Q#1 Name the four ways in which money is said to be used.
There are different ways in which money can be used. The four important ways are:
- Payment of expenses
- Settlement of liabilities.
- Asset Acquisition
- Return to shareholder
Q# 2 what are the three reasons why a business keeps accounting records and which are reflected in a balance sheet?
A business can keep accounting records for various reasons however, three most important reasons that also reflect in a balance sheet are:
- Recording of Assets
- Recording of Liabilities
- Recording of equity
Q#3 Name a financial statement which helps an organization plan for the future.
The balance sheet is the critical financial statement that helps the organization to plan for the future as it provides information regarding the changes in the assets and liabilities. It further indicates the requirements that need to be met in order to meet its future requirements.
Q#4 Explain how profit is calculated.
Profit is the residual of income over expense. A business often has to incur expenses on the goods they either produce or resell. Apart from this, firm also incur expenses on other important overheads such as paying their rent, taxes, etc. whereas the income is what a firm earn from selling its goods and services.
Profit is therefore calculated by subtracting the expenses from the income. If the resulting figure is positive, this will be called profit; if a negative figure, this will be called loss. It is, however, also important to note that there are different types of profits that are calculated differently. For example, gross profit is calculated by deducting the expenses that are incurred on the direct costs including raw materials, labour etc. whereas operating profit is calculated by deducting the operating expenses from the gross profit, whereas net profit is calculated by deducting remaining items including taxes to arrive at the net profit earned by the firm.
Q#5 How is capital used in a business?
Capital is considered as the lifeblood of the business as it provides the necessary funds that are critical for the start of the business. Literally, capital is the money that is being introduced by the owners as their share in the business. It is critical to note that in the case of a sole propertiership, almost all capital is introduced by the owner whereas in case of partnerships or a limited liability company, the same may vary.
Capital is used in business in different ways; the most common uses of capital include:
- Purchase of assets – capital introduced by the owners can be utilized in purchasing the assets for the business which are than utilized to generate the revenue.
- To pay for the liabilities of the business: capital can also be used for the adjustment of the liabilities of the firm. A firm can issue new equity or debt to pay off the old debt.
- Research and development is another critical area where businesses invest their capital however, R&D investments may not provide the desired results.
- To make new investments is another critical use of capital i.e. firms often initiate new ventures with a combination of debt and equity to finance the capital expenditure incurred to increase the capacity of the firm.
Q#6 Give the name for items purchased and kept in an organisation for a long period. They are not intended for resale.
There are two types of assets that a firm held including current assets and noncurrent assets. Current Assets include inventories, receivables, prepayments etc. It is critical to note that the current assets often include those assets that are held for resale purposes.
Non-current assets are those assets whose economic life is more than one year and are often not held for resale purposes. Some of the items that are purchased and kept in organization for a long period include:
- Freehold land
- Plant and Machinery
- Furniture and Fixtures
- Computers and other related equipments
Q# 7: Explain what is meant by the term debiters?
An organization often purchases its raw materials on credit from third parties including suppliers etc. Debaters are therefore the entities that sell their goods to the companies on credit and customers are liable to pay the firm. For example, if Mr. A purchases x amount of goods at $500 from ABC Co and promises to pay after 15 days than Mr. A will be considered as debiter of ABC Co and ABC Co will show accounts receivables against Mr. A.
Q#8 Define working capital.
Working capital is the difference between the current assets and current liabilities of the firm. If the difference is positive i.e. current assets exceeds current liabilities, firm is considered to have enough working capital to finance its day to day operations however if it is negative than a firm may require external borrowing to meet its working capital requirements.
It is however also critical to note that most often working capital is considered as equivalent to the current assets of the firm.
Q#9 How can an organisation anticipate when it will need to borrow money?
Companies require funds to finance their day to day operations as well as capital expenditure. To anticipate as to when to borrow money therefore depends upon two things i.e. negative working capital as well as the capital expenditure requirements. If the current assets of the firm are less than the current liabilities of the firm, than the firm will anticipate borrowing to fill the gap to pay off its current liabilities.
If the firm is also anticipating expanding its capacity and wants to incur the capital expenditure then a firm can anticipate to borrow because to take advantage of the leverage firms often tend to borrow besides introducing their own equity into the new venture.
Q#10 Explain what is meant by depreciation?
When a firm purchases a non-current asset, they are held for more than 1 year because their economic benefits can be accrued over the period of the asset. It is also critical to understand that the non-current assets often wear and tear as their economic life pass. The normal wear and tear of the fixed assets is therefore recorded as expense and is considered as depreciation.
In more literal term, depreciation is the systematic spread of the cost of the asset over its economic life.
Q#11 What is the profit and loss account of charity normally called?
A Profit and Loss account or income statement is often prepared for profit oriented or commercial organizations. However, the same statement can also be prepared for non-profit organizations such as charities. The name of such a profit and loss account is called an Income and Expense account.
Q#12 Define capital employed.
There are different definitions of the capital employed; however, generally capital employed is considered as the funds or capital required by the firm to run its business. More specifically, capital employed is the equity plus all interest bearing loans incurred by the firm.
Capital employed = Equity + Loans
Capital employed can also be calculated by deducting the current liabilities from the total assets of the firm.
Q#13 Write down the acid test calculation.
Acid test ratio is one of the measures of calculating the liquidity of a firm and is calculated as follows:
Acid Test Ratio = Total Current Assets – Inventory / Total current liabilities.
Acid test ratio is more refined form of current ratio and indicates the core liquidity position of a firm. Since inventory is considered as less liquid as compared to other current assets, it is deducted from current assets. An acid test ratio of 1 is considered as ideal for any firm to comprehensively and easily pay out its current liabilities.
Q# 14 What is measured by the profit margin?
Profit margin is calculated as follows:
Profit Margin = Net Profit / Sales
This margin indicates that percentage of profit as compared to the total sales made by the firm and indicates the profitability of a firm in percentage. When this percentage is either compared with other firms or previous years’ figure, it can provide greater insight into the overall profitability and performance of the firm as compared to other firms as well as over the period of time.
Q# 15What is meant by ROCE?
ROCE stands for return on capital employed and is measured by following formula:
ROCE = Earnings before interest and tax / Capital Employed.
This is a critical ratio and indicates the overall return earned by the firm on its capital employed and indicate as to how much a firm is basically gaining over its assets or losing over its liabilities. What is also critical to note that return is calculated against the book value of the assets and the actual results may not truly depict the actual return earned by the firm.
Q# 16 State a source of both short-term and long-term funds.
The source of short term and long term funds can be:
- Bank loans