Unit 3.4 Final Accounts

Question 1

Final accounts

Answer 1

financial statements complied by a business at the end of a particular accounting period

Question 2

Importance of final accounts

Answer 2

help inform external and internal stakeholders about the financial position and performance of an organization

Question 3

The main final accounts

Answer 3

1. Profit and loss account
2. The balance sheet

Question 4

Profit and loss account (definition)

Answer 4

also known as the income statement, is the record of income and expenditure flows of a business over a given period

Question 5

Profit and loss account (3 parts and calculations )

Answer 5

1. Trading account

gross profit = sales revenues - costs of sales

2. Profit and loss account

profit before tax and interests = gross profit - expenses

3. Appropiation account

retained profit = profit for period - dividends)

Question 6

Cost of sales

Answer 6

opening stock + purchased stock - closing stock

Question 7

Structure of profit and loss account

Answer 7

Sales revenues
Costs of sales
Gross profit

Expenses
Profit before interest and tax
Interest
Profit before tax
Tax
Profit for period

Dividends
Retained profit

Question 8

Balance sheet

Answer 8

a financial statement that outlines the assets, liabilities and equity of a firm at a specific point in time

Question 9

Assets

Answer 9

resource of value that a business owns or is owed to it

Question 10

Total assets (formula)

Answer 10

non current assets + current assets

Question 11

Liabilities

Answer 11

a firm’s legal debts or what it ows to another individual or institution

Question 12

Total liabilities (formula)

Answer 12

non current liabilities + current liabilities

Question 13

Net assets (formula)

Answer 13

total assets - total liabilities

Question 14

Equity

Answer 14

the amount of money that would be returned to a business if all its assets were liquidated

Question 15

Total Equity formula

Answer 15

Share Capital + Retained Profit

Question 16

Liquidation

Answer 16

a situation where all of a firm’s assets are sold off to pay any funds owing

Question 17

Balance sheet structure

Answer 17

• non-current assets

• current assets
  total assets

• total liabilities

net assets

equity
share capital (not for non-profit)
retained profit
total equity

Question 18

Equity (formula)

Answer 18

total assets - total liabilities
or
share capital + retained profit

Question 19

Intangible assets

Answer 19

assets that are non-physical in nature

1. Patents
2. Trademarks
3. Copyright
4. Goodwill

Question 20

Patents

Answer 20

provides the inventors with exclusive right to sell, use manufacture or control the process or product they invented

Question 21

Copyright laws

Answer 21

legislation that provides to the creators the exclusive right to protect the production and sale of their artistic or literary work

Question 22

Trademarks

Answer 22

a recognizable word, phrase, sign or design that is officially registered and identifies a product or a business

Question 23

Depreciation

Answer 23

the decrease in value of a fixed asset over time

Question 24

Types of depreciation

Answer 24

1. Straight line depreciation
2. Units of production

Question 25

Straight line depreciation

Answer 25

method that evenly divides an asset’s cost over its life. Each year, a set amount (residual value) is subtracted from the asset’s value for depreciation

Question 26

Straight-line depreciation (formula)

Answer 26

(original cost - residual value) /expected useful lifetime

Question 27

Residual value

Answer 27

an estimation of an asset’s worth or value over its useful life, also known as scrap or salvage value

Question 28

Units of production

Answer 28

also called the units of activity method calculates the depreciation of the value of an asset based on its usage

Question 29

Unit of production (formula)

Answer 29

(original cost - residual value) / estimated total units to be produced over estimated useful life * actual units of production

Question 30

Units of production rate

Answer 30

(original cost - residual value) / estimated total units to be produced over estimated useful life

Question 31

Units of production
Advantages vs disadvantages

Answer 31

advantages
- depreciation expense is directly tied to wear and tear
- a more accurate reflection of physical valued

disadvantages
- complicated to compute: requires an accurate estimation of the total units that an asset will produce over its lifetime, which can be difficult to predict, especially for new or innovative types of machinery.

• Inapplicability to All Assets: only suitable for assets where usage can be directly measured in units (like machines measured by the number of units they produce or vehicles by miles driven).

Question 32

Straight line depreciation
Advantages vs disadvantages

Answer 32

advantages
- simple to compute
- suitable for less expensive assets

disadvantages
- not suitable for expensive assets
- not take into account fast change in tech
- increase in repair and expenses

Question 33

Goodwill

Answer 33

the value of positive or favourable attributes that relate to the business