Accounting II

  • Created by: sophiesss
  • Created on: 10-12-16 15:25
Business Risk
Applies to all companies in an industry. Some variation for size and diversity. E.g. in British beef farmers there was an outbreak of a disease, which meant it couldn't be exported, effecting all farmers.
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Financial Risk
Firm specific. Financial structure determines risk. Debts i) repayment at specified dates and ii) risk of increase in interest rates
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Short-Term Finance
Up to one year. Used to finance short-term capital requirements. Sources include: trade credit/ overdraft/ factoring/ invoice discounting,
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Trade Credit
ST finance. It has few costs and security is not required. Normally a supplier will allow business customers a period of time after the goods have been delivered before payment, funds receivables. Depends on relations with suppliers/ bargaining power
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Late Commercial Debts Act
Protects small suppliers. It allows businesses to charge 8% over the Bank of Englands base rate on late payment. The longer you delay payment, the more you have to pay.
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Bank Overdrafts
Interest is only charged when it is used. Costs include interest and often set-up charge. Some form of security will be required and it will depend on the risk. Used to fund ST cash flow needs
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Factoring
ST finance. Provision of a debtor accounting service. They take over the collection of debt, freeing personal to run the business, creating more certain cash flows. Costs inc interest/ debt management charge. Finance is secured on receivables
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Invoice Discounting
The business receives 75-80% of the face value invoice and agrees to repay it within the period of up to 90 days. The responsibility of collection is the firms. The advance has to be repaid within the period, even if collection hasnt happened.
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Medium-Term Finance
Includes loans, hire purchase and leasing.
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Loans
For a fixed purpose and period. They have set repayment dates. Secured on an asset and require some form of security. Costs include interest and set-up costs.
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Hire Purchase
For a fixed period a company buys an asset and hires it out. Ownership stays with the provider of the finance until instalments are paid. Requires credit worthiness. Failure to pay - repossession. Costs include interest.
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Leasing
For a fixed period. The lessor owns and asset and rents it out, ownership doesn't pass to the person who is renting it. Costs include interest. Two types: operating/ financial.
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Operating Lease
Rental arrangment
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Finance Lease
Finance arrangement
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Long-Term Finance
Finance of 3/4/5+ years. Includes debt (loans/ debentures/leases) and equity (ordinary shares/ retained profit/ preference shares)
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Debt
Borrowing. Generally carries a higher IR then ST loans. Requires security. Some can be traded on the secondary market, there is usually a right to repayment. E.g. a commercial mortgage on a property.
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Equity
Money is contributed by the owners. Two main sources: contributed capital/ retained earnings. It is for limited companies and you can have both ordinary and preference shares.
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Ordinary Shares
Represents contributed capital and reserves, which represent profits made by the company. Riskiest form of shares and is a variable dividend.
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Preference Shares
Normally has a fixed dividend and, even if more profits are made, the preference divided remains the same. They normally carry a right to preference in the order of payment if the company goes into liquidation.
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Dividends
The share of the profits paid out to owners interim (halfway through the year) or final. Payment is based on the nominal value of a share. There are restrictions on how much the owner can take out
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Voting Rights
One vote per ordinary share. Shareholders are the last to receive if the company folds.
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Gearing
The relationship between external (debt) and internal (equity) finance. The ratio of debt to equity. Levels of gearing effect financial risk. As gearing increases, risk rises. Affects the future attractiveness of future debt
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Tax Shield
Shielding profits from tax
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Partnership
The relation which subsists between the person carrying on a business in common with a view of making profit.
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The Partnership Act
Specified a minimum of two partners and a maximum of twenty, for professional firms.
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High Gearing
Lots of borrowing
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Debentures and Loan Stock
Can be issued by the company raising finance and can usually be traded on secondary markets. The price at which they are sold/ bought on these are not the same as they were issued. There is a right to repayment if interest isn't paid.
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Leases and Leasehold
