Financial Statement Flashcards

1
Q

Purpose of the statement of profit or loss

A
  • 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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2
Q

The impact of a change on the statement of profit or loss

A

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

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3
Q

Working capital

A

Current assets - current liabilities

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4
Q

Reserves

A

Shareholders equity - share capital

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5
Q

Relationship between the financial statements

A
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6
Q

Net realizable value (NRV)

A

The amount for which the existing inventory can be sold - cost of selling it

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7
Q

Annual depreciation

A

Original cost of asset - expected residual value / expected useful life of asset (years)

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8
Q

Evaluation of straight line method

A
  • 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
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9
Q

Impact of depreciation on the SFP and the statement of profit or loss

A
  • 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.
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