An appropriation account is a nominal account used in the general ledger of companies, close corporations and partnerships to distribute the profit on year end.

The auditor's report is complied by independent external auditors and is given to the shareholders of the company. The report comments on the financial statements of the company.

A bank reconciliation statement is a monthly statement compiled by the business to reconcile the cash journals with the bank statements to ensure that all entries appear in both.

The business entity concept is based on the assumption that the business will continue to trade as a separate entity.

A cash flow statement is compiled to indicate the inflow and outflow of cash to and from a business. The statement provides insight into the future cash position of the business.

A dividend is a share or part of the profit, which is paid to the shareholders.

FIFO stands for First In First Out. This method of stock valuation issues stock in the order in which it is received.

An imputed expense is an expense for the business that is a non-cash item and that is calculated annually.

Input VAT is paid to the supplier from the person buying the goods. Output VAT is collected from the customer by the supplier.

A legal person is defined as a separate legal entity that owns assets, has liabilities, pays taxes, can enter into contracts and can be sued in court.

Limited liability means the liability of the investor or shareholder is limited to the amount of money invested in the shares and does not include any debt of the company.

Matching concept is the depreciation and profit/loss on the sale of assets.

Materiality refers to the decision made by auditors about the transaction amounts that they will audit. Any amounts smaller than this amount are ignored (are not material).

Provisional income tax is paid to SARS during the financial year in respect of year-end income tax. This makes the final payment of income tax easier for the business.

Internal auditors are employees of the business, whereas external auditors are independent of the business. Both internal and external auditors have the same function.

Age analysis is an important part of effective credit control. The debtor's ledger is altered to show the amount owed by any debtor and the period of the debt.

GAAP stands for Generally Accepted Accounting Principles.

The International Accounting Standard 7 explains the objective of a cash flow statement.

The cash flow statement consists of operating activities, investing activities and financing activities.

Auditing is the accumulation and evaluation of evidence to determine and report on the degree to which information and established criteria correspond.

Compliance auditing measures the degree of compliance with policies, procedures, laws and regulations.

The direct costs are the costs or expenses that can be linked directly to the manufacturing process. These costs can be split into direct material costs and direct labour costs.

On a graph, the breakeven volume is the point where the sales line crosses the total cost line. It indicates the minimum number of units needed to make a profit.

Fixed costs remain constant during the production process and do not depend on the number of units produced during a period.

The four types of fixed costs are as follows: Factory building (e.g. rent or rates and taxes, water and electricity, repairs and maintenance and insurance); Factory plant (e.g. repairs and maintenance, insurance, depreciation, supervision, drivers and quality control); Labour (e.g. supervision, security, quality control and drivers); and Administration costs (e.g. salaries and wages, stationery, printing, postage, advertising, audit fees and telephone bills)

We draw up a cash budget to determine future expected cash inflows (receipts) and cash outflows (payments); whether the business has money to pay for large expenses; and if the business needs to arrange for a loan or overdraft facility.

Input VAT is the VAT a business pays to suppliers on the goods or services it acquires from a registered vendor. Output VAT is the VAT a business collects from its customers on goods and services they buy.

Any request from a customer to evade tax shows a lack of ethics on the part of the customer and would create the following problems: It is a criminal offence to evade tax; the business does not want to be part of an unethical or illegal transaction; The business has paid input VAT on goods and can claim the portion back from SARS for the sale; recording the sale in the books of the business could become a problem.

Internal auditing is an independent, objective consulting and assurance activity, designed to add value and improve an organisation's operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.

Learn the seven GAAP principles: business entitity concept, historical cost concept, going concern concept, matching concept, prudence concept and materiality concept.

Name the two types of financial reports.