LOF Flashcards
Financial documents
A business needs to understand its financial performance. After all it is likely that one of their main objectives is to make a profit.
In this learning objective we are going to investigate two documents that are used to assess and monitor
What is. A statement of comprehensive income
A statement of comprehensive income provides a business with an accurate account of its profit and loss.
It records sales, costs,gross and net profit over a time usually 1 year.
Why is a statement of comprehensive income is vital for understanding the businesss position financially
They can see if they are making a loss of not it is ideal for businesses to make a profit.
key terms
sales revenue
cost of goods sold
inventory
gross profit
expenses
depreciation
net profit
Sales revenue
Is the money a company earns from selling its goods and service to customers.
It is income the company earns exclusively from the sale of goods or services. It does not include soured of income that derive from anything other than sales.
Cost of goods sold
Cost of goods sold COGS includes all of the costs and expenses directly related to the production of goods. It excluded indirect costs such as overhead and sales and marketing. Cost of goods sold is deducted from revenues (sales) in order to calculate gross profit and gross margin. Higher COGS results in lower margins.
Inventory
Inventory is the term for the goods available for sale. Inventory represents one of the most important assets of a business because the turnover of inventory represents one of the primary sources of revenue generation.
Gross profit
The profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with proving its services. Gross profit will appear on a company’s income statement and can be calculated by subtracting the cost of goods sold from the revenue.
Net profit
The measurement of a company’s profit once operating costs, taxes, interest and depreciation have all been subtracted from its total revenue. The term is often referred to as a company bottom line and may also be described as net earning or net income.
Expenses
An expense is the cost of operation that a company incurs to generate revenue. As the popular saying goes it costs money to make money.
Common expenses include payments to suppliers. Employees wages, leases and equipment depreciation.
Depreciation
An accounting method of allocating the cost of a tangible or physical asset over its useful life or life expectancy.
Depreciation represents how much of an assets value has been used up
Calculating profit and loss
Profit is the amount of ,omen you still have once all your expenses have been taken away from your gross profit and any other revenue income has been added.
A loss here alll expenses have been deducted and the business has made less money that it had earned in sales revenue,. Meaning the business has lost money that year.
Sales revenue
Money coming into a buisdness from selling its goods or services
Quantity sold x selling price
Cost of goods sold
The costs directly linked to providing that good or service
Opening inventory + purchases - closing inventories
Gross profit
A,lung of money left over after the cost of goods so,d is deducted from sakes revenue.
Sales turnover- costs of goods sold
Full statement of comprehensive income
First half of statement of compre Statement helps identify the buisdness gross profit.
Business can assess things like their expenses and make amedmends for the following year. They may notice that they spend too much on costs of goods sold and try to reduce this or realise some wages are to high and they will reduce these total expenses to improve their net margin.
What does the full statement incclue
Expenses
Revenue income
New profit
Expenses
Needs to be suntracted from the gross profit figure as there are costs that are associated with selling a product or service.
Net profit
Amount the buissnes pays tax on.
Tangible
Tangible assets are anything yiu can physically touch. Money. Machines. Buildings
Something that can be physically touched
Premesies
Vehicles
Fixture and fittings
Intangible
A non-monetary asset that cannot be seen or touched.
Something that cannot be touched
Patents
Goodwill
Branding
Copyrights
Adjustments for Depreciation
Depreciation represents how much of an assets value has been used up over time
How much has the value of an asset lost during time.
It is shown on the statement if comprehensive income as an expens as the asset has lord value and is now worth less therefore the buisdness has lost this value in the asset.
Straight line method
Each year the business record same rate of depreciation.
Historic value- residential value/expected life
Reducing balance method
Reducing value of asset by a set percentage each year.
Historic value x percentage of depreciation.
Depreciation key terms
Historic value
Expected life
Residential value
Historic value
Cost of an asset when it was first purchased
Expected life
How long the asset is expected to be used within the business.
Residential value
Value of the asset at the end of its expected life.
Prepayment
When an expense is made in advance of the period where it is used its is a prepayment
E.g you may pay rent in advance therefore these expenses may be incurred in one tax year but then the premesies may be used in another year. Needs to be adjusted on statement of comprehensive income.
Accruals
Expense is paid after the period where it was purchased.
What is the stat, wt of comprehensive income used for
Compare figures such as gross and net profit. Allows you to look at how expenses have Impacted the difference between the two.
Compare years. Have sales improved from one year to the next.
Has net and gross profit improved
Has expenses increased or decreased
Compare different departments and products within the buisdness. - intrafirm
Intrafirm
Compare different departments and products within the buisdness.
What does a statement of financial position also known as a balance sheet shiw
Businesses net worth at a particular point
It shows everything the business owns abd everything the business owes- liabilities
Analysing a Statment of financial position
A balance sheet it useful as it shows assets (things the business owns)
Liabilities /debts a business owes)
Capital employed (how the buissness ks financed)
What is a statement of financial position
Current assets
Current assets are alll the asssets of a company that are expected to be sold or used as a result of a standard buissness operations within the current year.
Ureent asstes include
Cash in hand
Cash in bank
Inventories
Current liabilties
Debts that the business owes that need repaying in under one year.
Non current liabilities
Non-current laobilties are long-term debts that need to be paid back in more than one years time
Example
Bank loan
Mortages
Capital employed
Shows the capital that has been used to finance the business
Capital + retained profit
