3.4 Frinancial Accounts Flashcards
(125 cards)
1
Q
What is the purpose of final accounts?
A
To keep records of financial statements and assist managers in financial control and planning.
Final accounts help ensure that all payments and receipts of a business are officially accounted for.
2
Q
What are the components of financial accounts?
A
Profit and loss account, balance sheet.
Financial accounts provide a snapshot of a firm’s financial situation and performance.
3
Q
Define ‘final accounts’.
A
Published annual financial statements that limited liability companies are legally required to report.
These include the balance sheet and profit and loss account.
4
Q
What is the profit and loss account?
A
A financial record of a firm’s trading activities over the past 12 months, showing all revenues and costs.
The main purpose is to show the value of profit or loss for the business.
5
Q
What does the balance sheet contain?
A
Financial information about an organization’s assets, liabilities, and capital invested by the owner.
It provides a snapshot of the firm’s financial situation.
6
Q
What is a legal requirement concerning final accounts?
A
Companies must have final accounts audited by independent chartered accountants.
This ensures the financial statements are accurate and truthful.
7
Q
Who uses final accounts and for what purpose?
A
Internal stakeholders use them for business management and strategic decision-making; external stakeholders use them for evaluating the firm’s ability to pay suppliers and repay finances.
8
Q
What is profit?
A
The surplus that a business earns after all expenses have been paid from the firm’s gross profit.
Profit creates an incentive for the business to perform well.
9
Q
What is the formula for calculating net income?
A
Net Income = Revenue - Expenses.
It represents the money remaining after all costs have been deducted.
10
Q
List the three sections of the statement of profit.
A
- Trading account
- Profit & loss account
- Appropriation account
11
Q
Define ‘expenses’.
A
Any money that is credited in producing revenue.
Expenses are subtracted from income to determine net income.
12
Q
What is gross profit?
A
The difference between sales revenue and direct costs of producing sold goods.
Gross profit = Sales revenue - Cost of goods sold.
13
Q
Define ‘cost of goods sold’ (COGS).
A
The direct costs of producing or purchasing the stock that has been sold.
COGS = Opening stock + Purchases - Closing stock.
14
Q
What does ‘opening stock’ refer to?
A
Inventory at the beginning of the accounting period.
15
Q
What does ‘closing stock’ refer to?
A
Inventory at the end of the accounting period.
16
Q
Fill in the blank: Gross profit is calculated by _______.
A
Sales revenue - Cost of goods sold.
17
Q
True or False: Final accounts are optional for limited liability companies.
A
False.
They are legally required.
18
Q
What does a profit and loss account show?
A
Net profit (or loss) of a business at the end of a trading period
19
Q
How is net profit calculated?
A
Net Profit = Financial surplus from sales revenue after all costs and expenses are accounted for
20
Q
What is the formula for gross profit before interest and tax?
A
Gross profit before interest and tax = Gross profit - Expenses
21
Q
What is net profit before tax?
A
Net profit before tax = Net profit before interest and tax - Interest
22
Q
What is the relationship between gross profit and expenses?
A
Net profit = Gross profit - Expenses
23
Q
What is net profit after interest and tax?
A
Net profit after interest and tax = Net profit before tax - Corporation tax expenses
24
Q
What are some examples of expenses that can reduce net profit?
A
- Rent
- Utility bills
- Other overheads
25
What is the definition of expenses in the context of a profit statement?
Costs incurred by a company to generate revenue
26
What is the cost of goods sold (COGS)?
The direct costs attributable to the production of the goods sold by a company
27
What is the appropriations account?
It shows how net profit after interest and tax is distributed
28
How is net profit typically distributed according to the appropriations account?
* Dividends
* Retained profit
29
What are dividends?
Payments made to shareholders from the company's profits
30
What is retained profit?
Amount of profit after interest, tax, and dividends have been paid, reinvested in the business
31
What term is used for retained profit in non-profit organizations?
Retained surplus
32
How is retained profit recorded on the balance sheet?
