Financial statement terminology

Question 1

What is an income statement?

Answer 1

A financial statement which is prepared to calculate the Gross Profit which is the profit on buying and selling inventory.
It is also prepared to calculate the final profit to the business before tax. This is our Profit for the Year = Gross Profit - Expenses

Question 2

What is carriage in?

Answer 2

Transport/delivery costs involved in getting the inventory from the supplier to the business. It is included as part of the Cost of Sales calculation in the Income Statement.

Question 3

What is discount allowed?

Answer 3

This refers to the discount we have given our customers off the cost of the goods. It is shown as an expense in the Income Statement.

Question 4

What is depreciation?

Answer 4

The reduction in the value of Non-Current Assets due to age and wear and tear. It is shown as an expense in the Income Statement and is also added to the Provision for Depreciation as part of the Aggregate Depreciation calculation in the Statement of Financial Position.

Question 5

What is carriage Out?

Answer 5

Transport/delivery costs involved in getting the goods to our customers. It is shown as an expense in the Income Statement.

Question 6

What is bad debts?

Answer 6

These usually refer to Trade Receivables who have become bankrupt and are not going to pay us the money they owe us. Bad Debts are shown as an Expense in the Income Statement.

Question 7

What is provision for bad debts?

Answer 7

This is created to retain funds in the business to cover bad debts. There is no money in a provision. It is shown as an expense in the Income Statement when created or increased and is deducted from Trade Receivables in the Statement of Financial Position.

Question 8

What is meant by discount recieved?

Answer 8

This refers to discount we have received from our suppliers. It is shown as ‘Other Income’ in the Income Statement.

Question 9

What is a statement of financial position?

Answer 9

A financial statement which shows what the business owns (assets), what the business owes (liabilities) and what the business is worth.

Question 10

What is a non current asset?

Answer 10

Items which the business owns and has in the business for several years eg property, machinery, vehicles, equipment, fixtures and fittings.

Question 11

What is provision for depreciation?

Answer 11

This refers to the total depreciation that has been deducted from a Non-Current Asset eg Motor Vehicles over the previous years. It is included as part of the Aggregate Depreciation (AggDepn) calculation in the Statement of Financial Position. The Provision for Depreciation (shown in Trial Balance) + the depreciation shown in the Income Statement as an expense are added together to find Aggregate Depreciation shown in the SOFP.

Question 12

What is sales revenue?

Answer 12

This is the value of goods sold during trading period. It represents the value of goods sold and not necessarily the sales revenue received as some credit customers will owe you money. The sales revenue is the first item shown in an income statement.

Question 13

What is sales returns?

Answer 13

Sometimes customers will return goods back to the business as they are faulty, or the wrong goods were received etc. Sales returns are deducted from sales revenue in the income statement and are therefore the second item shown in an income statement.

Question 14

What is net sales revenue?

Answer 14

This is sales revenue-sales returns. It represents the net value of goods sold to customers.

Question 15

What is cost of sales?

Answer 15

This is the cost of buying the inventory sold by the business in a financial year. It is the opening inventory + purchases - purchase returns + carriage in- closing inventory. The cost of sales is deducted from net sales revenue to find the gross profit.

Question 16

What is opening inventory?

Answer 16

This is the inventory (stock) left over from last year. The business would try to sell this inventory on, before buying in any new . If the business is brand new, then there will not be an opening inventory value.

Question 17

What is purchases?

Answer 17

This refers to the value of inventory bought from suppliers during the accounting period. It will be included as part of the cost of sales calculation.

Question 18

What is purchase returns?

Answer 18

This refers to the value of inventory (stock) returned to suppliers during the year. The goods may have been faulty/damaged, or the wrong goods were received.

Question 19

What is closing inventory?

Answer 19

This refers to the value of goods left over at the end of an accounting period. It is deducted in the cost of sales calculation and will become the opening inventory for the following year.

Question 20

What is gross profit?

Answer 20

The profit on buying and selling the inventory. In simple terms it is Net Sales Revenue- Cost of Sales.

Question 21

What is expenses?

Answer 21

These are the running costs of the business. They may also be referred to as overheads. The main examples include wages, rent, advertising, insurance, electricity, bad debts, carriage out, discount allowed and depreciation.

Question 22

What is other income?

Answer 22

This refers to income other than sales revenue. The main examples of other income are discount received, rent received, dividends received and a decrease in the provision for bad debts. Loans are NOT other income!!!!!!

Question 23

What is a current asset?

Answer 23

Items which the business owns but for less than one year and their value will constantly change eg inventory, trade receivables, cash and cash equivalents (bank and cash) and expenses receivable (any expense we have paid in advanced) and VAT (if DR balance).

Question 24

What is trade receivables?

Answer 24

This refers to customers who owe the business money. Trade receivables are shown as current assets in the statement of financial position.

Question 25

What is expenses receivable?

Answer 25

This refers to any expense which we have paid this year, but it is not due until next year. It is shown as a current asset in the statement of financial position.

Question 26

What is current liabilities?

Answer 26

This refers to amounts we owe which should be paid back within a year (short term debt) eg trade payables, bank overdraft, expenses that are payable, VAT (if CR balance), debenture interest payable and corporation tax payable.

Question 27

What is trade payables?

Answer 27

Suppliers the business owes money to. Shown as a current liability in the statement of financial position.

Question 28

What is bank overdraft?

Answer 28

This is when the business has spent more money than they had to spend in their bank account, and they are overdrawn. It is a current liability in the statement of financial position.

Question 29

What is wages payable?

Answer 29

Wages which should have been paid this year but have not yet been paid to employees (they are due). This is shown as a current liability in the statement of financial position.

Question 30

What is expenses payable?

Answer 30

These are expenses which are due this year but are still unpaid. They will be shown as a current liability in the statement of financial position.

Question 31

What is non current liabilities?

Answer 31

This refers to amounts we owe which will take years to repay (long term debt) for eg loans, mortgages and debentures.

Question 32

What is equity?

Answer 32

This is the amount invested into the business by the owners. It is shown as the first entry in the bottom half of the statement of financial position.

Question 33

What is drawings?

Answer 33

This refers to cash/cash equivalents or inventory, taken out of the business by the owner for their own personal use.