Financial Statement Flashcards
Purpose of the statement of profit or loss
- Can be used to measure and compare the performance of a business over time or with other firms
- Bankers and creditor of the business will need the info to help decide whether to lend money to the business
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The impact of a change on the statement of profit or loss
An increase in price : demand is inelastic - Revenue, gross profit, operations profit, profit before tax, and retained earnings will all increase.
Increase in direct cost per unit - Cost of sales will increase thus reducing gross profit and profit for the year
Working capital
Current assets - current liabilities
Reserves
Shareholders equity - share capital
Relationship between the financial statements
Net realizable value (NRV)
The amount for which the existing inventory can be sold - cost of selling it
Annual depreciation
Original cost of asset - expected residual value / expected useful life of asset (years)
Evaluation of straight line method
- The method requires estimates to be made regarding both life expectancy and residual value. Any errors in these estimates lead to inaccurate depreciation charges being calculated
Impact of depreciation on the SFP and the statement of profit or loss
- It is a business expense so it will reduce profit from operation on the statement of profit or loss.
- It reduces the net book value of a non-current asset. The value of non-current assets on the SFP will fall as a consequence.