Business 3.4

Question 1

What are two types of final accounts

Answer 1

Balance sheets and profit and loss account

Question 2

Purpose of final accounts for different for stakeholders (which ones)

Answer 2

Shareholders (Owners):

Focus on market capitalisation and dividends.
Interested in the company’s revenue, profits, and dividend payouts.
For entities without shares, referred to simply as “owners”.
Managers:

Concerned with job security and bonuses.
Pay attention to expenses, costs, and indicators of managerial performance.
High costs may imply poor expense management, affecting employment.
Employees:

Assess job security through company’s profit trends.
Use financial statements to gauge the right time for salary negotiations.
Government:

Interested in full and timely tax payments and the absence of fraud.
Relies on audits for verification.
Competitors:

Compare performance and market standing using others’ financial statements.
Suppliers:

Review debtors’ financial health to decide on trade credit terms.
Customers:

Look at profit distribution, charitable contributions, and support for NPOs.
Prefer companies that do not solely focus on enriching owners.

Question 3

What is the IB structure for profit or loss statement:

Answer 3

Title: Statement of profit or loss for the year ended 31 december 20XX

Sales Revenue
Cost of Sales
Gross profit
Expenses
profit before interest and tax
Interest
profit before tax
Tax
profit for period
dividends
retained profit

(Use surplus if non profit entity)

Question 4

What are the different parts of P&L statement

Answer 4

Trading account is the part of profit and loss account that shows gross profit

Profit statement (or Loss statement, if things aren’t going well, haha) is the part of profit and loss account that shows net profit

Appropriation account is the last part of profit and loss account that shows dividends

Question 5

3 parts of balance sheet

Answer 5

Assets
Liabilities
Equity

Question 6

Structure of Balance sheet

Answer 6

Look at IA bible

Question 7

What is residual/scrap value

Answer 7

how much an asset is worth at the end of its lifespan

Question 8

Book value

Answer 8

value of an asset in the balance sheet.

Question 9

Market value

Answer 9

estimated price of an asset if it was to be sold.

Question 10

what are two methods to calculate depreciation

Answer 10

Straight line method
Units of production method

Question 11

Advantage unit of production method

Answer 11

More reflective of reality, flexible (can count depreciation for different years separately.

Question 12

straight line method advantage

Answer 12

Simple, easy, suitable with cheaper assets, approriate when time matter

Question 13

straight line method disadvantage

Answer 13

Inapplicable to expensive complex assets, doesnt take into account qualitative factors

Question 14

Disadvantage unit of production method

Answer 14

Quite complicated, only applicable to assets that produce output

Question 15

Advantage of P&L statement

Answer 15

Breaks down trading activity into the most important elements.
Comparison of GP and NP-> good indicator of organisation trading activities

Question 16

Disadvantage of P&L statement

Answer 16

Backwards looking.
Window dressing->has opportunities for manipulating some figures

Question 17

Advantage of balance sheet

Answer 17

Quick way to asses financial standing at any point in time

Helps to make sure all assets and liabilities are accounted for->good way to check that equity and net assets balance and how much an organization is worth

Question 18

Disadvantage of balance sheet

Answer 18

Can be inacurate: hard to know real market value of assets-> leaves room for inacuracies and manipulation