3.4A Final Accounts

Question 1

What are the 3 accounts which compromise the “final accounts”?

Answer 1

1. Profit and Loss account
2. Balance sheet
3. Cash flow statements (unit 3.7)

Question 2

Which internal stakeholders could be interested in final accounts?

Answer 2

Management, shareholders, employees

Question 3

Why would the final accounts of a business be useful to “employees”?

Answer 3

To know the overall financial stability of the business and therefore how secure their jobs are.

Question 4

Why would the final accounts of a business be useful to “shareholders”?

Answer 4

How effectively their money has been invested + How much they will receive in dividends.

Question 5

Why would the final accounts of a business be useful to the “management”?

Answer 5

They enable them to make key and strategic financial decisions.

Question 6

Which external stakeholders could be interested in final accounts?

Answer 6

Government, competitors, suppliers

Question 7

Why would the final accounts of a business be useful to the “suppliers”?

Answer 7

Assess how effectively the firm will be able to pay for the goods supplied to it on credit

Question 8

Why would the final accounts of a business be useful to the “competitors”?

Answer 8

To assess the overall business financial strength of the firm + compare this to other years

Question 9

Why would the final accounts of a business be useful to the “government”?

Answer 9

Primarily interested in final accounts to determine the tax payable by the firm + ensure that the business is conducting its financial affairs with honesty and integrity

Question 10

What is “depreciation”?

Answer 10

Depreciation refers to the fall in the value of a fixed asset.
(As a fixed asset is used over and over, its value drops due to wear and tear. + new technologies become available

Question 11

Why do assets depreciate?

Answer 11

1. As a fixed asset is used over and over, its value drops due to wear and tear.
2. Newer and better models and/or improved technologies become available, further depreciating the value of older assets such as computers and equipment

Question 12

Why does depreciation need to be accounted for in the profit and loss account?

Answer 12

If you fail to account for depreciation the firm’s fixed assets will be over-valued, and therefore misrepresent the value of a business’ assets to different stakeholders

Question 13

What is the “residual/ scrap value”?

Answer 13

The value of a fixed asset at the end of it’s useful life

(not ALL assets have this)

Question 14

What are the 2 ways in which you can account for depreciation?

Answer 14

1. Straight-Line method
2. Declining-Balance method

Question 15

What is the “straight-line” method?

Answer 15

Spreads the depreciation evenly over the asset’s useful life.
–> Value of asset falls by an equal amount every year

Question 16

What are some advantages of the “straight-line” method?

Answer 16

• Easier to make historical comparisons of data
• Easy to calculate
• Useful for assets with a known useful life-span

Question 17

What are some disadvantages of the “straight-line” method?

Answer 17

• Can be misleading and inaccurate
• Not suitable it the lifespan of asset is unknown

Question 18

What is the “declining-balance” method?

Answer 18

This method uses a pre-set and fixed percentage to calculate the value of depreciation.
This results in a larger amount of depreciation, reducing the value more at the earlier years of the asset’s useful life.

Question 19

What are some advantages of the “declining-balance” method?

Answer 19

• Suitable for assets that have a consistent usage rate
• Suitable for assets that last a long time
• More realistic than the other method

Question 20

What are some disadvantages of the “declining-balance” method?

Answer 20

• Determining a suitable depreciation rate is difficult
• More difficult and consuming to calculate

Question 21

What is the definition of “final accounts”?

Answer 21

“Final accounts are published accounts of an organization, made available to and used by different stakeholders, such as managers, employees, shareholders, sponsors, financiers and investors. “

(idk if you have to know this though)