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business unit 3 > assessing competitiveness > Flashcards

assessing competitiveness Flashcards

1
Q

How is Finance Cost defined?

A

interest paid by a business on any borrowed money

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2
Q

How is Finance Income defined?

A

interest received by a business on any money help in deposit accounts

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3
Q

What are Financial Statements?

A

There are 2 main financial statements that all companies are required to produce, by law for each financial year. They are:
- Statement of financial position (balance sheet)
- Statement of comprehensive income (profit & loss account)

Unincorporated businesses are also required to create financial statements, but they will not be as detailed as those required by companies. However, they will usually take a similar format to those listed above.

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4
Q

What is the Statement of Comprehensive Income?

A
  • Otherwise known as an income statement or profit and loss account, the statement of comprehensive income will record the income and expenditure of a business over a period of time.
  • The period of time is usually 1 year (but can vary from 6 months to 18 months)
  • It will be used to calculate whether a business has made a profit or a loss over the accounting period.
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5
Q

What are the Key Parts of the Statement of Financial Income?

A
  • Revenue
  • Cost of Sales
  • Gross Profits
  • Selling Expenses
  • Administrative expenses
  • Operating Profit
  • Finance Costs
  • Profit for the Year (net profit)
  • Profit for the year (net profit) after tax
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6
Q

What is the Revenue section of Statement of Comprehensive Income?

A
  • This is the money the business receives from selling goods and services.
  • Revenue must not include VAT. This is because VAT does not belong to the business
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7
Q

What is the Cost of Sales section of Statement of Comprehensive Income?

A
  • This refers to the production costs of a business
  • More specifically it relates to direct costs, such as raw materials and labour
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8
Q

What is the Gross Profit section of Statement of Comprehensive Income?

A
  • This is the cost of sales subtracted from the revenue
  • It is the profit made before the deduction of general overheads
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9
Q

What is the Selling Expenses section of Statement of Comprehensive Income?

A

A business is likely to incur a range of expenses that are directly related to the selling its products e.g. sales commissions, advertising, distribution and promotional costs.

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10
Q

What is the Administrative Expenses section of Statement of Comprehensive Income?

A
  • These are the general overheads or indirect costs of the business e.g. office salaries, expenses claimed by senior staff, stationery supplies, IT expenses etc.
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11
Q

What is the Operating Profit section of Statement of Comprehensive Income?

A
  • If the selling and administrative costs are subtracted from gross profit we get the operating profit
  • The operating profit is the profit generated from the firm’s core acitivites
  • It does not include any income from financial investments made by the business
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12
Q

What is the Finance Costs Section of Statement of Comprehensive Income?

A
  • If a business borrows money it will have to pay interest to the lender.
  • The amount paid will be entered in the statement as a finance cost
  • However, a business may also recieve interest if it has money in deposit accounts this will appear as finance income in the account
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13
Q

What is the Profit for the Year (Net Profit) section of the Statement of Comprehensive Income?

A
  • If the cost of finance is subtracted from the operating profit the net profit for the year is determined
  • This is the profit before taxation
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14
Q

what is the Profit for the Year (Net Profit) after tax section of the Statement of Comprehensive Income?

A
  • This is the amount of money that is left over after all expenses, including taxation, have been deducted from revenue
  • It is often referred to as the ‘bottom line’
  • The money belongs to the owners of the business,
  • In case of a limited company it belongs to the shareholders, Some of it may be retained
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15
Q

What are the different Stakeholders that would be interested in the Statement of Financial Income?

A
  • Shareholder
  • Managers & Directors
  • Employees
  • Suppliers
    -Government
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16
Q

Why would Shareholders be interested the Statement of Financial Income?

A
  • Naturally the owners of a business will be interested in its performance
  • Shareholders are likely to be interested in the profit made by the business - particularly the profit for the year (net profit) after tax
  • Rising profits are an indicator of improving performance –> probably calculate the net profit and gross profit margin from the statement of financial income to assess performance more rigorously
  • It is also possible to gauge the growth of the business by looking at the statement of comprehensive income –> if the revenue is rising this suggests that the business is growing
17
Q

Why would Managers & Directors be interested in the Statement of Financial Income?

A
  • Since managers and directors are responsible for running the business, they are likely to use key information in the statement of comprehensive income to monitor progress
  • For example, they might be setting annual targets for growth in revenue or profit for the year (net profit).
  • Changes in the revenue, for example will show how fast a company has grow and whether targets have been met
18
Q

Why would Employees be interested in the Statement of Financial Income?

A
  • If employees, or their representatives, are seeking a wage increase, it may be helpful to have access to some of the information in the statement of comprehensive income when presenting a claim
19
Q

Why would Suppliers be interested in the Statement Financial Income?

A
  • Before a supplier accepts an order form a new customer on trade credit, it is prudent to carry out a check on their creditworthiness
  • One way to do this is to look at the trading history of the customer
  • If the customer can provide several years of authenticated accounts, this might help to show whether the customers is able to pay what is owned at the end of the credit period
  • If the statement of comprehensive income show that a customer is consistently profitable, this might be enough proof for the supplier
20
Q

Why would Government be interested in the Statement Financial Income?

A
  • Companies have to produce a statement of comprehensive income by law
    -It is needed by the tax authorities to help assess how much tax a business has to pay
  • HMRC collects taxes on behalf of the government and requires all business owners to provide documentary evidence of the profits or losses made by the business ever year
  • Also, the ONS (Office for National Statistics), a government agency, may have an interest in business accounts because it collects economic data, which is collated and presented for public consumption
21
Q

What are the section of a Statement of Financial Position?

A

Previously known as the balance sheet, the Statement of Financial Position catalogues the a businesses assets and liabilities on a particular date in time.

It is broken down into 3 section:
- Assets
- Liabilities
- capital

22
Q

What is the Asset section of the Statement of Financial Position?

A
  • These are items that a business owns or uses. They are divided into current or non-current assets.
  • Current assets, such as raw materials and inventory (stock) are used up in the production process.
  • Non-current assets, such as factories and machinery, are used repeatedly over a period of time. A business would expect to retain these assets for beyond the next accounting period.
23
Q

What is the Liabilities section of the Statement of Financial Position?

A
  • These are debts that of a business, money owed to other parties. Again they will be categorised as either current or non-current.
  • These may be short term, an overdraft or a supplier who’s provided trade credit, or long term, such as a mortgage, bank loan or hire purchase agreement

business unit 3 (6 decks)

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