Flashcards in Section F - Complete statements of comprehensive income and financial position and evaluate a business’s performance Deck (64):
What are the two key documents that a firm will produce?
1) Statement of comprehensive income
2) Statement of financial position
What is the purpose of a statement of comprehensive income?
Will give an accurate calculation showing how much profit or loss the business has made.
What is the use of a statement of comprehensive income?
It records sales, costs and profit over a period of time (normally a year).
What is the formula for sales turnover?
Quantity sold * Selling price
What is sales revenue?
The money coming into the business from providing that trade
What is the formula for cost of goods sold?
Opening inventories + Purchases - Closing inventories
What is gross profit?
Is the amount of money left or the surplus after the cost of goods sold has been deducted from the sales turnover.
What is the formula for gross profit?
Sales turnover - Cost of goods sold
The calculation for profit for the year is:
Profit or loss for the year = gross profit - expenses + other income
What is retained profit?
When profits are put back into the business.
What are the two ways depreciation can be calculated?
1) Straight-line depreciation
2) Reducing balance depreciation.
Explain what straight-line depreciation is.
Ana set is depreciated by a set amount each year
Explain what reducing balance depreciation is.
An asset is depreciated by a set percentage of its remaining value each year.
What are the two decisions made when working with straight line depreciation?
1) How long the asset is expected to be useful to the business, i.e. its expected life
2) At the end of its useful life, how much it might be worth is sold on or sold for scrap, i.e. its residual value.
What is the formula for straight-line depreciation?
(Historic Value - Residual Value) / Expected Life
A car costs £16,000 and it was expected to be used by the business for four years with a resale value of £4,000. Calculate the straight-line depreciation.
(16,000 - 4,000) / 4 = 3,000
A car costs £16,000 and a decision was made to depreciate it by 20 per cent per year the depreciation. Calculate the depreciation for 3 years.
Year 1 depreciation = £16,000 * 0.20 = £3,200
Net book value = £16,000 - £3200 = £12,800
Year 2 depreciation = £12,800 * 0.20 = £2560
Net book value = £12,800 - £2560 = £10,240
Year 3 depreciation = £10,240 * 0.20 = £2480
Net book value = £10,240 - £2480 = £7,760.
Why are adjustments made to a statement of comprehensive income.
So the expenditure shown matches the period in which the good or service is used.
What is a prepayment?
When an expense if made in advance of the periods to which it relates.
What is an accrual?
Is when an expense is paid after the periods to which it relates.
What adjustment is made for prepayments?
The expense is taken out of expenses in the statement of comprehensive income and shown as a current asset in the statement of financial position.
What adjustment is made for an accrual?
The expanse is added as an expense in the statement of comprehensive income and shown as a current liability in the statement of financial position.
How is the statement of comprehensive income analysed?
1) Comparisons between figures within the statement of comprehensive income, e.g. profit as a percentage of sales revenue.
2) Comparison between years, i.e. gross profit this year as compared with gross profit for last year.
3) Intrafirm comparisons to see how different aspects of the business are performing, e.g. revenue for one profit or branch compared with another profit or branch.
4) Interfirm comparisons to see how the business is performing in relation to its competitors.
What is window dressing?
Accounts must be accurate to meet legal requirements but it is possible to manipulate data to make it look more favourable.
What is the purpose of a statement of financial position?
Is a snapchat of a business's net worth at a particular moment in time, normally the end of a financial year.
What is the use of a statement of financial position?
It is a summary of everything that the business owns (its assets) and owes (its liabilities). A statement of financial position therefore states the value of a business.
What are non-current assets?
Those items of value that are owned by the business and likely to stay within the business for more than one year.
Give an example of non-current assets?
What are tangible assets?
They can be touched, for example machine or premises.
What are intangible assets?
They cannot be touched, for example a trademark or recognised name.
What is an example of an intangible asset on a balance sheet?
Current assets include:
Cash in the bank
Cash in hand.
What is inventory?
Is the value of stock held at that moment int time.
What are trade receivables?
People who owe the business money.
What is a current liabilities?
Is something owed by the business that should be paid back in under one year.
Give an example of current liabilities.
What is an overdraft?
The ability to withdraw money from a current account that you do not have.
What is net current assets/liabilities?
It represents the business's ability to meet short-term debts.
What is the formula for net current assets/liabilities
Current assets - current liabilities
What does it mean if a liability is classed as non-current?
It means the business will pay it back in more than one year.
Give an example of non-current liabilities.
What are net assets?
The figures that represent the total value of all the assets minus the value of the liabilities.
What is the formula for net assets?
Non-current assets + current assets - (current liabilities + long term liabilities)
What is opening capital?
The capital in the business at the start of trading
What are drawings?
Are withdrawals made by owners from the business.
What are the profitability ratios?
1) Gross profit margin
3) Net profit margin
4) Return on capital employed (ROCE).
What is the formula for gross profit margin?
(Gross profit / Revenue) * 100
Explain what gross profit margin is?
The ratio looks at gross profit as a percentage of sales turnover. It shows for ever £1 made in sales, how much is left as gross profit after the cost of goods sold has been deducted.
What us the formula for mark-up?
(Gross profit / Cost of sales) * 100
Explain what mark-up is.
This ratio looks at profit as a percentage of cost of sales. It shows what percentage of cost of sales is added to reach selling price.
What is the formula for net profit margin?
(Net profit / Revenue) * 100
Explain what net profit margin is,
This ratio looks at net profit as a percentage of sales turnover. It shows, for every £1 made in sales, how much of it is left as net profit after all expenses have been deducted.
What is the formula for Return on capital employed (ROCE)?
(Net profit before interest and tax / Capital employed) * 100
Explain what Return on capital employed (ROCE) is.
This ratio shows the percentage return a business is achieving from the capital (or money) being used to generate that return.
How is ROCE used?
Investors will often compare ROCE to the interest rate being offered in a bank or building society to see if their investment is working effectively for them in generating a return.
What re the efficiency ratios?
1) Trade receivable days
2) Trade payable days
3) Inventory turnover
What is the formula for trade receivable days?
(Trade receivables / Credit Sales) * 365
Explain what trade receivable days is.
The ratio measures, on average, how long it takes for debtors to pay; it is expressed as a number of days.
What is the formula for trade payable days?
(Trade payables / Credit purchases) * 365
Explain what trade payable days is.
The ratio measures, on average, how long it takes a firm to pay for goods and services bought on credit; it is expressed as a number of days.
What is the formula for inventory turnover?
(Average inventory / Cost of sales) * 365
What is the formula for average inventory?
(Opening inventory + Closing Inventory) / 2
Explain what inventory turnover is.
This ratio measures the average amount of time an item of stock is held by a business, and is expressed as a number of days