3.2 Profit and Loss Account and Balance Sheets

Question 1

What are the purpose of businesses financial statements?

Answer 1

To see if the business is making a profit
To attract investors
Helps to identify issues and this helps to plan ahead
To decide whether or not to invest into a PLC
To know if jobs are secure
For legal reasons - To make sure the business is paying the right amount of tax

Question 2

What are the main components of the Profit and Loss Account?

Answer 2

Sales Turnover
Cost of sales
Gross profit
Operating costs
Net Profit
Taxation
Dividends
Retained Profit

Question 3

How can the Profit and Loss Account be used?

Answer 3

The record of past costs and revenues- helps businesses to make decisions about the future.
A summary of recent events for owners and possible investors in the business. (helps to work out value of the shares)
Assessment of company’s tax
Assessment to judge whether or not to lend credit

Question 4

What is the formula for Gross Profit?

Answer 4

Gross Profit = Sales Turnover - Cost of Sales

Question 5

What is the formula for Net Profit?

Answer 5

Net Profit = Gross Profit + Non sales revenue - operating profit

Question 6

What is the difference between Gross and Net Profit?

Answer 6

Gross Profit doesn’t take the overheads costs into account whereas Net Profit takes into account all costs

Question 7

What is the Distribution costs?

Answer 7

The cost of getting products to the customer

Question 8

What is the Administration expenses?

Answer 8

Costs of the employees that are not directly employed and also the costs of running the company

Question 9

What is the Trading Account?

Answer 9

A record of the sales turnover and the cost of sales