Basics of Accounting
7 important questions on Basics of Accounting
Which are the three main Financial Statements and why do we need all three to get a good insight into a business?
Statement of Financial Position (Balance Sheet)
Statement of Cash flows
Purpose of the financial statements is to provide information about the results of the business financial position
What are the characteristics of the 3 main financial statements and how are the statements intertwined?
Summarizes the revenue and expenses of an organization over a period of time. Shows the performance of the business over the
period. The bottom line, the profit or loss is shown.
Shows the financial position of a company at a specific
moment in time. Is comprised of Assets and Equity & Liabilities. Shows what is owned and owed
Shows movement of cash over a period of time
Three categories:
Operating activities, Investing activities. Financing activities
Two methods:
Direct (See actual cash movements). Indirect (use Balance Sheet & P&L)
What is needed when making a balance sheet?
Equity = Capital plus Retained Earnings
Non Current Assets = Fixed Assets
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What is depreciation and why is it used?
Depreciation is an estimate of the amount by which a non-current asset has been depleted in a financial year.
To get a fair assignment over time, of the costs of an
investment (expenditure) made in the past.
It gives a more realistic picture of the expenses (costs)
that are made to produce a product or service.
It leads to a more evenly distributed operating profit
across the years.
What are the key variables of depreciation?
Price at which the asset was bought, Residual value/ trade-in value
The product's lifetime
Technical lifetime (capable of producing)
Economic lifetime (economically sensible)
The depreciation method
Equal amounts for every year, Depreciation higher in the beginning
What is Marginal Costing and Contribution?
Marginal cost is the cost of one additional item. It excludes fixed costs.
Contribution refers to the amount that is left over after deducting variable costs from sales.
What is the break-even point and analysis?
Contribution per unit = Selling price per unit - variable costs per unit
Margin of Safety M.O.S.
The excess of planned/actual sales above the break-even point
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