3.4 - final accounts Flashcards
what are the 2 purposes of final accounts
- Final accounts are a legal requirement of financial statements that businesses have to fulfil at the end of a particular accounting period (normally a year).
- Final accounts help with the organization of the business since they include transactions, revenues and expenses but also help to inform internal and external stakeholders of the business situation.
what is an example of internal stakeholders
Some examples of internal stakeholders are: shareholders, managers and employees. And external stakeholders: the Government, costumers, suppliers, the local community, etc. The final accounts will have a different impact in the different stakeholders.
purpose of accounts for 3 internal stakeholders
- shareholders
- mangers
- employees
why would a shareholder want access to final accounts
- the owners of the company are interested to see where there money was spent and the return they will get from the business. shareholders use the financial performance to decide weather to keep their shares, sell them or maybe buy more.
- they are also interested in the performance of the company’s directors to decide ways of motivation or maybe to replace them.
why would a manager want access to final accounts
- managers are interested in the performance of the business for target setting and strategic planning.
- they are also interested in the firms efficiency
why would employees want access to final accounts
- employees are interested in the performance of the business for “job security” and possible increase in salaries.
- it could also lead to strikes and the creation of unions, if the company is profitable and does not increase employees salaries (since this does not happen automatically if profit increase)
name 6 external stakeholders who would be interested in final accounts
- the government
- suppliers
- customers
-competitiors - financers
- the local community
why would the government be interested in final accounts
- the government is interested in a business for tax profitability
- also to verify if the company if following the law
- in case of big multinational companies, the government expects an increase in employment
why would suppliers be interested in final accounts
- the suppliers are interested in the firms final accounts to ensure they will get payed on time or to grant more credit if needed
- also if the firm has a debt with the suppliers, with the final account they can see if its possible to get payed or not
why would customers be interested in final accounts
- customers are interested to see if the firm will keep supplying the product
- final accounts give them an idea to continue being customers of the firm or look for alternatives
why would competitors be interested in final accounts
- competitors use final accounts to compare their performances
- they compare their sales revenues and levels of profitability
why would financers be interested in final accounts
- financers, such as banks, look at the final accounts before approving loans. basically, to verify if the business can pay back the loans
why would the local community be interested in final accounts
- if the business is profitable it might create jobs and improve the living conditions of the local community
- conversely, if the business creates environmental issues it will have a negative effect in the local community
why must a organisation do before preparing its final accounts
- they MUST comply with the ‘principles and ethics of accounting practice’ stablished by a regulatory body.
- Professional accountants have the responsibility to act in the public interest and follow the ethic code.
- Ethics in accounting refers to the study of moral values and judgements as applied in the accounting process.
- The Association of Chartered Certified Accountants (ACCA) is a global regulatory body for professional accountants that assures its member are properly regulated.
what are the 5 principles of the association of chartered certified accountants (ACCA)
- integrity
- objectivity
- professional competence and due care
- confidentiality
- professional behaviour
what does a profit and loss account show
shows the records of income and expenditure flows of a business over a given period of time. Also know as ‘income statement’. It basically stablishes if the business is making a profit or a loss and it’s divided in 3 parts: a) the trading account; b) the profit and loss account or section; and c) the appropriation account
what does a balance sheet show
also known as “Statement of financial position” a financial statement that outlines the assets, liabilities and equity of a business at a specific point of time.
what is a trading account
it’s the first part of the income statement basically shows the difference for the business’s sales revenue and the cost of those sales for the business.
what are the 2 formulas for calculating trading accounts
- gross profit = sales revenue - cost of sales
- cost of sales = opening stocks + purchases - closing stock
define cost of goods sold
the direct cost of producing or purchasing the goods that were sold during the period.
define gross profit
the difference between the costs of goods sold and the sales revenue
whats is the profit and loss account
it’s the second part of the income statement that shows the net profit before interest and tax and the net profit after interest and tax.
how do you calculate net profit before interest and tax
First, to calculate net profit before interest and tax expenses need to be subtracted from the gross profit (calculated in the trading account). Expenses refer to indirect or fixed costs of production which are not directly linked to the units sold (i.e. rent, advertising costs, insurance, stationary, etc.)
Second, subtracting interest payable on loans we get the net profit before tax.
Finally, deducting the corporation tax we get the net profit after interest and tax.
state the equation for net profit before interest and tax
net profit before interest and tax = gross profit - expenses
state the equation for net profit before tax
net profit before tax = net profit before interest and tax - interest
state the equation for net profit after interest and tax
bet profit after interest and tax = net profit before tax - corporation tax
what is the appropriation account
it’s the final part of the income statement showing how the company’s net profit after interest and tax is distributed. This distribution could be either dividends or retained profit.
state the formula for retained profit
retain profit = net profit after interest and tax - dividends
define dividends
the sum of money paid to shareholders decided by the board of directors of a company.
define retained profit
the amount of earning left after dividends and other deductions have been made.