Recorded as 'retained earnings'
33
What is the format of a profit and loss account for a profit-making organization?
Statement of profit or loss includes sales revenue, cost of sales, gross profit, and expenses
34
Fill in the blank: The formula for calculating gross profit is _______.
Sales revenue - Cost of sales
35
True or False: Non-profit organizations use the term 'retained profit'.
False
36
What is the surplus before interest and tax in a non-profit organization's profit statement?
Gross surplus - Expenses
37
What does the profit for the period represent in a profit-making organization?
Net profit after all expenses, interest, and tax have been deducted
38
What is the retained surplus for a non-profit organization?
The surplus for the period after all expenses and distributions
39
What is the total sales revenue for Florists-R-Us for the year ended 31 December 2020?
460,000
## Footnote
This figure represents the income generated from sales before any costs are deducted.
40
What is the cost of sales for Florists-R-Us for the year ended 31 December 2020?
(230,000)
## Footnote
This amount reflects the direct costs attributable to the production of the goods sold.
41
What is the gross profit for Florists-R-Us for the year ended 31 December 2020?
230,000
## Footnote
Gross profit is calculated as sales revenue minus cost of sales.
42
What is the profit before interest and tax for Head to Toe Wellbeing Limited for the year ended 31 December 2022?
(165,000)
## Footnote
This figure indicates the company's profitability before accounting for interest and tax expenses.
43
What is the tax percentage applied in the profit and loss account?
10%
## Footnote
This percentage is used to calculate the tax owed based on the profit before tax.
44
What is the profit after interest and tax for Head to Toe Wellbeing Limited?
49,500
## Footnote
This amount represents the net earnings after all expenses have been deducted.
45
What percentage of the profit is distributed as dividends?
30%
## Footnote
Dividends are payments made to shareholders from the company's profits.
46
What is retained profit for Head to Toe Wellbeing Limited?
34,650
## Footnote
Retained profit refers to the portion of profit that is kept in the company rather than distributed as dividends.
47
True or False: The Statement of Profit or Loss guarantees future performance based on past results.
False
## Footnote
Historical financial performance does not ensure future results.
48
What is window dressing in accounting?
The legal act of creative accounting by manipulating financial data
## Footnote
This practice is used to present a more favorable view of a company's financial position.
49
List the stakeholders interested in the Statement of Profit or Loss.
* Shareholders
* Employees
* Managers & Directors
* Suppliers
* Government
* Local Community
## Footnote
Each stakeholder group has different interests in the financial information provided.
50
What is the purpose of the balance sheet?
To show the financial position of an organization, including assets, liabilities, and capital invested by owners
## Footnote
It provides a snapshot of the company's financial status at a specific point in time.
51
What does net assets represent?
The value of the business calculated by subtracting liabilities from assets
## Footnote
This figure must match the equity of the business in the balance sheet.
52
Fill in the blank: The balance sheet is required for auditing purposes for all _______.
[limited liabilities companies]
## Footnote
This requirement ensures transparency and accountability in financial reporting.
53
How long are firms required to report balance sheets in many countries?
2 years
## Footnote
This common practice allows for comparisons of financial performance over time.
54
What are essential puts in financial terms?
O assets, 2 liabilities, 3 equity
55
Define assets.
Items of monetary value owned by a business, such as cash, stocks, and property
56
What are the two classifications of assets?
* Non-current assets
* Current assets
57
What are non-current assets?
Items owned by a firm, not intended for sale within 12 months, used to generate revenue
58
What are current assets?
Cash or liquid assets likely to be turned into cash within 12 months of balance sheet date
59
Give examples of current assets.
* Cash
* Debtors
* Stocks
60
What are debtors?
People or entities that owe money to the firm for goods purchased on credit
61
How are stocks defined in a business context?
Unsold supplies of raw materials, semi-finished goods, and finished goods
62
True or False: Finished stocks are less liquid compared to raw materials.
False
63
Define liabilities.
Legal obligations of a firm to repay lenders or suppliers
64
What are the two classifications of liabilities?
