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