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Accounting and Finance Notes for Final Exam

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19 views

Accounting and Finance Notes for Final Exam

Nice

Uploaded by

rasvm112
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Accounting:

Break Even Point:


The break-even point (BEP) in accounting is the level of sales at which a company's total revenues
equal its total expenses, resulting in neither a profit nor a loss.

Essentially, it is the point at which the company "breaks even" and starts to generate profit from any
sales beyond this point.

Zero Base Budgeting:

Zero-Based Budgeting (ZBB) is a method of budgeting where every expense must be justified for
each new period, starting from a "zero base."

ZBB is often used by governments and public sector organizations to control costs and ensure
taxpayers’ money is spent efficiently.

Nonprofit organizations often use ZBB to ensure that funds are being used effectively to support
their mission, particularly when donations are the primary funding source.
Cost Centre and Profit Centre:
Cost Centres help provide a detailed view of how costs are incurred within an organization.

Profit Centres, on the other hand, are focused on generating profits.


Accounting Concepts & Conventions:

Accounting Concepts:

Accounting concepts are the fundamental assumptions or rules that form the basis of accounting
practices.

1. Accrual Concept
Revenue is recognized when a product is delivered, even if payment is received later.

2. Consistency Concept
If a company chooses to depreciate assets using the straight-line method, it should continue
to do so from year to year unless it provides a valid reason for changing the method.

3. Going Concern Concept


Depreciation of assets is based on the assumption that the business will continue to use
those assets in the future.

4. Matching Concept
5. (Conservatism) Concept
6. Economic Entity Concept
7. Money Measurement Concept
8. Time Period Concept

Accounting Convention:

Accounting conventions are the generally accepted procedures that accountants follow when
preparing financial statements.

1. Conservatism Convention
2. Full Disclosure Convention
3. Materiality Convention
4. Objectivity Convention
The cost of inventory should be recorded based on invoices and receipts, not based on
estimates or assumptions.
5. Consistency Convention
If a company changes its method of inventory valuation (from FIFO to LIFO), this change must
be disclosed in the financial statements.
6. Business Entity Convention
The personal income or expenses of the business owner should not be included in the
business’s financial statements.
Finance:

Risk and Return:

Summary: Risk and Return in Finance

• Risk refers to the possibility that the return on an investment will differ from the expected
return. It can be systematic (market-wide) or unsystematic (specific to an asset).
• Return is the financial gain or loss from an investment. It reflects the reward for taking on
risk.
• The Risk-Return Tradeoff implies that higher potential returns generally come with higher
risks.
• Risk-Return Models like Capital Asset Pricing Model (CAPM), Modern Portfolio Theory
(MPT), and the Sharpe Ratio help investors evaluate investments based on their expected
return and associated risk.

Cash Management

Cash Management refers to the process of managing a company's cash flow, ensuring that it has
sufficient cash on hand to meet its immediate obligations.

It also includes minimizing idle cash to optimize profitability.

Properly forecast cash inflows and outflows to avoid cash shortages or excesses.

Investing excess cash in short-term instruments like treasury bills, money market funds, or
certificates of deposit (CDs) to earn returns while keeping liquidity intact.

Credit Management

Assess the risk of customers defaulting on their payments and set credit limits accordingly.

Make sure that customers pay their invoices promptly to maintain a steady cash flow.

Offering credit to customers can boost sales, but this must be balanced with the risk of late or non-
payment.

Inventory management:

Avoid both overstocking and stockouts to balance carrying costs and customer demand.

Ensure that inventory is available when needed to fulfill customer orders, preventing lost sales.

A formula used to determine the optimal order quantity that minimizes the total costs of inventory,

EOQ formula

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