3.4 - Final Accounts + Depreciation

Question 1

Final Accounts

Answer 1

• Outline the financial performance of a business over a period of time
• For publicly-held companies, these are published in the annual report

Might include:

• Statement of Profit & Loss
• Balance Sheet
• Cash Flow

Question 2

Internal Stakeholders

Answer 2

• Investors/Shareholders
• Managers

Question 3

External Stakeholders

Answer 3

• Banks
• Suppliers
• Employees, Customers, Government, etc…

Question 4

Profit & Loss Account

Answer 4

• Also known as Income Statement
• A summary of the business’s financial performance over a given time period
• Uses the revenue, cost and profit over a period of time to calculate how much money the “business has made”

Question 5

Structure of Profit and Loss

Answer 5

1. Statement of Profit & Loss for XX for year ended 31/12/2025
2. Sales Revenue
3. Costs of Sale
4. Gross Profit
5. Expenses
6. Profit before interest and tax
7. Interest
8. Profit before tax
9. Tax
10. Profit per period
11. Dividends
12. Retained Profits

Question 6

Sales Revenue

Answer 6

Price x Quantity

Question 7

Costs of Sales

Answer 7

Costs x Quantity

Question 8

Gross Profit

Answer 8

Sales Revenue - Costs of Sales

Question 9

Expenses

Answer 9

Fixed or indirect cost not directly involved in production

Question 10

Profit before interest and tax

Answer 10

Gross Profit - Expenses

Question 11

Interest

Answer 11

Interest paid on any loan

Interest rate x Bank loan amount

Question 12

Profit before tax

Answer 12

Profit before interest and tax - Interest

Question 13

Tax

Answer 13

Pay tax on any profit
No profit = no tax (non-profit business)

Question 14

Profit per period

Answer 14

Profit before tax - Tax

Question 15

Dividends & Pros and Cons of Paying Dividends

Answer 15

• The business may choose to pay out dividends to owners
• The rest is retained, and put back into growing the business

Pros of paying dividends:

• Satisfies shareholders who get a return
• Possible impact on share price

Pros of not paying dividends:

• Can retain the money and grow the business
• May lead to higher profits and dividends in the future

Question 16

Retained Profits

Answer 16

Profit for period - Dividends

Question 17

What happens if the company is a non-profit enterprise?

Answer 17

Use “Surplus” rather than “Profit”

Dividend = 0 - DO NOT INCLUDE IN PNL

Usually no tax is paid

• Gross Profit = Gross Surplus
• Profit before interest = Surplus before interest

Question 18

Balance Sheet

Answer 18

• Financial Statements contained in the Annual Report
• Records the net worth of a business at one moment in time
• Shows the profitability of a business over a certain period of time

Question 19

Structure of Balance Sheet

Answer 19

Statement of financial position for XX as at DD/MM/YY

Non-Current Asset

• Property, plant and equipment
• Accumulated Depreciation
• Non-Current Assets (Net)

Current Asset

• Cash
• Stocks
• Debtors

Total Asset

Current Liabilities

• Bank Overdraft
• Trade Creditors
• Other short-term loans
• Current Liabilities (net)

Non Current Liabilities

• Borrowings Long-term
• Non-Current Liabilities

Total Liabilites

Net Asset

Net Equity

• Share capital
• Retained earnings
• Total Equity

Question 20

Assets

Answer 20

Items of monetary value owned by the business

Question 21

Non-Current Assets

Answer 21

Long-term assets - Used for > 12 months

• Tangible - Property (land), plants (factory) and equipment (vehicles, machinery)
• Intangible - Patents, copyrights, goodwill

Question 22

Current Assets

Answer 22

Assets that are likely to be converted into cash within 12 months (berfore the next account)

• Cash
• Stock
  Will be sold and then turn into cash
• Debtors
  Customers who have bough our product will pay at a certain date in the future

Question 23

Things on the Balance Sheet

Answer 23

1. Title
2. Non-Current Assets
3. Current Assets
4. Total Assets
5. Current Liabilities
6. Non-Current Liabilities
7. Total Liabilites
8. Net Assets
9. Equity

Question 24

Title of Balance Sheet

Answer 24

Statement of financial position for XX as at DD/MM/YY

Question 25

Non-Current Assets in Balance Sheet

Answer 25

* Property, plant and equipment * Accumulated Depreciation * Non-Current Assets (Net)

Question 26

Current Assets in Balance Sheet

Answer 26

* Cash * Debtors * Stock * Current Assets (Net)

Question 27

Total Assets

Answer 27

Non-Current Assets + Current Assets

Question 28

Current Liabilities in Balance Sheets

Answer 28

* Bank Overdraft * Trade Creditors * Other short-term loans * Current Liabilities (net)

Question 29

Non-Current Liabilities in Balance Sheet

Answer 29

* Borrowings Long-term * Non-Current Liabilities (Net)

Question 30

Total Liabilities in Balance Sheet

Answer 30

Current Liabilites + Non-Current Liabilites

Question 31

Net Asset

Answer 31

Total Asset - Total Liabilities

Question 32

Equity in Balance Sheet

Answer 32

* Share capital * Retained earnings * **Total Equity = Net Asset**

Question 33

Liabilities

Answer 33

A financial obligation that must be paid in the future

Question 34

Current Liabilities

Answer 34

Debts of the business to be paid in less than 12 months * Bank Overdradt * Trade Creditors You have bought an input from another and will pay at a certain date in the future * Other short-term loans

Question 35

Non-Current Liabilities

Answer 35

Long term loans of the business longer than 12 months

Question 36

Net Assets

Answer 36

* One measurer of the worth of the busines * If all assets were sold and debts paid, this is the amount left to go to investors

Question 37

Equity

Answer 37

Sum of all previous profits put back into the business

Question 38

Tangible assets

Answer 38

Assets that are physical * E.g. factory, land, vehicles

Question 39

Intangible assets

Answer 39

Assets that have no physical properties * And are not financial instruments (e.g. bank account) Marketing-related * Trademarks, logos, brand names, slogans, internet domain sites Technolgy-related * Patents Contract-related * Franchises, licensing agreements Goodwill * Value of the customer base and brand image

Question 40

Depreciation

Answer 40

**The reduction in the value of an asset over time** For example, a business buys new machinery. The value of this will go down over time due to: * Operational wear - less reliable as one gets older * Outdated Important to put it onto the balance sheet as we can see the real value of the asset over time

Question 41

Straight-line method of depreciation

Answer 41

* The amount that an asset decreases every year is the same * Each year the asset depreciates by the same amount every year * (Original value - expected residual value) / Expected future life of asset

Question 42

Pros and Cons of Straight-line method of depreciation

Answer 42

* Simple to calculate and understand * Best for small-value assets with minimal balance sheet impact. * Generally unrealistic - assets usually lose more value in earlier years

Question 43

Units of production method of depreciation

Answer 43

* The assets depreciate according to the amount of production * More usage = higher depreciation **Formula: (Units of production in one year/total life units of production) x (Original value - expected residual value)**

Question 44

Pros and Cons of Units of production method of depreciation

Answer 44

* More depreciation in years of heavy use * More accurate * Harder to calculate * Requires detailed tracking of usage or output