* Current liabilities
* Non-current liabilities
65
What are current liabilities?
Debts that must be settled within 1 year of balance sheet date
66
List examples of current liabilities.
* Bank overdrafts
* Trade creditors
* Short-term loans
67
What are non-current liabilities?
Debts owed by a firm expected to take longer than 1 year to repay
68
Provide examples of non-current liabilities.
* Mortgages
* Bank loans
* Bonds
69
What is net balance in financial terms?
Assets = (Non-current assets + Current assets) - (Non-current liabilities + Current liabilities)
70
What is the formula for net assets?
Net assets = Total assets - Total liabilities
71
What does total equity represent?
Value of business belonging to owners, including share capital and retained earnings
72
What are retained earnings?
Total profits retained in the business after dividends have been paid
73
True or False: Equity shows how the net assets of a business are funded.
True
74
What is the purpose of the statement of financial position?
To show the asset structure of the business and the financial position at a given point in time
75
How do shareholders use the balance sheet?
To assess their investment's growth and the asset structure of the business
76
What do managers and directors use the balance sheet for?
To assess the financial position of the business and guide decisions on capital structure
77
What questions might employees ask regarding the balance sheet?
* Is the business financially stable?
* Has performance improved or worsened?
* What is the business spending its money on?
78
Fill in the blank: Total equity is the sum of _______ and _______.
[share capital], [retained earnings]
79
What is a sole trader?
A sole trader is an individual who owns and operates a business independently.
80
What is the key difference between a sole trader and a limited liability company?
A sole trader has unlimited liability, while a limited liability company limits the owner's personal liability.
81
What is a balance sheet?
A balance sheet is a financial statement that summarizes a company's assets, liabilities, and equity at a specific point in time.
82
What are the sources of finance for a sole trader?
Sources of finance include owner's equity and capital.
83
What does 'dividends' refer to in the context of a sole trader?
Dividends do not appear under current liabilities for a sole trader.
84
True or False: A balance sheet remains static and does not change over time.
False.
85
What are some disadvantages of a balance sheet?
* Financial position may differ in subsequent periods
* Capital value can change daily
* Figures are estimates
* No universal format for comparison
* Not all assets are recorded
86
Define intangible assets.
Intangible assets are noncurrent assets that do not exist in physical form but have monetary value.
87
List the main types of intangible assets.
* Branding
* Patents
* Copyrights
* Goodwill
* Registered trademarks
88
What is branding?
Branding involves brand recognition and value that drives global sales.
89
What are patents?
Patents provide legal protection for inventors, preventing others from using their ideas for a fixed number of years.
90
What do copyrights protect?
Copyrights protect original artistic works created by the author.
91
What is goodwill in business?
Goodwill is an intangible asset that reflects the value of a firm's reputation and customer relationships.
92
What are registered trademarks?
Registered trademarks are distinctive signs identifying a brand, product, or business entity, protected by law.
93
Fill in the blank: Intangible assets account for a large part of a firm's _______.
asset value.
94
True or False: The true market value of non-current assets is known once sold.
True.
95
What is a major challenge in valuing goodwill?
Goodwill can be subjective and difficult to place a value on.
96
Why are intangible assets not always recorded on the balance sheet?
Because it is hard to measure their value
## Footnote
Intangible assets may lead to 'window dressing' if included on financial statements.
97
What is a limitation of using single year accounts in financial analysis?
It does not allow for a series comparison of financial performance
## Footnote
A series of final accounts provides a better analysis.
98
What human resources factors are often ignored in financial analysis?
Skills, loyalty, goodwill, and motivation
## Footnote
These qualitative factors can significantly impact financial performance.
99
What qualitative factors are not shown in final accounts?
Culture, contributions to the local community, and ethical objectives
## Footnote
These factors can influence financial performance but are not quantifiable.
100
True or False: Financial accounts are fully honest and transparent.
False
## Footnote
Firms may limit financial information that goes public.
101
What does depreciation refer to?
