all the answers

    In the example provided for AT&S, what is the asset turnover ratio when calculated based on average assets?

    <p>0.67</p> Signup and view all the answers

    How is average net assets calculated?

    <p>Average net assets = (net assets 2018 + net assets 2017) / 2.</p> Signup and view all the answers

    What is the asset turnover ratio for AT&S when calculated based on average net assets?

    <p>1.05</p> Signup and view all the answers

    What is the formula for calculating inventory turnover?

    <p>Inventory turnover = cost of sales / (average) inventory.</p> Signup and view all the answers

    In the AT&S example, what is the stock turnover ratio?

    <p>6.8 times per year</p> Signup and view all the answers

    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.

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