3.4 Final accounts Flashcards Preview

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Flashcards in 3.4 Final accounts Deck (35)
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1
Q

what is the purpose of final accounts?

A

ensures that all payments and receipts of a business have to be officially accounted for.

2
Q

what statements do final accounts consist of?

A

profit and loss accounts

balance sheet

3
Q

what are the different purposes of final accounts for different stakeholders?

A

Shareholders - Interested to see where their money was spent and the return on their investments.
Employees - Interested in the organisation’s financial accounts to assess the likelihood of pay increments and the degree of job security.
Managers - Judge the operational efficiency of their organisations; useful for target setting and strategic planning.
Competitors - Make comparisons of their financial performance.
Government - Ensure that they pay the correct amount of tax.
Financiers - Banks or lenders want scrutinise the accounts before approving any funds.
Suppliers - Decided the extent to which trade credit should be given.
Potential investors - Assess whether an investment would be financially worthwhile.

4
Q

Association of Chartered Certified Accountants (ACCA)

A

a global regulatory body for professional accountants, assuring that its members are appropriately regulated.

5
Q

what are the five guiding principles of the ACCA?

A
Integrity
Objectivity
Professional competence and due care
Confidentiality 
Professional behaviour
6
Q

Profit and loss account (income statement)

A

a financial statement of a firm’s trading activities over a period of time, usually one year

7
Q

what are the three sections of an income statement?

A

The trading account
The profit and loss account
The appropriation account

8
Q

profit

A

the positive difference between a firm’s revenues and its costs

9
Q

revenue

A

the inflow of money from ordinary trading activities e.g. cash sales, credit sales, charges/fees and royalties

10
Q

trading account

A

first section of the Profit and Loss account

11
Q

gross profit

A

difference between a firm’s sales revenue (the value of products sold to customers) and its costs of producing and purchasing.

12
Q

formula for gross profit

A

Gross profit = Sales revenue - Cost of goods sold

13
Q

Cost of goods sold (COGS)

A

the accountant’s term for the direct costs of the goods that are actually sold.

14
Q

formula for COGS

A

COGS = Opening stock + Purchases - Closing stock

15
Q

How can a business improve its gross profit (reduce costs/raising revenue)?

A

Using cheaper suppliers
Increase selling price
Enhanced marketing strategies

16
Q

profit and loss account (in the P&L)

A

shows net profit (or loss) of a business at the end of a trading period

17
Q

Net profit

A

the surplus from sales revenues after all expenses are accounted for.

18
Q

formula for net profit

A

Net profit = Gross profit - Expenses

19
Q

what are ways that a business can increase its net profit?

A

better deals with the suppliers/rent provider
reviewing administration costs
control fuel consumption

20
Q

appropriation account

A

final section of the P&L account

21
Q

what are the two sections of the appropriation account?

A

dividends

retained profit

22
Q

limitations of the profit and loss account

A

shows the historical success
window dressing can occur
no internationally standardised format for producing a P&L account

23
Q

balance sheet

A

one of the annual financial statements that all companies are legally required to produce for auditing purposes.

24
Q

what does the balance sheet contain?

A

assets
liabilities
equity

25
Q

what are assets?

A

items of monetary value that are owned by a bsuiness

26
Q

fixed asset

A

any asset used for business operations (rather than for selling) and lasts for more than 12 months

27
Q

current asset

A

cash or any other liquid asset that is likely to be turned into cash within 12 months

28
Q

net assets

A

value of all assets minus its liabilities

29
Q

formulae for net assets

A

fixed assets + working capital - long-term liabilities

total assets - total liabilties

30
Q

equity

A

the value of the business that belongs to the owners

31
Q

what are the sections of the equity part?

A

share capital

retained profit

32
Q

differences between the balance sheets of sole traders and limited companies

A

sources of finance
shareholders’ funds
dividends not present in sole traders’ balance sheet

33
Q

what are the limitations of balance sheets?

A

static documents - the financial position of a business might be different
only estimates
different businesses will have different formats
not all assets are included such intangible assets and value of human capital

34
Q

intangible assets

A

non-physical fixed assets that have the ability to earn revenue for a business

35
Q

main intangible assets of a company

A
brand 
patents
copyright
goodwill
registered trademarks