The fall in value of non-current assets over time
## Footnote
Depreciation is caused by wear and tear or obsolescence.
102
What is appreciation in the context of non-current assets?
An increase in the value of non-current assets
## Footnote
This can apply to property or land.
103
List the causes of depreciation.
* Wear and tear
* Obsolescence
* Changes in market demand
## Footnote
Both physical deterioration and technological advancements can lead to depreciation.
104
What is the purpose of recording depreciation?
* To calculate the value of a business more accurately
* To reflect the realistic value of non-current assets over time
* To plan for future replacement of assets
## Footnote
Accurate depreciation helps in financial planning and assessment.
105
What is historic cost?
The purchase cost of a particular fixed asset
## Footnote
Historic cost is used in the calculation of depreciation.
106
Fill in the blank: Depreciation spreads historic costs over the _______ of fixed assets.
useful lifespan
## Footnote
This method allows for a more accurate representation of asset value.
107
What is the straight-line method of depreciation?
A method that reduces the value of non-current assets by a fixed amount each year
## Footnote
This method assumes a consistent usage of the asset over its useful life.
108
What is the formula for annual depreciation using the straight-line method?
Annual depreciation = (Purchase cost - Scrap value) / Useful life
## Footnote
Scrap value is the worth of the asset at the end of its useful life.
109
What are the three variables that affect annual depreciation?
* Purchase cost
* Useful life
* Scrap value
## Footnote
Purchase cost is the initial cost of the noncurrent asset.
110
What is the historic cost in the context of noncurrent assets?
Historic cost is the purchase cost of a noncurrent asset.
## Footnote
This is the original value paid for the asset.
111
What is one advantage of the straight-line method of depreciation?
Simple to calculate and understand.
## Footnote
It provides a consistent expense amount each period.
112
What is one disadvantage of the straight-line method of depreciation?
Doesn't consider loss of efficiency or higher repair costs over time.
## Footnote
It assumes the asset depreciates evenly over time.
113
What is the units of production method?
A method of calculating depreciation that allocates equal amounts of depreciation to each unit of output rendered by the noncurrent asset.
## Footnote
This method is based on usage rather than time.
114
How do you calculate depreciation per unit in the units of production method?
Depreciation per unit = (Purchase cost - Scrap value) / Expected number of units over life span.
## Footnote
This reflects the asset's usage rather than a fixed time period.
115
What is the disadvantage of the units of production method?
More cumbersome, as it requires calculating depreciation for each time period based on output.
## Footnote
It can complicate accounting processes.
116
What is one advantage of the units of production method?
Provides better insight into the running cost of noncurrent assets.
## Footnote
It adjusts the calculation based on actual usage.
117
True or False: Some firms may set the scrap/residual value of fixed assets to zero.
True
## Footnote
This is often unrealistic as assets typically retain some value.
118
What ethical considerations are important in financial disclosures?
They reveal the financial health and profitability of a firm.
## Footnote
Ethical practices help prevent 'window dressing' in financial statements.
119
What is creativity in a business context?
The ability to develop new ideas and solutions
## Footnote
Creativity is essential for innovation and growth in businesses.
120
What is a balance sheet used for?
To assess a business's financial position and attract funding for growth
## Footnote
A balance sheet provides a snapshot of assets, liabilities, and equity.
121
What is a common strategy for businesses seeking external funding?
Developing intellectual property rights
## Footnote
Intellectual property can enhance a company's value and competitive edge.
122
What does creating new products contribute to?
Long-term sustainability and growth of the business
## Footnote
New product development is critical for staying relevant in the market.
123
True or False: Legal protection of intellectual property increases a firm's value.
True
## Footnote
Legal protection helps secure a company's innovations and market position.
124
Fill in the blank: A balance sheet is used for businesses wanting to seek _______.
external funding
## Footnote
External funding can come from various sources, including investors and loans.
125
What is the importance of intellectual property (IP) for new products?
It provides legal protection and increases firm value in turbulent markets
## Footnote
IP rights can deter competitors and enhance market position.
