accounting terminology
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Accountimg Reports & Terminology series: Accounting Terminology. Paper 05.01TRANSCRIPT
ACCOUNTING REPORTS AND TERMINOLOGY
Accounting Terminology
Alan Lewis AAccccoouunnttaannttss
Any period of time utilised to measure accounting performance
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1. Accounting Period
Short term financial obligations
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2. Accounts Payable (Sundry Creditors)
Amounts owed to the firm by customers
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3. Accounts Receivable (Sundry Debtors)
Acquired by the firm to accomplish its business objectives
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4. Assets
The comparison of operating figures from one firm with another
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5. Benchmarks
Sales to cover all variable and fixed expenses
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6. B.O.S. (Before Owners’ Salary)
Sales to cover all variable and fixed expenses
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7. Break – Even Sales
Future maintainable profit expressed at a capitalisation rate
Rate of return required by a prudent investor
Reflects a mark up on prevailing interest rates
Items which affect rate of return:◦ Risk◦ Lack of negotiability◦ Economic conditions
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8. Capitalisation Rate
Items which affect rate of return (cont’d):◦ Restrictions on entry◦ Size of the share parcel◦ General business risks
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8. Capitalisation Rate cont'd...
Review your performance during each benchmark period
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9. Comparative Analysis
Opening StockPlus:PurchasesFreight Inwards
Less:Closing Stock
Equals – Cost Of Goods Sold
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10. Cost Of Goods Sold
Average days to pay creditors divided into 365 days
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11. Creditors Turnover
Usually turned into cash within twelve months
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12. Current Assets
Normally paid within twelve months
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13. Current Liabilities
Indication of Liquidity Calculated
Current Assets Current Liabilities
= Current Ratio
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14. Current Ratio
Business’ valuation of assets
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15. Current Market Value
Shows how a business is paying its creditors
Calculated: Creditors
Average Daily Credit Purchase
= Days Creditors Outstanding
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16. Days Creditors Outstanding
Calculated:Debtors
Average Daily Credit Sales
= Days Debtors Outstanding
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17. Days Debtors Outstanding
Percentage of debtors outstanding compared to credit sales
Debtors Ratio – calculated:Debtors x 100
Credit Sales 1
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18. Debtors’ Ratio
Amounts owed to the firm by customers
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19. Debtors
Debtor Ratio to Borrowed Funds
Working Capital Ratio to Borrowed Funds
Debt to Equity Ratio
Other key performance indicators applicable
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20. Debt Covenants
Percentage of external debt to equity
Debt to Equity % - calculated:Total Debt x 100 Equity 1
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21. Debt To Equity Percentage
Record department’s:◦ Sales◦ Cost of Goods Sold◦ Gross ProfitsTo determine GP% for each department
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22. Departmental Gross Profit %
Costs incurred in producing net profit
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23. Expenses
Measures financial commitments:◦ Profitability◦ Exposure to Debt◦ Interest Rate◦ Owners’ ReinvestmentIndicators to measure:◦ Debt as % of Sale◦ Debt as % of Equity
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24. Financing Indicators
Earning before Interest and Tax
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25. EBIT
Earnings Before Interest, Depreciation and Tax
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26. EBIDT
Earnings Before Interest, Tax, Depreciation & Amortisation.
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27. EBITDA
Calculated earnings before interest and tax plus principal’s wages, superannuation etc
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28. Adjusted EBIT
Items owned by the business used to generate business revenue
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29. Fixed Assets
Fixed Assets as a % of Total Assets – calculated:
Fixed Assets x 100Total Assets 1
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30. Fixed Assets As A Percentage Of Total Assets
Expected profitability after making adjustment for unusual or non recurring itemsIncludes:◦ Reasonable Management Salaries◦ “Notional Rent” on Owned Premises
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31. Future Maintainable Profits
Difference between sales and cost of goods sold
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32. Gross Profit
Measures gross profit earned on sales
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33. Gross Profit % Of Sales
Sales - Cost of Goods Sold = Gross Profit, then
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34. Gross Profit Ratio
Gross ProfitX
100= Gross Profit
RatioSales 1
Borrowings expressed as a percentage of assets:Assets worth $100,000Borrowings $ 62,000
Calculated:Assets Worth x 100 Borrowings 1
Gearing is: = 62%
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35. Gearing
Measures increase from previous year.Factors effecting growth includes:◦ Competition◦ Business Presentation◦ Catchment Area Growth◦ Customer Buying Habits◦ Advertising
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36. Growth - Sales
Original cost of assets
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37. Historical Cost
Industry group according to the Australian & New Zealand Standard Industry Classification Coding System of the Australian Bureau of Statistics.
