Unit 3.4 - Final Accounts

Question 1

The appropriation account

Answer 1

The final section of a P&L account and shows how the net profit after interest and tax is distributed
(i.e. dividends to shareholders and/or retained profit kept by the business)

Question 2

Balance sheet

Answer 2

Contains financial information on an organisation’s assets, liabilities and the capital invested by the owners on one specific day, thus showing a ‘snapshot’ the firm’s financial situation

Question 3

Book value

Answer 3

• The value of an asset as shown on a balance sheet
• The market value of assets can be higher than its book value because of intangible assets such as the brand value or the goodwill of the business

Question 4

Cost of goods sold (COGS) (/cost of sales (COS))

Answer 4

Shown in the trading account and represents the direct costs of producing or purchasing stock that has been sold

Question 5

Creditors

Answer 5

Suppliers who allow a business to purchase goods and/or services on trade credit

Question 6

Current assets

Answer 6

The short-term assets that belong to a firm, which are expected to remain in the business for up to 12 months (e.g. cash, debtors and stock (inventory))

Question 7

Depreciation

Answer 7

The fall in the value of fixed assets over time, from wear and tear (due to the asset being used) or obsolescence (outdated or out of fashion)

Question 8

Final accounts

Answer 8

The published annual financial statements that all limited liability companies are legally obliged to report
(ie, the balance sheet and the P&L, accounts)

Question 9

Fixed assets

Answer 9

Items owned by a business, not intended for sale within the next twelve months, but used repeatedly to generate revenue for the organisation
(e.g. land, premises and machinery)

Question 10

Goodwill

Answer 10

Intangible asset which exists when the value of a firm exceeds its book value
(the value of the firm’s net assets)

Question 11

Gross profit

Answer 11

The difference between the sales revenue of a business and its direct costs incurred in making or purchasing the products that have been sold to its customers

Question 12

Historic cost

Answer 12

The purchase cost of a particular fixed asset

Question 13

Intangible assets

Answer 13

Fixed assets that do not exist in a physical form
(e.g. goodwill, copyrights, brand names and registered
trademarks)

Question 14

Long-term liabilities

Answer 14

The debts owed by a business, which are expected to take longer than a year from the balance sheet date to repay

Question 15

Net assets

Answer 15

• Show the value of a business by calculating the value of all its assets minus its liabilities
• This figure must match the equity of the business in its balance sheet.

Question 16

Net profit

Answer 16

Surplus (if any) that a business makes after all expenses have been paid for out of gross profit

Question 17

Profit and loss account (/income statement)

Answer 17

Financial record of a firm’s trading activity over the past 12 months, consisting of three parts:

• the trading account
• the P&L account
• the appropriation account

Question 18

Reducing balance method

Answer 18

• A method of depreciation that reduces the value of a fixed asset by the same percentage each year throughout its useful life
• This is the more realistic method to use

Question 19

Residual value of an asset

Answer 19

An estimate of the scrap or disposal value of the asset at the end of its useful life

Question 20

Retained profit

Answer 20

• The amount of net profit after interest, tax and dividends have been paid
• It is then reinvested in the business for its own use

Question 21

Share capital

Answer 21

• The amount of money raised through the sale of shares

- It shows the value raised when the shares were first sold, rather than their current market value

Question 22

Shareholders’ funds

Answer 22

Show the equity of the owners

ie. the share capital invested by the owners and the retained profit and reserves that have been accumulated

Question 23

Straight line method

Answer 23

• Method of depreciation that reduces the value of a fixed asset by the same value each year throughout its useful life
• This is the relatively easier method to calculate

Question 24

The trading account

Answer 24

The first section of the P&L account, showing the difference between a firm’s sales revenue and its direct costs of trading
(i.e. it shows the gross profit of a business)

Question 25

Window dressing

Answer 25

The legal act of creative accounting by manipulating financial data to make the results look more flattering