SBOTS Accounting & Financial Management Syllabus

How is net profit derived from gross profit on the income statement?

Net Profit = Gross Profit + Other Income - Operating Expenses - Finance Costs - Tax.

What does a balance sheet (statement of financial position) show?

The financial position of a business at a specific point in time, listing its assets, liabilities, and owner's equity.

Distinguish between current and non-current (fixed) assets.

Current assets are expected to be converted to cash or used within one year (e.g. inventory, receivables, cash); non-current assets are held for long-term use (e.g. property, plant, equipment).

Give two examples of current liabilities.

Trade payables (creditors) and short-term loans/bank overdraft (also: accrued expenses, tax payable).

What are the three sections (activities) of a cash flow statement?

Cash flows from operating activities, investing activities, and financing activities.

Under the cash flow statement, which activity includes purchase or sale of fixed assets?

Investing activities.

Give an example of a cash flow under financing activities.

Issuing shares, raising or repaying loans, or paying dividends (any one is acceptable).

In the indirect method of preparing operating cash flow, why is depreciation added back to net profit?

Because depreciation is a non-cash expense that reduced profit but involved no cash outflow, so it is added back.

What is the purpose of adjusting entries?

To record revenues earned and expenses incurred in the correct accounting period (accruals and prepayments) so the accounts comply with the matching/accrual concept before preparing financial statements.

What is an accrued expense and how is it adjusted?

An expense incurred but not yet paid; the adjusting entry debits the expense and credits an accrued liability (payable).

What is a prepaid expense and how is it treated in adjustments?

An expense paid in advance for a future period; it is recorded as a current asset and only the expired portion is charged to the income statement.

What is the purpose of closing entries?

To transfer the balances of temporary accounts (revenues, expenses, drawings) to the capital/retained earnings account so they start the next period at zero.

Which accounts are closed at period-end and which remain open?

Temporary (nominal) accounts - revenues, expenses, drawings - are closed; permanent (real) accounts - assets, liabilities, capital - remain open and carry forward.

State the formula for the current ratio.

Current Ratio = Current Assets / Current Liabilities.

State the formula for the quick (acid-test) ratio.

Quick Ratio = (Current Assets - Inventory) / Current Liabilities.

What is the generally accepted ideal benchmark for the current ratio?

2:1 (and approximately 1:1 for the quick ratio).

State the formula for gross profit margin.

Gross Profit Margin = (Gross Profit / Net Sales) x 100.

State the formula for net profit margin.

Net Profit Margin = (Net Profit / Net Sales) x 100.

State the formula for Return on Equity (ROE).

ROE = (Net Profit after Tax / Shareholders' Equity) x 100.

State the formula for Return on Capital Employed (ROCE).

ROCE = (Operating Profit / Capital Employed) x 100, where Capital Employed = Total Assets - Current Liabilities.

State the formula for the debt-to-equity ratio.

Debt-to-Equity Ratio = Total Debt (Liabilities) / Shareholders' Equity.

What does the interest coverage (times interest earned) ratio measure and how is it calculated?

It measures the ability to meet interest payments; Interest Coverage = Operating Profit (EBIT) / Interest Expense.

What is the difference between liquidity ratios and solvency ratios?

Liquidity ratios assess the ability to meet short-term obligations; solvency ratios assess long-term financial stability and the ability to meet long-term debt obligations.

State the formula for the inventory (stock) turnover ratio.

Inventory Turnover = Cost of Goods Sold / Average Inventory.

State the formula for the receivables (debtors) collection period in days.

Receivables Collection Period = (Average Trade Receivables / Net Credit Sales) x 365.

What does the asset turnover ratio measure and how is it calculated?

It measures how efficiently assets generate sales; Asset Turnover = Net Sales / Total Assets.

State the future value formula for a single sum under compound interest.

FV = PV x (1 + r)^n, where r is the interest rate per period and n is the number of periods.

State the present value formula for a single future sum.

PV = FV / (1 + r)^n.

Define Net Present Value (NPV) and its decision rule.

NPV is the sum of discounted future cash inflows minus the initial investment; accept the project if NPV is positive (greater than zero).

What is the Internal Rate of Return (IRR) and its decision rule?

IRR is the discount rate at which a project's NPV equals zero; accept the project if IRR exceeds the required rate of return (cost of capital).

What does the payback period measure and what is its main limitation?

It measures the time taken for cumulative cash inflows to recover the initial investment; its main limitation is that it ignores the time value of money and cash flows after the payback period.

What is the Weighted Average Cost of Capital (WACC)?

The average rate of return a company must earn on its investments, weighting the cost of each source of finance (debt and equity) by its proportion in the capital structure.

Why is the cost of debt usually lower than the cost of equity?

Because debt is less risky to investors (fixed interest, priority on repayment) and interest is tax-deductible, giving a tax shield, whereas equity holders bear residual risk and expect higher returns.

Define working capital and give its formula.

Working capital is the funds available for day-to-day operations; Working Capital = Current Assets - Current Liabilities.

What does the working capital (cash conversion) cycle represent?

The time taken to convert resources into cash: Inventory Days + Receivables Days - Payables Days; a shorter cycle indicates more efficient working capital management.

State the key distinction between internal audit and external audit in terms of purpose.

Internal audit evaluates and improves the effectiveness of internal controls, risk management and operations for management; external audit gives an independent opinion to shareholders on whether the financial statements show a true and fair view.

To whom does an external auditor report, and to whom does an internal auditor report?

The external auditor reports to the shareholders/members; the internal auditor reports to management and/or the audit committee.

Is internal audit a statutory (legal) requirement like external audit?

No; external audit is generally a statutory legal requirement for companies, whereas internal audit is usually voluntary and established by management.

List the main stages of the audit process.

Planning (understanding the entity and assessing risk), testing of internal controls, substantive testing of transactions and balances, gathering audit evidence, and forming/reporting the audit opinion.

What is audit evidence and what makes it sufficient and appropriate?

Audit evidence is the information used by the auditor to support the audit opinion; it is sufficient when there is enough quantity and appropriate when it is relevant and reliable.

Name four common methods of obtaining audit evidence.

Inspection, observation, inquiry, confirmation, recalculation/reperformance, and analytical procedures (any four).