3.4 Final accounts Flashcards
what is the purpose of final accounts?
ensures that all payments and receipts of a business have to be officially accounted for.
what statements do final accounts consist of?
profit and loss accounts
balance sheet
what are the different purposes of final accounts for different stakeholders?
Shareholders - Interested to see where their money was spent and the return on their investments.
Employees - Interested in the organisation’s financial accounts to assess the likelihood of pay increments and the degree of job security.
Managers - Judge the operational efficiency of their organisations; useful for target setting and strategic planning.
Competitors - Make comparisons of their financial performance.
Government - Ensure that they pay the correct amount of tax.
Financiers - Banks or lenders want scrutinise the accounts before approving any funds.
Suppliers - Decided the extent to which trade credit should be given.
Potential investors - Assess whether an investment would be financially worthwhile.
Association of Chartered Certified Accountants (ACCA)
a global regulatory body for professional accountants, assuring that its members are appropriately regulated.
what are the five guiding principles of the ACCA?
Integrity Objectivity Professional competence and due care Confidentiality Professional behaviour
Profit and loss account (income statement)
a financial statement of a firm’s trading activities over a period of time, usually one year
what are the three sections of an income statement?
The trading account
The profit and loss account
The appropriation account
profit
the positive difference between a firm’s revenues and its costs
revenue
the inflow of money from ordinary trading activities e.g. cash sales, credit sales, charges/fees and royalties
trading account
first section of the Profit and Loss account
gross profit
difference between a firm’s sales revenue (the value of products sold to customers) and its costs of producing and purchasing.
formula for gross profit
Gross profit = Sales revenue - Cost of goods sold
Cost of goods sold (COGS)
the accountant’s term for the direct costs of the goods that are actually sold.
formula for COGS
COGS = Opening stock + Purchases - Closing stock
How can a business improve its gross profit (reduce costs/raising revenue)?
Using cheaper suppliers
Increase selling price
Enhanced marketing strategies
profit and loss account (in the P&L)
shows net profit (or loss) of a business at the end of a trading period
Net profit
the surplus from sales revenues after all expenses are accounted for.
formula for net profit
Net profit = Gross profit - Expenses
what are ways that a business can increase its net profit?
better deals with the suppliers/rent provider
reviewing administration costs
control fuel consumption
appropriation account
final section of the P&L account
what are the two sections of the appropriation account?
dividends
retained profit
limitations of the profit and loss account
shows the historical success
window dressing can occur
no internationally standardised format for producing a P&L account
balance sheet
one of the annual financial statements that all companies are legally required to produce for auditing purposes.
what does the balance sheet contain?
assets
liabilities
equity
what are assets?
items of monetary value that are owned by a bsuiness
fixed asset
any asset used for business operations (rather than for selling) and lasts for more than 12 months
current asset
cash or any other liquid asset that is likely to be turned into cash within 12 months
net assets
value of all assets minus its liabilities
formulae for net assets
fixed assets + working capital - long-term liabilities
total assets - total liabilties
equity
the value of the business that belongs to the owners
what are the sections of the equity part?
share capital
retained profit
differences between the balance sheets of sole traders and limited companies
sources of finance
shareholders’ funds
dividends not present in sole traders’ balance sheet
what are the limitations of balance sheets?
static documents - the financial position of a business might be different
only estimates
different businesses will have different formats
not all assets are included such intangible assets and value of human capital
intangible assets
non-physical fixed assets that have the ability to earn revenue for a business
main intangible assets of a company
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