Ch 30 Accounting fundamentals Flashcards
What are the 3 accounts?
- The income statement
- The balance sheet/ Statement of financial position
- Cash flow statement
What does the income statement show?
The gross and net profit of the company. Details of how the net profit is split up between dividends and retained profits
What does the balance sheet show?
The net worth of the company. This is the difference between the value of what a company owns and what it owes
What does the cash flow statement show?
Where cash was received from and what it was spent on
Definition of income statement
Records the revenue, costs and profit (or loss) of a business over a given period of time
What are the elements of an income statement?
cost of sales, gross profit, operating profit, profit for the year, retained earnings
What are the three sections of an income statement?
The trading account
The profit and loss account
Appropriation account
What are the 2 elements of the trading account and what does it show?
Gross profit: equal to sales revenue minus cost of sales
Sales revenue
Cost of sales: direct cost of purchasing the goods that were sold during the year. opening stocks plus purchases minus closing stocks
The account shows how gross profit or loss has been made from the trading activities
What are the elements of the profit and loss account and what does it show?
Net profit: gross profit minus overhead expenses
Profit after tax: operating profit minus interest costs and corporation tax
Overheads are costs or expenses of the business that are not directly related to the number of items made or sold - rent, management salaries, depreciation
Limited companies pay corporation tax before they pay dividends or keep profits
What are the elements of the appropriation account and what does it show?
Dividends: the share of the profits paid to shareholders as a return for investing in the company
Retained profits: the profit left after all deductions, including dividends, have been made. This is ploughed back into the compant as a source of finance
Definition of low quality profit
one off profit that cannot easily be repeated or sustained
Definition of high quality profit
Profit that can be repeated and sustained
Define balance sheet (statement of financial position)
An accounting statement that records the values of a business’ assets, liabilities and shareholders’ equity at one point in time
Define asset
An item of monetary value that is owned by a business
Define liability
A financial obligation of a business that it is required to pay in the future
Define shareholders’ equity
total value of assets - total value of liabilities
Comes from 2 main sources: share capital and retained earnings
All net wealth belongs to the shareholders
Define share capital
The total value of capital raised from shareholders by the issue of shares
Define non-current assets
Assets to be kept and used by the business for more than one year. Used to be referred as fixed assets
Examples: land, machinery (tangible), patents, trademark, copyrights and goodwill: arises when a business is valued at or sold for more than the balance sheet value of its assets (intangible)
Define current assets
Assets that are likely to be turned into cash before the next balance-sheet date
E.g. accounts receivables, cash, inventory
Define inventories
Stocks held by the business in the form of materials, work in progress and finished goods
Define accounts receivables (debtors)
The value of payments to be received from customers who have bought goods on credit
Define accounts payable (creditors)
Value of debts for goods bought on credit payable to suppliers
Define current liabilities
debts of the business that will usually have to be paid within a year
accounts payable, bank overdraft, unpaid dividends
Define non-current liabilities
value of debts of the business that will be payable after more than one year
