Learning Outcome F Flashcards
Explain what a statement of comprehensive income is and why it is used?
A statement of comprehensive income provides a business with an accurate account of its profit and loss.
It helps to understand the businesses’s position financially.
What are the 6 main components in the statement of comprehensive income?
- Sales revenue
- Cost of goods sold (cost of sales)
- Gross profit
- Expenses (overheads)
- Revenue income
- Net profit before tax (profit, profit for the year)
Sales revenue explanation
Total amount of money achieved as a result of selling goods or services.
Cost of goods sold (cost of sales) explanation
Costs which are directly related to producing the goods or services sold e.g. raw materials.
Gross profit explanation
Sales revenue - cost of sales.
Expenses (overheads) explanation
All other costs experienced by the firm e.g. advertising, salaries and depreciation.
Revenue income explanation
Income generated by the business other than its core business activity e.g. interest from the bank.
Net profit before tax (profit, profit for the year) explanation
(Gross profit + Revenue income) - expenses.
Sales revenue FORMULA x2
Price x quantity sold.
Cash sales + credit sales.
Cash sales definition
Revenue received immediately (via any method of payment).
Credit sales definition
Revenue received at a later date.
Cost of goods sold (cost of sales) FORMULA
Opening inventories + purchases - closing inventories.
Opening inventory definition
The value of inventory (stock) in a business at the start of the financial year.
Closing inventory definition
The value of inventory (stock) in a business at the end of the financial year.
Depreciation explanation
How much the value falls of an item over a period of time.
Straight line of depreciation FORMULA
(Historic value - residual value) / expected life.
Reducing balance method of depreciation FORMULA
Historic value x %of depreciation.
Historic value definition
The cost of an asset when it was first purchased.
Residual value definition
Value of an asset at the end of its expected life. How much the asset is worth once its disposed of.
Expected life definition
How long the asset is expected to be used within the business.
Prepayment explanation
These are when an expense is made in advance of the period where it is used.
Accrual explanation
This is the opposite to a prepayment and is when an expense is paid after the period where it was incurred e.g. utility bills.
What are also classed as other expenses?
- Depreciation.
- Discount allowed (reductions offered to customers are classed as an expense as it reduces the amount of cash flowing into the business).
What is profit quality?
- Profit quality is how sustainable the profit is.
– If profits have increased due to the sale of an asset then this cannot be repeated the next year = the profit quality may be poor.
– If sales have increased leading to higher profits = profit quality is good.
How can you improve GROSS profit on a statement of comprehensive income?
+ what will lead to.
+ Increase sales revenue – do this by advertising/promotions, lowering prices, improving quality – increase expenses.
+ Decrease C.O.G.S/C.O.S – do this by gaining better supplier relationships e.g. JIT (more frequent deliveries), changed supplier, trade credit (pay for supplies at later date).
How can you improve NET profit on a statement of comprehensive income?
+ what will lead to.
+ Increase sales revenue – do this by advertising/promotions, lowering prices, improving quality – increase expenses.
+ Decrease C.O.G.S/C.O.S – do this by gaining better supplier relationships e.g. JIT (more frequent deliveries), changed supplier, trade credit (pay for supplies at later date).
+ Reduce expenses – lease? 1 off costs? rent?
Explain what a statement of financial position is and its purpose?
Also know as a balance sheet.
Shows a business’s net worth at a particular point in time.
Usually produced at the end of the financial year.
It shows everything the business owns (assets) and everything it owes (liabilities).
What are the two parts to the statement of financial position called? What must happen to those numbers?
- Net assets
- Capital employed
Both of these should balance (be the same number).
Non-current assets explanation
+ give examples
Items owned by the business that are likely to stay within the business for more than one year.
Examples - brand name, machinery, premises, vehicles, fixtures and fittings as well as patent/trademark.
What are the two types of non-current assets?
Intangible assets and tangible assets.
Current assets explanation
+ give examples
Items owned by the business whose value is likely to fluctuate on a regular basis.
Examples - cash in hand, cash in the bank, trade receivables and inventories (stock).
Current liabilities explanation
+ give examples
Items the business owes that should be paid back within one year.
Examples - trade payables and overdraft.
Non-current liabilities explanation
+ give examples
Items the business owes that should be paid back in over a year. These are likely to be used to buy tangible non-current assets.
Examples - bank loan and mortgage.
What does working out net current assets show?
Shows how much finance is available in the business to fund day-to-day expenditure.
Net current assets (working capital) FORMULA
Current assets - current liabilities.
Net assets FORMULA
Non-current assets + current assets - current liabilities - non-current liabilities.
What are trade payables?
A current liability which is the amount billed by a supplier to a business.
What are trade receivables?
A current asset which is the amount billed by a business to its customers.
Capital employed FORMULA
Owners/shareholders capital + retained profits - drawings.
Drawing explanation
How much you pay yourself.
What can a statement of financial position be used for? (3 points)
1.Compare figures such as the current assets and current liabilities.
2. Compare years e.g. have assets increased or decreased?
3. Compare how the business is performing in relation to its competitors.
Where do prepayments show on the statement of financial position?
Listed under current assets
Where do accruals show on the statement of financial position?
Listed under current liabilities.
What are the 4 profitability ratios?
- Gross profit margin.
- Net profit margin (year).
- Mark-up.
- Return on capital employed (roce).
How do you calculate Gross profit margin?
(gross profit / revenue (sales, turnover)) x 100 = %
How do you calculate Net profit margin (year)?
(net profit / revenue) x 100 = %
How do you calculate Mark-up?
(gross profit / cost of goods sold) x 100 = %
How do you calculate Return on capital employed (roce)?
(net profit / capital employed) x 100 = %
What does the ratio - Gross profit margin - tell us?
If gross profit margin is 70%,
£1 in sales = 70 p gross profit.
What does the ratio - Net profit margin (year) - tell us?
If net profit margin is 35%,
£1 made in sales = 35p net profit.
What does the ratio - Mark-up - tell us?
+ example
It shows what % is added to the cost of goods sold to reach the selling price.
e.g. a mark up of 20% would mean that if the cost of raw materials used to produce a product were £1, then the product would be sold for £1.20, as it had been marked up by 20%.
What does the ratio - Return on capital employed (roce) - tell us?
+ example
It tells the company the % return the business is making in relation to the capital invested.
e.g. If the ROCE was 10% then this means for every £1 invested, the business returns 10p in net profit.
Give 2 ways a business can increase their gross profit margin?
Increase sales revenue.
Decrease cost of goods sold.
Give 3 ways a business increase their net profit margin?
Increase sales revenue.
Decrease cost of goods sold.
Lower expenses.
True or false? Net profit will always be higher than gross profit. Explain why?
False, net profit is for the year so also includes expenses.
