FAPR - Final Accounts Prep

Question 1

Calculating profit margin

Profit as a percentage of sales price

Answer 1

To calculate the profit margin percentage, divide the gross profit by the selling price and then multiply by 100.

Gross profit/Selling price x 100 = Profit margin %

Question 2

Calculating profit mark-up

Profit as a percentage of cost of goods sold

Answer 2

To calculate the profit mark-up percentage, divide the gross profit by the cost and then multiply by 100.

Gross profit/Cost price x 100 = Profit margin %

Question 3

How do we account for carriage out and carriage inwards?

Answer 3

Carriage out is the cost of delivery when it is paid for by the seller. This is included as a separate expense in the seller’s statement of profit or loss.

Carriage inwards is a cost to the buyer when the buyer is expected to pay delivery costs. This is added to purchases in the statement of profit or loss

Question 4

The statement of profit or loss

Calculating the profit for the period

Answer 4

The statement of profit or loss is prepared for a financial period, and shows the income less the cost of goods sold, and expenses of the business, to calculate the profit or loss for the period

Question 5

The statement of financial position

A snapshot of the business

Answer 5

The statement of financial position gives the value of a business on a specific date at the end of the financial period; it shows assets minus liabilities to give the capital/equity of the business.

Question 6

Goodwill in partnerships

When is it used?

Answer 6

Goodwill is calculated as the difference between the net assets of the partnership (assets minus liabilities) and the value of the partnership as a whole. It is an intangible asset and includes customer loyalty and the reputation of the business. Goodwill is used to value the partnership when a new partner joins and/or an existing partner retires.

Question 7

Equity

How the business is financed

Answer 7

Equity is the investment that the owners have made in the business.

In a limited company this is the share capital plus retained profit.

In a sole trader or partnership this is the capital that the owners have invested plus any retained profit.

Question 8

What is the going concern concept?

Answer 8

A concept that says that we assume that an organisation will continue for the foreseeable future, so the accounts are prepared on that basis. This means that we value assets at their value to the organisation, usually at cost less depreciation, rather than at their current sales/scrap value.

Question 9

Limited liability - What does it mean?

Answer 9

Limited liability companies and limited liability partnerships are incorporated and are a legal entity separate from their owners or shareholders. This means that the liability of the shareholders or partners is limited to the amount they have invested.

Question 10

Trustees - What are they and what do they do?

Answer 10

The trustees of a charity are the people who take decisions about the way in which the charity is run. Trustees are not usually paid by the charity but in certain situations may be liable for the debts of the charity.

Question 11

Goodwill. What is it?

Answer 11

An intangible asset, goodwill is the difference between the sale value of a company, and the total value of the assets owned by the company. In other words, it’s the extra paid for the existing customer base, brand name and other intangible assets that a company may have over the value of any physical buildings and machinery.

Question 12

On the Statement of Financial Position, what are the current assets displayed?

Answer 12

Inventories - Stock/materials for production

Receivables - Money that customers owe the business

Cash - Money currently sat in the bank

Question 13

How is the top half of the Statement of Financial Position displayed?

Answer 13

Non-Current Assets

Current Assets

• Inventory
• Receivables
• Cash

Current Liabilities
-Payables

Net Current Assets = Total of Current Assets-Total Current Liabilities

Non-Current Liabilities
-Bank Loan

Net Assets = Total Non-Current Assets+ Net Current Assets-Non-Current Liabilities

Question 14

How is the bottom half of the Statement of Financial Position displayed?

Answer 14

Proprietors Interest
Capital
Profit (from P&L)
Less: Drawings
Total = Capital + Profit - Drawings

This should equal the same as the top half of the Statement of Financial Position

Question 15

How is the Statement of Profit & Loss displayed?

Answer 15

Sales

Cost of Sales:

• Open Inventory
• Purchases
• Closing Inventory

Gross Profit = Sales - Cost of Sales

Sundry Income (i.e Interest received/dividends)

Less Expenses:

• Rent
• Salaries
• Electricity
• Depreciation
• Bad Debts
• Bank Charges etc

Net Profit for the year = Gross Profit + Sundry Income - Expenses

Question 16

What are the advantages of trading as a Limited Company?

Answer 16

Limited liability status - Owners & shareholders will only lose what they put in to the business, and are not liable for any debts the company incurs.

Easier to raise finance - Through shares and other securities, there is greater access to funding.

Company can continue to trade with different owners - The business can change hands without any affect on the business operations.

Taxed under Corporation Tax - Limited companies only pay Corporation tax which is lower than personal tax i.e Income tax & NI.

Question 17

What are the disadvantages of trading as a limited company?

Answer 17

Companies House - Limited companies will need to submit their accounts to Companies House where they can be accessed by anyone to see how the business is doing.

There are more regulations to comply with - Due to Companies Act 2006, there are restrictions on what a business can do and how it must be managed as well as placing additional reporting regulation on the company.

Audits - Larger companies must undertake audits at a cost. This is to ensure the business is being run properly and accounts are accurate.

Shares are regulated - Issuing of shares are heavily controlled.

Question 18

How is Goodwill calculated?

Answer 18

Sales price of business

Less: value of net assets on B/S

Question 19

What is an appropriation account used for?

Answer 19

This account is used to split profit between partners after taking allowance for any other entries.

Question 20

What is the process for an appropriation account?

Answer 20

Net profit (from P&L)
\+
Interest on drawings
-
Interest on Capital
-
Salaries
=
Profit share ratio (What is left to split)

This should then contra