3.4 Final Accounts Flashcards
Final accounts
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.
Current assets definition
Liquid assets are assets that are easily turned into cash
Aside from cash
Debtors – money owed to the company
Stocks – unsold inventory
Current assets formula
Cash + Debtors + Stocks
Current liabilities
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
Current liabilities formula
Overdrafts + Creditors + Tax
Working capital
(=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
Working capital formula
Current assets – Current liabilities
What does the profit and loss account/income statement show?
Shows the trading position of the business over a period of time, determining the income, profit or loss
What is the parts of an income statement
Heading: Profit and loss for (company name) for year ended (date)
- Trading account – shows the difference between sales and direct costs (may be also shown together with the restof data, without separation from expences etc)
- Profit and loss account - profit after deducting operating expenses, interests and tax
(Depreciation is included as expense) - Appropriation account - shows distribution of profits, dividends vs retained
Stakeholders of a business account
Business managers
Workforce
Banks
Creditors such as suppliers
Customers
Government and tax authorities
Investors and potential investors in a business
Local community
Business managers
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
Workforce
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.
Banks
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
Creditors such as suppliers
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
Customers
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
Government and tax authorities
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
Investors and potential investors in a business
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
Local community
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)
Limitations of accounting information to stakeholders
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)
What is window dressing?
Presenting the accounts of a business in the best possible, or most flattering, way which could potentially mislead users of accounts
