Accountimg Reports & Terminology series: Accounting Terminology. Paper 05.01

1. ACCOUNTING REPORTS AND TERMINOLOGY Accounting Terminology

2. Any period of time utilised to measure accounting performance www.lewistaxation.com.au 1. Accounting Period

3. Short term financial obligations www.lewistaxation.com.au 2. Accounts Payable (Sundry Creditors)

4. Amounts owed to the firm by customers www.lewistaxation.com.au 3. Accounts Receivable (Sundry Debtors)

5. Acquired by the firm to accomplish its business objectives www.lewistaxation.com.au 4. Assets

6. The comparison of operating figures from one firm with another www.lewistaxation.com.au 5. Benchmarks

7. Sales to cover all variable and fixed expenses www.lewistaxation.com.au 6. B.O.S. (Before Owners’ Salary)

8. Sales to cover all variable and fixed expenses www.lewistaxation.com.au 7. Break – Even Sales

9. 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 www.lewistaxation.com.au 8. Capitalisation Rate

10. Items which affect rate of return (cont’d): Restrictions on entry Size of the share parcel General business risks www.lewistaxation.com.au 8. Capitalisation Rate cont'd...

11. Review your performance during each benchmark period www.lewistaxation.com.au 9. Comparative Analysis

12. Opening Stock Plus: Purchases Freight Inwards Less: Closing Stock Equals – Cost Of Goods Sold www.lewistaxation.com.au 10. Cost Of Goods Sold

13. Average days to pay creditors divided into 365 days www.lewistaxation.com.au 11. Creditors Turnover

14. Usually turned into cash within twelve months www.lewistaxation.com.au 12. Current Assets

15. Normally paid within twelve months www.lewistaxation.com.au 13. Current Liabilities

16. Indication of Liquidity Calculated Current Assets Current Liabilities = Current Ratio www.lewistaxation.com.au 14. Current Ratio

17. Business’ valuation of assets www.lewistaxation.com.au 15. Current Market Value

18. Shows how a business is paying its creditors Calculated: Creditors Average Daily Credit Purchase = Days Creditors Outstanding www.lewistaxation.com.au 16. Days Creditors Outstanding

19. Calculated: Debtors Average Daily Credit Sales = Days Debtors Outstanding www.lewistaxation.com.au 17. Days Debtors Outstanding

20. Percentage of debtors outstanding compared to credit sales Debtors Ratio – calculated: Debtors x 100 Credit Sales 1 www.lewistaxation.com.au 18. Debtors’ Ratio

21. Amounts owed to the firm by customers www.lewistaxation.com.au 19. Debtors

22. Debtor Ratio to Borrowed Funds Working Capital Ratio to Borrowed Funds Debt to Equity Ratio Other key performance indicators applicable www.lewistaxation.com.au 20. Debt Covenants

23. Percentage of external debt to equity Debt to Equity % - calculated: Total Debt x 100 Equity 1 www.lewistaxation.com.au 21. Debt To Equity Percentage

24. Record department’s: Sales Cost of Goods Sold Gross Profits To determine GP% for each department www.lewistaxation.com.au 22. Departmental Gross Profit %

25. Costs incurred in producing net profit www.lewistaxation.com.au 23. Expenses

26. Measures financial commitments: Profitability Exposure to Debt Interest Rate Owners’ Reinvestment Indicators to measure: Debt as % of Sale Debt as % of Equity www.lewistaxation.com.au 24. Financing Indicators

27. Earning before Interest and Tax www.lewistaxation.com.au 25. EBIT

28. Earnings Before Interest, Depreciation and Tax www.lewistaxation.com.au 26. EBIDT

29. Earnings Before Interest, Tax, Depreciation & Amortisation. www.lewistaxation.com.au 27. EBITDA

30. Calculated earnings before interest and tax plus principal’s wages, superannuation etc www.lewistaxation.com.au 28. Adjusted EBIT

31. Items owned by the business used to generate business revenue www.lewistaxation.com.au 29. Fixed Assets

32. Fixed Assets as a % of Total Assets – calculated: Fixed Assets x 100 Total Assets 1 www.lewistaxation.com.au 30. Fixed Assets As A Percentage Of Total Assets

33. Expected profitability after making adjustment for unusual or non recurring items Includes: Reasonable Management Salaries “Notional Rent” on Owned Premises www.lewistaxation.com.au 31. Future Maintainable Profits

34. Difference between sales and cost of goods sold www.lewistaxation.com.au 32. Gross Profit

35. Measures gross profit earned on sales www.lewistaxation.com.au 33. Gross Profit % Of Sales

36. Sales - Cost of Goods Sold = Gross Profit, then www.lewistaxation.com.au 34. Gross Profit Ratio

37. Borrowings expressed as a percentage of assets: Assets worth $100,000 Borrowings $ 62,000 Calculated: Assets Worth x 100 Borrowings 1 Gearing is: = 62% www.lewistaxation.com.au 35. Gearing

