3.4 Financial accounts

Question 1

All companies must provide a set of final accounts including three major accounting statements:

Answer 1

• the profit and loss account (the income statement)
• the balance sheet
• the cash flow (funds flow) statement

Question 2

The various stakeholders in a business look at the accounts for different reasons:

Answer 2

• Managers use the ‘numbers’ to analyse performance against targets.
• Employees look for security of employment.
• Shareholders analyse the accounts to check management’s performance and efficiencies.
• Potential investors look at figures before investing to check likely return.
• Creditors and suppliers (those owed money) examine the accounts to check on security of payment.
• The government checks firms are paying the correct tax.
• Customers want to be sure of a reliable supply of goods or services.
• Competitors want to compare their performance with other firms.

Question 3

The principles and ethics of accounting practice

Answer 3

All firms are required to have their own accounts audited by independent companies to ensure that they present a ‘true and fair view’ of the financial position of the firm.

Question 4

Trading account

Answer 4

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 5

Gross profit (formula)

Answer 5

Sales revenue - Cost of goods sold

Question 6

Cost of goods sold (COGS)

Answer 6

Opening stock + Purchases - Closing stock

Question 7

The profit and loss account

Answer 7

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 8

Net profit

Answer 8

gross profit−expenses

Question 9

The appropriation account

Answer 9

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 10

Balance sheet

Answer 10

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 11

Net assets (formula)

Answer 11

Fixed assets + Working capital - Long-term
liabilities
Total assets-Total liabilities

Question 12

Intangible assets

Answer 12

Non-physical assets that have value:
- goodwill
- patents and copyrights
- trademarks and brand names

Question 13

Depreciation

Answer 13

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 14

Straight-line depreciation (SLD) - formula

Answer 14

annual depreciation = purchase cost / lifespan

Question 15

Reducing balance method

Answer 15

A method of depreciation that reduces the value of a fixed asset by the same percentage each year throughout its usefullife. Thisis the more realistic method to use.