3.7.2 Financial Accounts 1 and 2

Question 1

What will an income statement do

Answer 1

Will communicate the revenue generated by a business and then its profits at various levels following a series of expenses and exceptional incomes.

Question 2

What is the difference between gross profit and operating profit

Answer 2

Gross profit - the profit a business makes on its trading activity taking into account the direct costs of goods sold

Operating profit - take into account all over indirect costs (overheads)

Question 3

What does an income statement show

Answer 3

Shows the revenue generated by a business, the costs it incurs and any profit generated, typically over a period of a year

Question 4

What are costs of goods sold

Answer 4

The direct costs associated with the production and sale of the product or service

Question 5

What is gross profit

Answer 5

The profit after direct costs have been deducted. Gives a broad indication of the success of a business’s trading activity

Question 6

Operating costs are …… from ……..

Answer 6

Operating costs are deducted from gross profit

Question 7

What is operating profit

Answer 7

The profit left after the other indirect costs (overheads) have been deducted

Question 8

What are exceptional expenses and income

Answer 8

These could be expenses or incomes that are not associated with the direct activity of the business. They may be one off items. They are kept separate in order to give an indication of the quality of profit

Question 9

What is net profit

Answer 9

The bottom line - what a business has left to reinvest or return to shareholders/owners after tax has been deducted

Question 10

What profitability ratios can be calculated from an income statement

Answer 10

Gross profit margin
Operating profit margin
Return on capital employed (ROCE)

Question 11

What can we find out from an income statement

Answer 11

Changes in sale revenue
Change in the direct costs of sales
How well a business manages its operating costs
The profitability of a business
Identify unusual incomes/expenses during the year

Question 12

What is a balance sheet

Answer 12

A financial document that records the assets and liabilities of a business. A balance sheet gives a snapshot of the value and financial strength of a business

Question 13

What are non current assets

Answer 13

Known as fixed assets - used to operate the business and include machinery (tangible / fixed assets) and brands and patents (intangible) - usually take longer than a year to sell.

Question 14

What are current assets

Answer 14

Assets that the business expect to use or sell within a year. They can be converted into cash to pay off liabilities.

Question 15

What are current liabilities

Answer 15

Payments due within a year

Question 16

What are net current assets and how is it calculated

Answer 16

The working capital a business has available

Current assets - current liabilities = the working capital a business has available

Question 17

What are non current liabilities

Answer 17

Debts that a business does nor expect to pay within a year

Question 18

What is net assets and how is it calculated

Answer 18

The value of a business

Total assets - total liabilities

Question 19

What will total equity always balance with and what does it represent

Answer 19

Will always balance with NET ASSETS

Represents how a business has been financed

Question 20

What can a balance sheet be used to calculate

Answer 20

Financial ratios such as:
Liquidity ratios
Gearing ratios
Efficiency ratios

Question 21

What can we find out from a balance sheet

Answer 21

The value of a business (equity)
The current assets a business holds 
Short term liabilities the business will need to pay within a year 
The liquidity of a business 
The long term debts a business has 
How a business has been financed