38. Measures increase from previous year. Factors effecting growth includes: Competition Business Presentation Catchment Area Growth Customer Buying Habits Advertising www.lewistaxation.com.au 36. Growth - Sales

39. Original cost of assets www.lewistaxation.com.au 37. Historical Cost

40. Industry group according to the Australian & New Zealand Standard Industry Classification Coding System of the Australian Bureau of Statistics. www.lewistaxation.com.au 38. Industry Categories

41. Number of times interest charges are covered by EBIT www.lewistaxation.com.au 39. Interest Cover

42. Goods purchased or manufactured for sale to customers www.lewistaxation.com.au 40. Inventory (Stock On Hand)

43. Detailed review and comparison of a business against a “pool of similar businesses” www.lewistaxation.com.au 41. Inter Firm Comparisons

44. Amounts owing by the firm www.lewistaxation.com.au 42. Liabilities

45. Ability to pay financial obligations www.lewistaxation.com.au 43. Liquidity

46. Current Assets to Current Liabilities www.lewistaxation.com.au 44. Liquid Ratio

47. Amounts owed not due for repayment within the next twelve months www.lewistaxation.com.au 45. Long Term Liabilities

48. People who look like current customers. They are normally the first group of prospects targeted in a marketing campaign. www.lewistaxation.com.au 46. Low-Hanging Fruit

49. Amount added to invoice cost www.lewistaxation.com.au 47. Mark - Up

50. Amount remaining after cost of goods sold and operating expenses have been deducted from sales www.lewistaxation.com.au 48. Net Profit

51. Operating Profit or Loss after income tax. www.lewistaxation.com.au 49. Net Profit After Tax

52. Measures net profit before tax earned on each dollar of sales www.lewistaxation.com.au 50. Net Profit Percentage Of Sales

53. Owner’s Funds as a percentage of total assets – calculated: Owner’s Funds x 100 Total Funds 1 www.lewistaxation.com.au 51. Owner’s Funds As A Percentage Of Total Assets

54. Include all expenditure to be paid from Gross Profit. www.lewistaxation.com.au 52. Overheads

55. A measure of output generated from resources www.lewistaxation.com.au 53. Productivity

56. Net profit after tax divided by total revenue and multiplied by 100. www.lewistaxation.com.au 54. Profit Margin

57. Ratio between current assets minus stock and current liabilities minus bank overdraft www.lewistaxation.com.au 55. Quick Ratio

58. The goods shall remain the property of the seller until all monies are paid www.lewistaxation.com.au 56. Romalpa Clause

59. Realistic arms length salaries if external persons were appointed www.lewistaxation.com.au 57. Reasonable Management Salaries

60. Relationship between net profit and total assets Return on Assets – calculated: Net Profit x 100 Assets 1 www.lewistaxation.com.au 58. Return On Assets

61. Relationship between net profit and owner’s equity Return on Equity – calculated: Net Profit x 100 Equity 1 www.lewistaxation.com.au 59. Return On Equity (Investment)

62. Net profit after tax as a percentage of shareholder's funds. www.lewistaxation.com.au 60. Return On Funds

63. Net profit after tax as a percentage of total revenue. www.lewistaxation.com.au 61. Return On Revenue

64. Factors affecting staffing costs Including: Structures Monitoring Training Experience Turnover productivity www.lewistaxation.com.au 62. Staffing Profile

65. Goods purchased or manufactured to sell to customers www.lewistaxation.com.au 63. Stock On Hand

66. Success of stock management including: Displays Mix Ordering Systems Stocktaking Security www.lewistaxation.com.au 64. Stock Indicators

67. Dissection of sales income into departmental sales and measures income to be contributed from each product group www.lewistaxation.com.au 65. Sales Mix

68. 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 www.lewistaxation.com.au 66. Store Profile

69. Shrinkage measures a business' ability to control its margins and pricing. Strong stock management policies will reduce shrinkage. www.lewistaxation.com.au 67. Shrinkage

70. Number of times the entire stock is sold and replaced www.lewistaxation.com.au 68. Stock Turnover/Stock Turns

71. 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 www.lewistaxation.com.au 69. Times Interest Covered By Profit

72. Based on prior year’s performance: Competition Management Business Planning Business Reinvestment Demographic Information www.lewistaxation.com.au 70. Trend Analysis

73. Excess of current assets over current liabilities Calculated: Current Assets less Current Liabilities = Working Capital www.lewistaxation.com.au 71. Working Capital