Profit and loss accounts and balance sheets Flashcards Preview

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Flashcards in Profit and loss accounts and balance sheets Deck (9):

What is the purpose of financial statements?

Every business has to keep financial records so that they know:
- Whether a profit or loss is being made
- How much cash is flowing into and out of the business
- When suppliers must be paid for goods and when tax must be paid to government


What will a financial statement include?

- Products sold; the value of them and which customers have not yet paid
- Goods and services brought by the business; the value of them and which suppliers have not yet been paid
- Equipment and other assets purchased
- Wages and other labor costs


What is profit?

- Profit is the RETURN for taking a RISK
- Profit measures the success of an INVESTMENT
- Profit is an important SOURCE OF FINANCE


What is the formula for profit?

Profit = total sales - total costs


What is profit in absolute terms?

The value (£) of profits earned
E.g. £50,000 profit made in the year


What is profit in relative terms?

The profit earned as a proportion of sales achieved or investment made
- E.g. £50,000 profit from £500,000 profit of sales is a profit margin of 10%
- E.g. £50,000 profit from an investment of £1 million = 5% return on investment


What is a profit and loss account?

A historical record of the trading of a business over a specific period (normally one year)
Shows the profit or loss made by the business- - which is the difference between the firm's total income and its total costs


What are the five important pieces of information on a profit and loss account?

1) The sales revenue: goods sold X price
2) Cost of sales: the cost of the goods + labour costs
3) Gross profits: sales revenue - cost of sales
4) Overheads: expenses of the business that are not part of production (e.g. rent and management salaries)
5) Net profit: also known as operating profit. Profit after all costs. Gross profit - overheads


Interpreting profit and loss accounts

- To properly understand what the numbers mean on a PL&L we need to have something to compare them with
- This could be numbers from previous years to see if the firm is doing better or worse
- It could also be compared with the colse comp