3.4 Final accounts

Question 1

The appropriation account

Answer 1

The appropriation account refers to the final section of a P&L account and shows how the net profit after interest and tax is
distributed, i.e.dividends to shareholders and/or retained profit kept by the business.

Question 2

A balance sheet

Answer 2

A balance sheet contains financial information on an organization’s assets, liabilities and the capital invested by the
owners on one specific day, thus showing a ‘snapshot’ the firm’s financial situation.

Question 3

Book value

Answer 3

Book value 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 the
goodwill of the business.

Question 4

Cost of goods sold (COGS)

or cost of sales (COS)

Answer 4

Cost of goods sold (COGS), also known as cost of sales (COS), is shown in the trading account and represents the direct costs of producing or purchasing stock that has been sold.

Opening stock + purchases - closing stock

Question 5

Depreciation

Answer 5

Depreciation is the fall in the value of fixed assets over time, from wear and tear (due to the asset being used) or obsolescence
(outdated or out of fashion).

Question 6

Final accounts

Answer 6

Final accounts are the published annual financial statements that all limited liability companies are legally obliged to report,
i.e. the balance sheet and the P&L accounts.

Question 7

Fixed assets

Answer 7

Fixed assets are items owned by a business, not intended for sale within the next twelve months, but used repeatedly to generate revenue for the organization, e.g. land, premises and machinery.

Question 8

Goodwill

Answer 8

Goodwill is an intangible asset which exists when the value of a firm exceeds its book value (the value of the firms net assets).

Question 9

Gross profit

Answer 9

Gross profit 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 10

historic cost

Answer 10

The historic cost refers to the purchase cost of a particular fixed asset.

Question 11

Intangible assets

Answer 11

Intangible assets are fixed assets that do not exist in a physical form, e.g. goodwill, copyrights, brand names and registered
trademarks.

Question 12

Net assets

Answer 12

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

Question 13

Net profit

Answer 13

Net profit is the surplus (if any) that a business makes after all
expenses have been paid for out of gross profit.

Question 14

The profit and loss account (or income statement)

Answer 14

The profit and loss account (or income statement) is a financial record of a firm’s trading activity over the past 12
months, consisting of three parts: the trading account,the P&L account and the appropriation account.

Question 15

Reducing balance method

Answer 15

Reducing balance method is a method of depreciation that reduces the value of a fixed asset by the same percentage each
year throughout its useful life. This is the more realistic method to use.

Question 16

The residual value

Answer 16

The residual value of an asset is an estimate of the scrap or disposal value of the asset at the end of its useful life.

Question 17

Retained profit

Answer 17

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

Question 18

Share capital

Answer 18

Share capital 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 19

Shareholders’ funds

Answer 19

Shareholders’ funds show the equity of the owners, i.e. the
share capital invested by theowners and theretained profit and
reserves that have been accumulated.

Question 20

Straight line method

Answer 20

Straight line method is a method of depreciation that reduces the value of a fixed asset by the same value each year throughout its useful life. This is the relatively easier method to calculate.

Question 21

The trading account

Answer 21

The trading account is the first section of the P&L account, showing the difference between a firm’s sales revenue and its
direct costs of trading, i.e. it shows the gross profit of a business.

Question 22

Window dressing

Answer 22

Window dressing refers to the legal act of creative accounting by manipulating financial data to make the results look more flattering