Financial statements (AL) Flashcards
Financial statements
Statement of profit or loss- records revenue, cost of sales, profits over a given period of time
Statement of financial position- records values of business’s assets and liabilities and shareholders equity at a point in time
Contents of profit or loss statement
-Trading account- calc gross profit
-Profit loss account- calc profit from operations and before tax
-Appropriations account- dividends
High and low quality profit
High quality -Profit that is repeated and sustained
Low quality- one off profit the is not easily sustained
Use of profit and loss statements
-Used to compare performance of business overtime
-Bankers and creditors require this to decide whether to lend money
-Prospective investors will use to guide whether to purchase shares
Shareholders equity
Total value of assets - liabilties
Trade payables and receivables
Payables- value of debts of goods bought on credit payable to suppliers
Receivables- value of payments to be received from customers who have bought goods on credit
Contents of statement of financial position
-Non current assets (tangible and intangible)
-Current assets
-Current liabilities
-Working capital
-Shareholders equity
-Non current liabilities
Goodwill
When business valued at is bought for more than balance sheet value
Window dressing
Techniques used by companies to manipulate (intangible assets) financial statement and reports to show favourable results
Reserves (Retained earnings)
Shareholders equity - share capital
Link between financial statements
-Retained earnings made (spor) leads to increase in shareholder equity and cash increases(sofp)
,vice versa
-Depreciation one non current assets (comes under expense) leading to fall in shareholder equity and value of non current assets
-Value of closing inventory falls due to obsolesce, increasing cost of sales leading to current assets value falling and shareholder equity falling
Net realisable value (NRV)
Amount of which inventory can be sold - cost of selling
Depreciation
The decline in the estimated value of a non current asset of time
Net book value
Current statement of financial position value of non current assets
Original cost - Accumulated depreciation
Method of calc depreciation
Constant depreciation - value of asset each year
Annual depreciation- (original cost of asset - expected residual value) /expected useful life of asset
