3.4 Final Accounts

Question 1

Final accounts

Answer 1

Financial statements that inform stakeholders about the financial profile and performance of a business

Businesses need to keep detailed records of purchases, sales, inventory, and other financial transactions to control the business but as well to keep stakeholders informed and satisfied.

Question 2

Current assets definition

Answer 2

Liquid assets are assets that are easily turned into cash

Aside from cash

Debtors – money owed to the company

Stocks – unsold inventory

Question 3

Current assets formula

Answer 3

Cash + Debtors + Stocks

Question 4

Current liabilities

Answer 4

Money owed by the business, must be paid by 12 months=

Overdrafts – short term loan to cover cash problems

Creditors – money owed to suppliers for goods bought on credit
Tax

Question 5

Current liabilities formula

Answer 5

Overdrafts + Creditors + Tax

Question 6

Working capital

Answer 6

(=net current assets)
Money needed by the business for its daily operations (running costs)

Also known as net current assets

Working capital is needed as buffer for expected shutdown in cash flow

Question 7

Working capital formula

Answer 7

Current assets – Current liabilities

Question 8

What does the profit and loss account/income statement show?

Answer 8

Shows the trading position of the business over a period of time, determining the income, profit or loss

Question 9

What is the parts of an income statement

Answer 9

Heading: Profit and loss for (company name) for year ended (date)

1. Trading account – shows the difference between sales and direct costs (may be also shown together with the restof data, without separation from expences etc)
2. Profit and loss account - profit after deducting operating expenses, interests and tax
   (Depreciation is included as expense)
3. Appropriation account - shows distribution of profits, dividends vs retained

Question 10

Stakeholders of a business account

Answer 10

Business managers

Workforce

Banks

Creditors such as suppliers

Customers

Government and tax authorities

Investors and potential investors in a business

Local community

Question 11

Business managers

Answer 11

Measure the performance of the business to compare against targets, previous time period and competitors

Provide information for taking decisions such s new investments, closing branches and launching new products.

Control and monitor the operation of each department and division of the business

Sets targets or budgets for the future

Question 12

Workforce

Answer 12

Assess whether the buidnessis secure enough to pay wages and salaries

Determine whether the business is likely to expand or be reduced in size

Determine whether jobs are secure

Find out whether, if profits are rising, a wage increase can be afforded

Find out how the average wage in the business compared with the salaries of directors.

Question 13

Banks

Answer 13

Decide whether to lend money to the business

Access whether to allow an increase in overdraft facilities

Decide whether to continue an overdraft facility or a loan

Question 14

Creditors such as suppliers

Answer 14

Assess whether the business is secure and liquid enough to pay off its debts

Assess wether the business is a good credit risk

Decide whether to press for early repayment of outstanding debts

Question 15

Customers

Answer 15

Assess whether the business is secure

Determine whether they will be assured of future supplies of the goods stye are purchasing

Establish whether there will be security of spare parts and service facilities

Question 16

Government and tax authorities

Answer 16

Calculate how much tax is due from the business

Determine whether the business is likely to expand and create more jobs

Assess whether the business is in danger of closing down, creating economic problems

Confirm that the business is staying within the law in term of accounting regulations

Question 17

Investors and potential investors in a business

Answer 17

Assess the value of the business and their investment in it

Determine what share of the profits investors are receiving.

Decide whether the business has the potential for growth

Potential investors compare these details with those from other businesses before making a decision to buy shares in a company

Existing investors decide whether to consider selling all or part of their holding

Question 18

Local community

Answer 18

See if the business is profitable and likely to expand, which could be good for the local economy, employment etc

Determine whether , the business has harmful practices, as long as it can be understood from final accounts (from risk profiles and other statements more than from financial accounts)

Question 19

Limitations of accounting information to stakeholders

Answer 19

One set of accounts without possibility to compare is of limited use

Accounts do not measure items which cannot be expressed in monetary terms eg technology

Only the minimum information required by law will be published

Accounts are historic

Window dressing (numbers/calculations may be manipulated to some extent)

Question 20

What is window dressing?

Answer 20

Presenting the accounts of a business in the best possible, or most flattering, way which could potentially mislead users of accounts