3.4 Final accounts Flashcards
Final accounts
Final accounts are financial statements compiled by businesses at the end of a particular accounting period such as at the end of a fiscal or trading year.
Who needs to know the final accounts of a company
Shareholder Government Managers Employees Financiers Suppliers Competitors Local community
What are principles related to the accounting code of ethics?
1 Integrity (fair and honest in dealing with business partners)
2 Objectivity (avoid bias, for instance when judging the financial situation of a company. e.g. if a company is bankrupt this must not be hidden.)
3. Competence and due care
4. Confidentiality (financial figures - also of other business partners - must not be given to others or stored not secured.)
5. Professional and compliance (with laws) not discredit the profession of accountants
Profit and loss account
also known as the income statement, shows the records of income and expenditure flows of a business over a given time period
Cost of goods sold (COGS)
the direct cost of producing or purchasing the goods that were sold during that period
Gross profit
found by deducting cost of goods sold (=direct cost) from sales revenue
(Indirect cost will only be deducted form the Net profit)
Net profit before interest and tax
Gross profit minus expenses (=indirect cost but w/o interest paid)
Sales revenue
- cost of goods sold
- expenses (indirect)
= net profit
Dividends
a sum of money paid to shareholders decided by the board of directors of a company
Retained profit
the amount of earnings left after dividends and other deductions have been made
What does the appropriation account show ?
how the companies net profit after interest and taxes are deducted is distributed into
- dividends (paid to the shareholders)
- and retained profit (remains in the company)
Retained profit = net profit after interest and tax - dividends
What is the main difference between
- profit and loss account
- balance sheet
Profit loss account shows the net profit (after interest and tax) for one year (how much the company earned in one year)
the balance sheet shows the “value” of a firm at a specific point in time - its assets, liability and equity
Liabilities
a firm’s legal debts or what it owes to other firms, institutions or individuals
Working capital
working capital = net current assets:
- cash
- stock
- debtors
Debtors and Creditors
Debtors : money the customer will get, e.g. for goods delivered but not yet paid
Creditors: money the company has to pay, e.g. for raw materials received but not yet paid
Equity
also known as shareholders’ equity, shows how the net assets are financed using shareholders’ capital and retained profit
Intangible assets
non physical values with potential to create future profit:
- Patents
- Goodwill
- Copyrights
- Trademarks
Patents
provide inventors with the exclusive rights to manufacture, use, sell or control their invention of a product
Goodwill
the value of positive or favourable attributes that relate to a business
(is usually the amount a company will be sold over its actual book value)
Copyright laws
laws that provide creators with the exclusive right to protect the production and sale of their artistic or literary work
Trademark
a recognizable symbol, word, phrase or design that is officially registered and that identifies a product or business
Depreciation
the decrease in the value of a fixed asset over time
if every year the same amount is depreciated this is straight line depreciation
if every year a percentage of the year before is depreciated this is reducing balance depreciation
net book value
an asset’s net value at the beginning of an accounting period, calculated by deducting the accumulated (total) depreciation from the cost of the fixed asset
