Unit 3.3 Final accounts

Question 1

What is the purpose of financial accounts?

Answer 1

Financial accounts detail the financial performance of a business over a trading period.

Question 2

What does the statement of profit or loss show?

Answer 2

The statement of profit or loss shows the income and expenditure of a business over a period of time, usually a year, and the amount of profit made.

Question 3

What are the three sections of the statement of profit or loss?

Answer 3

The three sections of the statement of profit or loss are:
1. The trading account
2. The profit and loss account
3. The appropriation account.

Question 4

What is calculated in the trading account?

Answer 4

In the trading account, the cost of sales is deducted from sales revenue to calculate the gross profit.

Question 5

Define the term gross profit.

Answer 5

Gross profit is the difference between sales revenue and cost of sales.

Question 6

What is deducted from gross profit in the profit and loss account section?

Answer 6

In the profit and loss account section, expenses are deducted to determine profit for the period.

Question 7

What does the appropriations account show?

Answer 7

The appropriations account shows how profits are distributed for the period.

Question 8

True or False? Non-profit organisations replace the word ‘profit’ with ‘surplus’ in their financial statements.

Answer 8

True.

Question 9

What stakeholder group is particularly interested in dividend payments?

Answer 9

Shareholders are particularly interested in dividend payments, as well as revenues, costs and profits earned and business growth.

Question 10

How is profit before interest and tax calculated?

Answer 10

Profit before interest and tax equals Gross profit minus Expenses.

Question 11

True or False? Non-profit organisations must pay corporation tax.

Answer 11

False.

Question 12

In which section of a company’s financial accounts could employees find details of executive pay?

Answer 12

Employees could find details of executive pay in the notes to the accounts.

Question 13

What does the statement of financial position show?

Answer 13

The statement of financial position shows the financial structure of a business at a specific point in time, recording the business assets and liabilities and specifying the capital used to fund the business.

Question 14

Give another common name for the statement of financial position.

Answer 14

Another name for the statement of financial position is the balance sheet.

Question 15

True or False? The statement of financial position is sometimes called the balance sheet because assets always equal liabilities.

Answer 15

False.

Question 16

What is the formula used to calculate net assets?

Answer 16

Net assets equals Total assets minus Total liabilities.

Question 17

Define the term current assets.

Answer 17

Current assets are assets that can be easily converted into cash within one year, such as cash, debtors, and stock.

Question 18

True or False? Current liabilities are debts that must be paid within one year.

Answer 18

True.

Question 19

What are non-current assets?

Answer 19

Non-current assets are long-term assets that are not easily convertible to cash, such as property, plant, and machinery.

Question 20

True or False? Shareholders use the statement of financial position to identify the level of profit generated during the financial year.

Answer 20

False.

Question 21

What are liquid assets?

Answer 21

Liquid assets are those current assets that are available to meet immediate financial obligations, such as cash.

Question 22

True or False? Creditors use the statement of financial position to judge the solvency of the business and determine the level of risk when offering firms trade credit.

Answer 22

True.

Question 23

What are intangible assets?

Answer 23

Intangible assets are non-physical items owned by a business, such as patents or goodwill, that cannot be held or touched.

Question 24

What is meant by the term brand value?

Answer 24

Brand value is the reputation, recognition and features such as brand name, logos and slogans associated with a brand that can be quantified and recorded in the statement of financial position.

Question 25

True or False? Intangible assets are not included in the annual report as they cannot be valued.

Answer 25

False.

Question 26

What is goodwill?

Answer 26

The quantifiable value of a company’s reputation, customer base and brand, which often represents the premium paid when one business takes over or merges with another business.

Question 27

True or False? Managers use the statement of financial position to identify the working capital position of the business.

Answer 27

True.

Question 28

Define the term depreciation.

Answer 28

Depreciation is the accounting recognition that the value of non-current assets falls over time due to wear and tear.

Question 29

State the two common methods of calculating depreciation?

Answer 29

The two common methods of calculating depreciation are:
1. Straight line depreciation
2. Units of production depreciation.

Question 30

What is the formula for calculating annual depreciation using the straight line method?

Answer 30

Annual depreciation equals (Historic cost - Residual value) / Life expectancy.

Question 31

Define the term residual value.

Answer 31

Residual value is the scrap value of an asset at the end of its useful life.

Question 32

What is accumulated depreciation?

Answer 32

Accumulated depreciation is the total amount of depreciation for an asset since its initial purchase.

Question 33

True or False? The straight line method reduces the value of an asset by the same amount each year.

Answer 33

True.

Question 34

True or False? The main benefit of straight line depreciation over other methods is that it is simple to calculate.

Answer 34

True.

Question 35

What is the units of production depreciation method?

Answer 35

The units of production method depreciates an asset based on its usage or production output during an accounting period.

Question 36

What is the formula for calculating depreciation per unit in the units of production method?

Answer 36

Depreciation per unit equals (Historic cost - Residual value) / Expected units over the asset’s lifetime.

Question 37

True or False? If an asset is heavily used in the early years and experiences less use later on, the units of production depreciation method may not accurately represent its true value.

Answer 37

False.

Question 38

True or False? The units of production method is commonly used for assets such as machinery or vehicles.

Answer 38

True.

Question 39

True or False? All assets depreciate over time.

Answer 39

False.