financial accounting Flashcards
What is meant by an income statement
The income statement, reports the level of profit or loss that a business has made in a given period of time, often known as the trading or accounting period.
what is contained with an income statement
revenue cost of sales gross profit operating profit profit before tax profit for the year (retained profit) expenses
how do you calculate profit
total revenue - total costs
how do you calculate gross profit
(sales) revenue - cost of sales
how do you calculate operating profit
Gross profit - expenses
how do you calculate net profit
gross profit - expenses
What is the usefulness of income statements for a business and its stakeholders
- the income statement enables the business to make decisions. Being able to see the amount of profit made may affect any decisions on future expenditure.
- management can use the income statement to monitor the progress of the business in terms of targets, it allows comparisons to be made between financial years.
- the figures can be used to calculate particular ratios to help assess the performance of the business
- it can help the business in formulating its objectives for the future
- A healthy profit may encourage a business to buy back shares from shareholders
- it provides other stakeholders with valuable information
- investors can use it to decide whether to invest in a business
- H M revenue and customs will be able to see that the correct amount of tax is being paid
- the employees will be able to see how much profit is being made
- it is a legal requirement
- suppliers may want to see the income statement as evidence of an ability to pay for materials supplied.
what is meant by a statement of financial position
a method of recording the value of wealth of a business at a given moment in time
what is contained within a statement of finacial position
assets non-current (fixed) assets tangible assets intangible assets goodwill patents prudence depreciation financial non-current assets current assets inventory (stock) debtors liabilities
what are non-current assets
these are the assets that are necessary to enable the business to function eg- owned factories/ buildings, machinery etc.
what is inventory
inventory (stock) can be in the form of materials, unfinished goods (work in progress) and finished goods.
what are receivables
money that are owed to the business
what are payables
what you owe
what is working capital
short-term finance required for the day-to-day running of a business
what are non-current liabilities
money owed for more than one year
what are net assests
to calculate the net assets, add the value of the net current assets to the non-current assets, minus the non-current liabilities. this figure reflects the value of the business at a given point in time
what are retained earnings
profit saved from previous years.
what is total shareholder equity
the value of funds tied up in the business, in the form of shares and retained profits. The shareholders’ funds may have arisen from different types of shares issued
what are current assests
everything owned by business which isn’t a non-current asset. These assets are capable of being converted into cash within the accounting period. The easier these assets can be converted into cash, the better. It is now normal practice that the current assets are listed in order of:
- inventories
- trade and other receivables (debtors)
- cash
what are recievables
Debtors
what is meant by depreciation
the allowance for the wear and tear on the fixable tangible assets. As the factory and machines age, their value decreases. Depreciation reflects this, usually as a % of the assets, to give a realistic value of the business
what is the need for the provision of depreciation
allows for an element of realism within the accounts of a business
what are the methods of depreciation
- straight-line method
- reducing (declining) method
what is the usefulness of a statement of financial position to a business and its stakeholders
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