Booklet 11: Financial Statements/Final Accounts

Question 1

What is income statement? (4)

Answer 1

An income statement summarises the trading performance pf the business for an accounting period.

Question 2

How to calculate Gross profit?

Answer 2

Sales Revenue - Cost of sales

Question 3

How to calculate Cost of good sold?

Answer 3

(Opening inventories + purchases) - closing inventory

Question 4

How to calculate Net profit?

Answer 4

Gross profit - Expenses

Question 5

What is a statement of financial position? (4)

Answer 5

A statement of financial position summarises the book value of the assets, liabilities and the net worth of a business at the end of the accounting period.

Question 6

What are assets?

Answer 6

Assets are owned by the business and grouped into non-current and current.

Question 7

What are liabilities?

Answer 7

Liabilities are amounts owed by the business and grouped into current and non-current.

Question 8

2 advantages and 2 disadvantages of the usefulness of Final Accounts. (18)

Answer 8

Advantages
1.Can be used by stakeholders
2.Allows management to assess the business performance against previous years and averages.

Disadvantages
1.Financial statements are known to be ‘window dressed’. This is where the profits are deliberately inflated or the non-current assets are overvalued to make the business performance and valuation look better to potential investors.
2.Information reported in financial statements is quantitative.