3.4 Final accounts

Question 1

what is the purpose of final accounts?

Answer 1

ensures that all payments and receipts of a business have to be officially accounted for.

Question 2

what statements do final accounts consist of?

Answer 2

profit and loss accounts

balance sheet

Question 3

what are the different purposes of final accounts for different stakeholders?

Answer 3

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.

Question 4

Association of Chartered Certified Accountants (ACCA)

Answer 4

a global regulatory body for professional accountants, assuring that its members are appropriately regulated.

Question 5

what are the five guiding principles of the ACCA?

Answer 5

Integrity
Objectivity
Professional competence and due care
Confidentiality 
Professional behaviour

Question 6

Profit and loss account (income statement)

Answer 6

a financial statement of a firm’s trading activities over a period of time, usually one year

Question 7

what are the three sections of an income statement?

Answer 7

The trading account
The profit and loss account
The appropriation account

Question 8

profit

Answer 8

the positive difference between a firm’s revenues and its costs

Question 9

revenue

Answer 9

the inflow of money from ordinary trading activities e.g. cash sales, credit sales, charges/fees and royalties

Question 10

trading account

Answer 10

first section of the Profit and Loss account

Question 11

gross profit

Answer 11

difference between a firm’s sales revenue (the value of products sold to customers) and its costs of producing and purchasing.

Question 12

formula for gross profit

Answer 12

Gross profit = Sales revenue - Cost of goods sold

Question 13

Cost of goods sold (COGS)

Answer 13

the accountant’s term for the direct costs of the goods that are actually sold.

Question 14

formula for COGS

Answer 14

COGS = Opening stock + Purchases - Closing stock

Question 15

How can a business improve its gross profit (reduce costs/raising revenue)?

Answer 15

Using cheaper suppliers
Increase selling price
Enhanced marketing strategies

Question 16

profit and loss account (in the P&L)

Answer 16

shows net profit (or loss) of a business at the end of a trading period

Question 17

Net profit

Answer 17

the surplus from sales revenues after all expenses are accounted for.

Question 18

formula for net profit

Answer 18

Net profit = Gross profit - Expenses

Question 19

what are ways that a business can increase its net profit?

Answer 19

better deals with the suppliers/rent provider
reviewing administration costs
control fuel consumption

Question 20

appropriation account

Answer 20

final section of the P&L account

Question 21

what are the two sections of the appropriation account?

Answer 21

dividends

retained profit

Question 22

limitations of the profit and loss account

Answer 22

shows the historical success
window dressing can occur
no internationally standardised format for producing a P&L account

Question 23

balance sheet

Answer 23

one of the annual financial statements that all companies are legally required to produce for auditing purposes.

Question 24

what does the balance sheet contain?

Answer 24

assets
liabilities
equity

Question 25

what are assets?

Answer 25

items of monetary value that are owned by a bsuiness

Question 26

fixed asset

Answer 26

any asset used for business operations (rather than for selling) and lasts for more than 12 months

Question 27

current asset

Answer 27

cash or any other liquid asset that is likely to be turned into cash within 12 months

Question 28

net assets

Answer 28

value of all assets minus its liabilities

Question 29

formulae for net assets

Answer 29

fixed assets + working capital - long-term liabilities

total assets - total liabilties

Question 30

equity

Answer 30

the value of the business that belongs to the owners

Question 31

what are the sections of the equity part?

Answer 31

share capital

retained profit

Question 32

differences between the balance sheets of sole traders and limited companies

Answer 32

sources of finance
shareholders’ funds
dividends not present in sole traders’ balance sheet

Question 33

what are the limitations of balance sheets?

Answer 33

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

Question 34

intangible assets

Answer 34

non-physical fixed assets that have the ability to earn revenue for a business

Question 35

main intangible assets of a company

Answer 35

brand 
patents
copyright
goodwill
registered trademarks