3.4 Final accounts

Question 1

Balance sheet

Answer 1

Contains financial information about an organisation’s assets, liabilities and the capital invested by the owners, showing a snapshot of the firm’s financial situation.

Question 2

Book value

Answer 2

Is the value of an asset as shown on a balance sheet. The market value of assets can be higher than its book value because of intangible assets such as the brand value or goodwill

Question 3

Cost of sales (COS)

Answer 3

refers to the direct costs of producing or purchasing stock that has been sold to customers

Question 4

Creditors

Answer 4

are suppliers who allow a business to purchase goods and/or services on trade credit

Question 5

Current asset

Answer 5

Refers to cash or any other liquid asset that is likely to be turned into cash within 12 months of the balance sheet date. Examples include cash, debtors and stocks

Question 6

Current liabilities

Answer 6

are debts that must be settled within one year of the balance sheet date. Examples include bank overdrafts, trade creditors and other short term loans

Question 7

Depreciation

Answer 7

The fall in value of non-current assets over time, caused by wear and tear (over used) or obselence (outdated)

Question 8

Expenses

Answer 8

are the indirect or fixed costs of production, such as administration charges, management salaries, insurance premiums and rent

Question 9

Final accounts

Answer 9

Are the published annual financial statements that all limited liability companies are legally obliged to report, namely the balance sheet and the P&L account.

Question 10

Goodwill

Answer 10

is an intangible asset which exists when the value of a firm exceeds its book value (the value of a firm’s net assets)

Question 11

Gross profit

Answer 11

Is the difference between the sales revenue of a business and its direct costs incurred in making or purchasing the products that have been sold to its customers.

Question 12

Historic cost

Answer 12

Refers to the purchase cost of a particular fixed asset. It is used in the calculation of depreciation.

Question 13

Intangible assets

Answer 13

Are non-current assets that do not exist in a physical form but are of monetary value, such as goodwill, copyrights, brand names and registered trademarks

Question 14

Net assets

Answer 14

show the value of a business to its owners by calculating the value of all its assets minus its liabilities. This figure must match the equity of the business in the balance sheet.

Question 15

Non-current assets

Answer 15

are items owned by a business, not intended for sale within the next 12 months, but used repeatedly to generate revenue for the organisation, such as property, plant and equipment

Question 16

Non-current liabilities

Answer 16

Are the debts owed by a business, which are expected to take longer than a year from the balance sheet date to repay.

Question 17

Profit

Answer 17

Is the surplus (if any) that a business earns after all expenses have been paid for from the firm’s gross profit.

Question 18

The profit and loss account

Answer 18

A financial record of a firm’s trading activities over the past 12 months, showing all revenues as well as costs and revenues during this time

Question 19

Residual value (or scrap value)

Answer 19

Is an estimate of the value of the non-current asset at the end of its useful life.

Question 20

Retained profit

Answer 20

Is the amount of profit after interest, tax, and dividends have been paid. It is then reinvested in the business for its own use.

Question 21

Share capital

Answer 21

refers to the amount of money raised through the sale of shares. It shows the value raised when the shares were first sold, rather than their current market value.

Question 22

Straight line method

Answer 22

Is a means of calculating depreciation that reduces the value of a fixed asset by the same value each year throughout its useful life.

Question 23

The units of production method

Answer 23

Is a means of calculating depreciation that allocates an equal amount of depreciation to each unit of output rendered by a non-current asset

Question 24

Window dressing

Answer 24

Refers to the legal act of creative accounting by manipulating financial data to make the results appear more appealing.