1 Financial Reporting

Question 1

Sales turnover:

Answer 1

the amount of revenue a company generates from its sales.

Question 2

Revenue:

Answer 2

: the total amount of money a company earns from sales, services or any other sources of income.

Question 3

Profit and loss:

Answer 3

a profit and loss statement that shows a company’s revenue, costs and expenses over a specific period, resulting in a net profit or loss.

Question 4

Accounting period:

Answer 4

the duration of time for which financial statements are prepared and reported, usually a year or quarter.

Question 5

Capital:

Answer 5

the difference between a company’s assets and liabilities

Question 6

Gross Profit

Answer 6

the difference between the cost of goods sold and the revenue from sales

Question 7

Net Profit

Answer 7

the total amount of revenue after deducting all expenses

Question 8

Breakeven point:

Answer 8

the point at which a company’s revenue covers all its costs, resulting in neither profit nor loss.

Question 9

Income statement:

Answer 9

a financial statement that shows a company’s revenue, costs and expenses over a specific period, resulting in a net profit or loss.

Question 10

Balance sheet:

Answer 10

a financial statement that shows a company’s assets, liabilities and equity at a specific point in time.

Question 11

Adjustment:

Answer 11

changes made to financial statements to ensure accuracy and completeness.

Question 12

Stakeholders:

Answer 12

individuals or groups with an interest in a company, including shareholders, employees, customers, suppliers and creditors

Question 13

Costs:

Answer 13

expenses incurred by a company in producing goods or services

Question 14

Assets:

Answer 14

items owned by a company that have value, including cash, equipment and property

Question 15

Liabilities:

Answer 15

a company’s debts and obligations, including loans, mortgages and outstanding bills.

Question 16

Cash flow:

Answer 16

the movement of cash in and out of a company.

Question 17

Corporation tax:

Answer 17

: a tax paid by companies on their profits.

Question 18

Income tax:

Answer 18

a tax paid on an individual’s income

Question 19

VAT:

Answer 19

value-added tax, a tax on goods and services

Question 20

Profit margin:

Answer 20

: the percentage of revenue that is profit

Question 21

Retained profit:

Answer 21

the amount of profit kept by a company after paying out taxes and dividends.

Question 22

Accounts receivable:

Answer 22

invoices that are owed to the business

Question 23

Accounts payable:

Answer 23

invoices that are owed by the business

Question 24

Financial reporting is a critical function for any organisation

Answer 24

-Financial reporting provides information about the financial health and performance of an organisation.
-It helps stakeholders (investors, lenders, employees, etc.) make informed decisions about the organisation.
-Financial reporting also ensures that the organisation complies with legal and regulatory requirements.

Question 25

Two main areas of financial reporting

Answer 25

-The income/sales area includes information about revenue, sales and other income streams.
-The spend/costs area includes information about expenses, such as salaries, rent, utilities and other costs.

Question 26

Financial Report Formats

Answer 26

Balance sheet: shows a snapshot of the organisation’s assets, liabilities and equity at a specific point in time.

Profit and loss accounts: show the organisation’s revenue, expenses and profit or loss for a specific period.

Management accounts: provide detailed financial information to help management make informed decisions.

Year-end reporting: summarises the organisation’s financial performance for the entire year.

Cash flow: shows the organisation’s inflows and outflows of cash during a specific period.

Question 27

How to calculate gross profit

Answer 27

Gross profit is the amount of revenue (total income) that remains after deducting the cost of goods sold (COGS). In other words, it is the difference between the revenue generated by a company’s sales and the direct costs of producing or purchasing the goods sold.

Question 28

Gross Profit Formula

Answer 28

Gross profit = revenue – cost of goods sold

For example, if a company generates £100,000 in revenue from the sale of goods and incurs £60,000 in direct costs, its gross profit would be £40,000.

Question 29

Net Profit

Answer 29

Net profit is the amount of revenue that remains after deducting all the expenses, including COGS, operating expenses, interest, taxes and other non-operating expenses. It represents the total profit or loss earned by the company during a specific period.

Question 30

Net Profit Formula

Answer 30

Net profit = revenue – cost of goods sold – operating expenses – interest – taxes – other non-operating expenses

For example, if a company generates £100,000 in revenue from the sale of goods, incurs £60,000 in direct costs, £20,000 in operating expenses and £5,000 in interest and taxes, its net profit would be £15,000.

Question 31

Balance Sheet

Answer 31

A balance sheet is a financial statement that provides a snapshot of a company’s financialposition at a specific point in time. It shows what the company owns (assets), what it owes(liabilities), and the difference between them (equity).​
​The balance sheet is divided into two main sections:assetsandliabilities and equity.

Question 32

Assets

Answer 32

Assetsare resources owned by the company that have future economic value. Assets can bedivided into two categories: current assets and non-current assets.​​Current assetsare assets that can be converted into cash within a year, suchas cash, accounts receivable and inventory.​
Non-current assetsare assets that have a longer useful life, such as property,plant and equipment.

Question 33

Liabilities

Answer 33

Liabilities are the obligations owed by the company to external parties, such as suppliers, lenders and employees. Like assets, liabilities can be divided into current and non-current liabilities.

Current liabilities are obligations that must be paid within a year, such as accounts payable, short-term loans and taxes owed.

Non-current liabilities are obligations that have a longer-term maturity, such as long-term debt.

Equity represents the residual interest in the assets after deducting liabilities. It includes the owner’s investment in the company and any accumulated profits or losses.
The balance sheet equation is:
Assets = liabilities + equity.