Financial Statements Flashcards
Characteristics of a asset (4)
- A probable future benefit exists
- Business must have an exclusive right to control the benefit
- Must arise from a past transaction
- Asset must be capable of measurement in monetary terms.
What is a claim? (1)
Obligation to provide cash or some other benefit to an outside party.
What is one claim against a business? (2)
Equity - represents the claims of the owner(s) to the business
Equity= capital (investment by owner) + profit
What is one claim against a business? (1)
Liability - represents the claims of outside parties
Statement of financial position/ balance sheet equation.(1)
Assets= claims
Define Non-Current Assets (3)
- NOT for resale - to be used by business
- Owned for MORE than a year
- e.g. computer, property & plant
Define Current Asset (3)
- Involved in day-to-day running of business
- Value changes constantly
- e.g. inventory, trade receivables, receivables & cash
Define Non-Current Liabilities (1)
Amounts due to other parties that are not liable for repayment in next 12 months. e.g. long term loan
Define Current Liabilities (1)
Amount due within the next 12 months
What are two financial statements and what is the purpose of each statement? (2)
Income statement - how much profit a business has generated during a trading period.
Statement of financial position/ balance sheet - how much a business is worth of a specific day
Statement of financial position/ Balance sheet layout
Balance sheet as at 31st Sept 20x1
£ £
NON-CURRENT ASSET 500
CURRENT ASSETS 350
TOTAL ASSETS 850
CURRENT LIABILITIES (150)
NON-CURRENT LIABILITIES (400)
TOTAL LIABILITIES 550
NET ASSETS 300
CAPITAL 100
RETAINED PROFIT 200
EQUITY 300
Income statement layout
Income statement for the year ended 31st Sept 20x1 Sales Revenue 1000 Cost of sales (450) Gross profit 550 Operating expenses (250) Operating profit 300 Interest/Finance cost (25) Profit BEFORE tax 275 Corporation tax 75 Profit AFTER tax 200 Dividends PAID 80 Retained profits 120
What term is being described?
Sales - cost of sales
Profit from buying & selling
GROSS PROFIT
What term is being described?
Cost of buying & selling
Opening inventory + purchases - closing inventory
COST OF SALES
What term is being described?
Profit once expenses deducted from gross profit
NET PROFIT
Accounting convention: REALISATION
Revenue is generated when goods/service has been provided to customer.
DO NOT need to wait until customer pays
Revenue generated even when customer doesn’t pay.
Accounting convention: MATCHING/ACCURALS
States that expenses should be matched to the revenues that they have helped to generate.
e.g. Andy & CO paid £15,000 on 1st Jan for the next 15 months of factory rent. What impact would this have on the financial statements to 31st Dec?
INCOME STATEMENT - Expense = £12,000
BALANCE SHEET - Rent Receivable = £3000 (future benefit)
WORKING PAPER - Cash column = £15000
Accruals/payables:
Expenses occurred but not yet paid for.
At 31st Dec, Andy & CO have only been charged for nine months of rent at £900 p/m, when they have been in the premises for 12 months. What impact would this have on the financial statement?
INCOME STATEMENT - Expense £6000
BALANCE SHEET - Accural £1500
WORKING PAPER - Cash Column = £4500
Depreciation
- Definition
- Formula
Depreciation - when a NCA goes down in value due to general wear&tear.
Depreciation per year=
(asset cost - disposal value)/estimated USEFUL life
e.g. Andy & CO purchase a Asset worth £40,000 on 1st Jan YR 1. Show how this would appear in financial statements to 31st Dec YR1.
Asset cost= £40,000
Disposal value= £5000
Estimated useful life= 5 years
Depreciation of per year=
(asset cost -disposal value)/estimated useful life
(40,000-5000)/5
£7000
This is recorded in the financial statements as:
INCOME STATEMENT - EXPENSE of DEP’N= £7000
BALANCE SHEET - NON CURRENT ASSET (value of asset at end of financial year once depreciation is deducted) = £33,000
WORKING PAPER - CASH COLUMN= £33,000
Limited Liability Company (PLC & LTD) [4]
- Owned by?
- Limited liability?
- Legal identity?
- Registered?
- Advantage & disadvantages
- Shareholders.
Shares e.g. 200,000 divided into 1million £0.20 nominal value. - Will only lose capital invested in business- no personal possessions should business fail.
- Shareholders cannot be sued directly because of business’s actions.
- Registrar of companies
- Easy to raise funds by selling SHARES (1) & debentures (1) on stock market.
+ Limited liability
- More legal regulations compared to sole traders e.g. HMRC.
- Easy to raise funds by selling SHARES (1) & debentures (1) on stock market.
Ordinary shares vs Preference shares
All companies issue ordinary shares and some may offer preference shares too.
PREFERENCE SHARES:
Know the dividend you are going to get.
e.g. 10% preference share of £1 = £0.10 dividend a year.
The dividend is NOT related to success of company but how much you invest in company.
Normally cumulative = if company doesn’t make profit one year, dividend due is carried over to next year business makes profit.
Non-voting: Don’t get a say in running of company
Ordinary shares - are entitled to all profits not appointed by prior chares e.g. loan interest, tax, preference dividends, retained profits.
RISKIER SHARES!!!
What is another name for loan interest?
Finance cost
Most companies classify expenses into four main functional areas
- Production (COST OF SALES)
- Selling/distribution -
- Administration - OPERATING COST
- Finance/ Loan interest -
What are retained profits? (3) Accounting implication (1)
Profits reinvested back into business for future growth
Forms part of owner(s)’ claims against business
Largest source of new financce
Accounting implication:
Added to share capital of B/S to form total equity
