Financial records Flashcards
What does a trading, profit and loss account show?
A trading, profit and loss account shows the business’s financial performance over a given time period, eg one year.
What does a balance sheet show?
A balance sheet shows the value of a business on a particular date. A balance sheet shows what the business owns and owes (its assets and its liabilities).
What do fixed assets show?
Fixed assets show the current value of major purchases that help in the running of the business, like delivery vans or PCs.
What do current assets show?
Current assets show the cash or near-cash available to the firm. This includes stock ready to sell, money owed to them by debtors and cash in the bank.
How do you find the value of the business on the day the balance sheet was drawn up?
Deducting all the current liabilities from the total amount of fixed and current assets gives the value of the business on the day the balance sheet was drawn up.
What are capital and reserves?
Capital and reserves are in effect liabilities, because the firm owes this money to the owners. What a firm owns, it owes.
Whats the working capital?
This is money that a business can access immediately, rather than money that is tied up in investments or property.
What makes a business solvent?
A business is solvent if it can meet its short-term debts when they are due for payment. To do this it needs adequate working capital.
There are three main reasons why a business needs adequate working capital, What are they?
They must:
pay staff wages and salaries
settle debts and therefore avoid legal action by creditors
benefit from cash discounts offered in return for prompt payment
How can you calculate a firm’s working capital?
working capital = current assets - current liabilities
Why are people interested in the published accounts of a company?
Many groups of people are interested in the published accounts of a company. The information they provide may influence future decisions. For example, lenders will be looking at the solvency of a business. Rivals are interested in monitoring the profits earned by competitors.