One on a commercial/ residential property, it is an alternative to ownership.
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Venture Capital
When new shares are sold via the stock exchange for businesses to get an injection of equity funds.
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Business Angels
Wealthy individuals who have been successful in business and who are willing to invest in growing other businesses.
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Government Assistance
Government schemes around to help a business grow. E.g. loan grant schemes/ grants/ tax incentives.
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High Risk
Have to use personal wealth to settle business debts
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High Rewards
Keep profits, greater freedom.
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Public Limited Company (PLC)
Large. Issued capital has to be above £50,000. Must have at least two shareholders and shares can be sold to the public. Tightly controlled. Can be quoted (listed on stock exchange) or unlisted. E.g. JD Weatherspoon PLC
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Private Limited Company (LTD)
Smaller - owner-director type. Can have one or more shareholders.
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Chairmans Statement
Part of the Annual Report. No legal requirements. It is an assessment of the annual results, major developments and future plans. Usually optimistic and opinion not fact.
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Corporate Governance
Arises out of the drive to make directors more accountable to shareholders. Governed by the Stock Exchange requirements. These practices are greatly affected by attempts to align the interests of stakeholders.
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Executive Directors
Employed by the company
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Non-Executive Directors
Part-time (attend 10-12 board meetings per annum), they are bought in for their independence and experience. They chair the audit and remuneration committees and hold directors accountable.
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Social and Environmental Accounting Statement
A recent trend to report on social, environmental and sustainability responsibility.
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Auditors Report
Indépendant assessment by certified accountants, appointed by shareholders to offer a professional and independent opinion - true/ fair. Clean v qualified.
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Proposed Dividend
A resolution of the AGM about the particular level of dividend for the year
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Number of Share Equation
Issued share capital/ par value of one share. E.g. £150,000/ £0.5 = 300,000 shares. 300,000 X 4p dividend = £12,000
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Reserves
Profits and gains which have been made by the company and which still form part of the shareholders claim as they have not been paid out to shareholders
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Revenue Reserves
Arise from trading of profits e.g. retained profits or revaluing upwards non-current assets
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Capital Reserves
Arise from issuing shares above par value and revaluing upwards non-current assets
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Share Premium
The face value of a share is 50p, we issue shares for 60p. This would be dealt with in accounts - for every 1 share issued, share capital goes up 50p and share premium goes up 10p. Premium is the extra issued price above the par value.
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Revaluation Reserve
An indépendant surveyor values a building at £1.2m not £1m we currently have it in our books at. In the SOFP in non-current asset the building gets shown as £1.2m (i.e. up £0.2m) and in owners equity we would have a revaluation reserve of £0.2m
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Sole Proprietorship
A one-owner business and is very simple to set-up. All that is required is a business bank account. Because it is so simple and has little recognition in law, there are no formal guidelines for accounts. Financed by the owners retained earnings
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End of Period Adjustments
Refer to adjustments such as those required to provide for depreciation, bad debts, accruals and prepayments.
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Limited Companies
Recognised as a separate legal entity, distinct from its owners.
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Non-Commercial Limited Companies
Members contribute a garenteed amount should the company go under, the amount of guarantee is limited to £1 a member.
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Commercial Limited Companies
Can be private (not traded on Stock Exchange) and public (can be traded)
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Comprehensive Income
Distinction between what is revenue and expenses relating to trading which result in a profit or loss and other gains or losses that arise in the normal course of business. Two types of gains/ losses
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Final Accounts
SOFP/ income statement/ cash flow statement
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Other cards in this set

Card 2

Front

Financial Risk

Back

Firm specific. Financial structure determines risk. Debts i) repayment at specified dates and ii) risk of increase in interest rates

Card 3

Front

Short-Term Finance

Back

Preview of the front of card 3

Card 4

Front

Trade Credit

Back

Preview of the front of card 4

Card 5

Front

Late Commercial Debts Act

Back

Preview of the front of card 5
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