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38. Industry Categories
Number of times interest charges are covered by EBIT
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39. Interest Cover
Goods purchased or manufactured for sale to customers
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40. Inventory (Stock On Hand)
Detailed review and comparison of a business against a “pool of similar businesses”
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41. Inter Firm Comparisons
Amounts owing by the firm
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42. Liabilities
Ability to pay financial obligations
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43. Liquidity
Current Assets to Current Liabilities
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44. Liquid Ratio
Amounts owed not due for repayment within the next twelve months
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45. Long Term Liabilities
People who look like current customers.
They are normally the first group of prospects targeted in a marketing campaign.
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46. Low-Hanging Fruit
Amount added to invoice cost
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47. Mark - Up
Amount remaining after cost of goods sold and operating expenses have been deducted from sales
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48. Net Profit
Operating Profit or Loss after income tax.
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49. Net Profit After Tax
Measures net profit before tax earned on each dollar of sales
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50. Net Profit Percentage Of Sales
Owner’s Funds as a percentage of total assets – calculated:
Owner’s Funds x 100 Total Funds 1
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51. Owner’s Funds As A Percentage Of Total Assets
Include all expenditure to be paid from Gross Profit.
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52. Overheads
A measure of output generated from resources
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53. Productivity
Net profit after tax divided by total revenue and multiplied by 100.
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54. Profit Margin
Ratio between current assets minus stock and current liabilities minus bank overdraft
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55. Quick Ratio
The goods shall remain the property of the seller until all monies are paid
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56. Romalpa Clause
Realistic arms length salaries if external persons were appointed
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57. Reasonable Management Salaries
Relationship between net profit and total assets
Return on Assets – calculated:Net Profit x 100 Assets 1
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58. Return On Assets
Relationship between net profit and owner’s equity
Return on Equity – calculated:Net Profit x 100 Equity 1
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59. Return On Equity (Investment)
Net profit after tax as a percentage of shareholder's funds.
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60. Return On Funds
Net profit after tax as a percentage of total revenue.
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61. Return On Revenue
Factors affecting staffing costsIncluding:◦ Structures◦ Monitoring◦ Training◦ Experience◦ Turnover◦ productivity
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62. Staffing Profile
Goods purchased or manufactured to sell to customers
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63. Stock On Hand
Success of stock management including:◦ Displays◦ Mix◦ Ordering Systems◦ Stocktaking◦ Security
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64. Stock Indicators
Dissection of sales income into departmental sales and measures income to be contributed from each product group
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65. Sales Mix
Describes characteristics of retail store: ◦ Average customers◦ Average items per customer◦ Average sale per customer◦ Trading days◦ Trading hours◦ Floor area◦ Sales per floor area
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66. Store Profile
Shrinkage measures a business' ability to control its margins and pricing.
Strong stock management policies will reduce shrinkage.
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67. Shrinkage
Number of times the entire stock is sold and replaced
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68. Stock Turnover/Stock Turns
Shows ability of a borrower to service the interest cost of a loan out of the business’ profit
Times Interest Covered by Profit – calculated:
Profit Before Tax And Interest Interest
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69. Times Interest Covered By Profit
Based on prior year’s performance:◦ Competition◦ Management◦ Business Planning◦ Business Reinvestment◦ Demographic Information
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70. Trend Analysis
Excess of current assets over current liabilities
Calculated:Current Assets less Current Liabilities= Working Capital
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71. Working Capital