Finance & Accounting Learning Intentions

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* 1. How well do you understand the following?

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 There are three main financial statements created by accounting processes: the cash flow statement, the income statement (also called revenue statement, profit and loss (P&L) , and the balance sheet.
The income statement is a summary of the income earned and the expenses incurred over a trading period.
The main classification of items in the income statement are revenues, cost of goods sold (COGS) and expenses.
Profit is the difference between revenue and expenses.
The balance sheet shows the overall financial stability of the business.
 The main items in the balance sheet are assets, liabilities and owners’ equity.
Assets are items of value to the business and can be either current or noncurrent.
 Liabilities are debts or business borrowing and can be either current or noncurrent.
 Owner’s equity items refers to the owners’ claims and is considered a liability from the point of view of the business.
The balance sheet equation is: Assets = Liabilities + Owner’s equity or A = L + OE.
Cash flow is the movement of cash in and out of the business over a period of time. Management is required to make sure payments are made and received without creating a cash flow problem.
A cash flow statement shows the movement of cash receipts (inflows) and cash payments (outflows) over a period of time.
 Cash flow statements are divided into three categories: cash flows from operating activities, those from investing activities and those from financing activities.
 Liquidity is used to describe whether a business has a good or adequate cash flow.
 It is vital for a business to be able to manage its borrowings and to use appropriate types of borrowings.
Profitability is the earning performance of the business and indicates its capacity to use resources to maximise profit.
The income statement is used to measure the profitability or earning capacity of the business. Figures from this statement are used to calculate the gross profit and net profit ratios.
The return on equity ratio shows how effective the funds contributed by the owners have been in generating profit, and hence a return on their investment.
Liquidity is the extent to which the business can meet its financial obligations in the short term.
Current assets and current liabilities determine the liquidity or short-term financial stability of a business.
A current ratio of 2:1 indicates a sound financial position.
Gearing measures the relationship between debt and equity.
Gearing is the proportion of debt (external finance) and the proportion of equity (internal finance) that is used to finance the activities of a business.
 Financial planning is essential if a business is to achieve its goals. Financial planning determines how a business’s goals will be achieved.
Planning processes involve the setting of goals and objectives, determining the strategies to achieve those goals.
 Budgets provide information in quantitative terms (facts and figures) about requirements to achieve a particular purpose.
Budgets are often prepared to predict a range of activities relating to short-term and longer term plans and activities.
 A business can overextend financially by:• – hire purchase or leasing over commitments
A business can overextend financially by:• – purchasing excess stock
A business can overextend financially by:• – employing too many staff for the business’s current needs.
To avoid overextending financially, a business should:• – undertake thorough planning
To avoid overextending financially, a business should:• – avoid overdependence on debt financing.
To avoid overextending financially, a business should:• – grow at a sustainable rate.
Overextension of stock ties up a business’s cash and can lose revenue.
Overextension of staff results in employing too many staff.
Overextending expenditure can create a high degree of business risk.
To increase profitability, a business should decrease Cost of goods sold by finding a new supplier or buying online
To increase profitability, a business should decrease costs such as admin or wages ( put on a casual, reduce hours, employ younger staff or outsourcing)
To increase profitability, a business should increase sales by increasing marketing, changing marketing strategies, or by increasing or decreasing the mark up of products sold.
To increase cash flow, a business could defer buying assets or leasing assets
To increase cash flow, a business could decrease drawings or increase equity into a business by contributing more capital into the business.