state the brief order of a profit and loss account
- trading account
- profit and loss account
- appropriation account
what falls under trading account in a profit and loss account
- sales revenue
- opening stock
- closing stock
- cost of goods sold
- gross profit
what falls under profit and loss account in a profit and loss account
- expenses
- net profit before interest and tax
- interest
- net profit before tax
- tax
- net profit after interest and tax
what falls under appropriation account in a profit and loss account
- dividends
- retained profit
define assets
items of monetary value that are owned by a business (i.e. cash, stocks, buildings). An asset could belong to a business but that does not mean it is paid for (i.e. a building could be worth a lot of money but its funded by debt). There a 2 types of assets: Fixed assets and current assets.
define non current assets (fixed assets)
long term assets that last more than 12 months (i.e. buildings, machinery, cars, equipment). It is important to take the ‘loss of value’ of the asset into account; this is known as depreciation (i.e. machinery losses its value over time due to its depreciation).
define current assets
short term assets that last the firms up to12 months. This could be: a) cash – money received from the sales of goods and services; b) debtors – money that’s its owned to the business and c) stock – includes raw materials, semi finish goods and finished goods (also know as inventory) .
state the equation for total assets
total assets = non current assets + current assets
define liabilities
refers to a legal obligation of a business to repay its lenders or suppliers, basically what the business owns in debt. They are classified in long-term and current liabilities
define long term and current liabilities
Non-current liabilities - long terms debts that need to be paid after 12 months (i.e. loans, mortgages)
Current liabilities – short term loans that need to be paid before 12 months (i.e. unpaid suppliers, bank overdrafts and tax)
state the formula for total liabilities
total liabilities = current liabilities + non current liabilities
state the formula of net assets
net assets = total assets - total liabilities
define equity
this shows the value of the business that belong to the owners (it could appear in the balance sheet as shareholders equity) . The Equity shows how the assets were financed. They are two main aspects in Equity, share capital and retained earnings
define share capital
it refers to the amount of money the firm raised trough the sale of shares when the share were first sold NOT their current market value. In other words, the value of equity in a business that is funded by shareholders, either through an initial public offering (IPO) or via a share issue.
define retained earnings
obtained from the profit and loss account it is also called ‘reserves’ since it included fund that were raised in previous years.
For a for-profit organization, they are the Retain profits form the P&L account.
For a non-profit organization, they are the Retain surpluses form the P&L account.
state the formula for equity
equity = share capital + retain profits
state the formula for equity in a non profit account
equity = retain surplus
how do you know if the balance sheet is correct
net assets = equity
what is the general order of a balance sheet
- non current assets
- current assets
- total assets
- current liabilities
- non current liabilities
- total liabilities
- net assets
- equity
what falls under the topic of non current assets in a balance sheet
- property plant and equipment
- accumulated depreciation
- total non current assets
what falls under the topic of current assets in a balance sheet
- cash
- debtors
- stock
- total current assets
what fall under the topic of total assets in a balance sheet
- total assets
what falls under the topic of current liabilities in a balance sheet
- bank overdraft
- trade creditors
- short term loans
- total current liabilities
what falls under the topic of non current liabilities in a balance sheet
- borrowing long term
- non current liabilities
what falls under the topic of total liabilities in a balance sheet
- total liabilities
what falls under the topic of net assets in a balance sheet
- total net assets
what falls under the topic of equity in a balance sheet
- share capital
- retained profit
- total equity
what differs between a non profit and a profit balance sheet
there is only retained surplus under the topic of equity
define intangible assets
is a non-physicalassetthat generally has a useful life greater than one year. Even if they do not have physical value they can be very valuable for the business success or failure
what is the negative to a intangible assets and how there are presence in a balance sheet
Intangible assets are very difficult to value and generally they are not registered in the Balance sheet. This is due to their subjective nature and their fluctuation in value. However, when they are registered in the Balance Sheet they are called “goodwill and intangible assets”.
what are the most common intangible assets
Patent, Goodwill, Copyright laws and trademarks.
define patents
they provide a legal protection for inventors preventing their creation is copied for a fixed number of years (normally 20 years). Therefore, it allows the inventor to have exclusive rights to commercial production of their invention for that period of time.
what is the aim of a patent
The aim of patents it that competitors invest in R&D and stimulate innovation so different products are created.
If a firm wants to use or copy the patent product they need to pay a fee to the patent holder.
define goodwill
they refers to the value of a firms’ image and reputation. I could also include the firm’s database, customer base or business connections.
how do goodwill’s benefit a company
It can provide a major competitive edge for the business if it has customer and employee loyalty. This is greatly apricated in cases of M&A’s.
when is a goodwill created
A Goodwillis created when one company acquires another for a price higher than the fair market value of its assets; forexample, if Company A buys Company B for more than the fair value of Company B’s assets and debts, the amount left over is listed on Company A’s balance sheet asgoodwill
define copyright laws
they provides legal protection for the original artistic work of musicians, authors, photographers, painters, film producers, etc. They normally last between 50 to 100 years after the death of the creator and anyone who wants to use that work has to seek permission and normally pay a fee
define trademarks
it refers to any name, symbol, figure, letter, word, or mark officially registered that identifies a production or a business. If anyone oversteps someone else’s trademark they can be sued. Trademarks normally last for 15 years, are renewable and can be sold.
state 3 examples of when someone might trademark something
- names
- symbols
- catchphrases
