3.

5 – Final Accounts
Income Statements
Income statements are used by businesses and their stakeholders. Governments are interested them for tax, shareholders look at the return they can expect, employees look at their job security, managers use it to assess performance. Trading Account This section shows the gross profit of the business.

The cost of goods sold is calculated by:

$000 Sales Revenue Cost of Goods Sold Opening Stock Purchases Closing Stock Gross Profit

$000

Gross profit can be improved by using cheaper suppliers, increasing the selling price and using marketing strategies. The gross profit would have to be adjusted if customers return a faulty product, etc.

Profit and Loss Account This shows how much profit or loss a business has made over a certain period of time.

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Expenses are the indirect costs of operation, so the operating profit is the actual profit made on the business’ sales. The business may try to reduce its expenses by negotiating lower rent, moving to cheaper premises, reducing use of utilities by being more economical, and reducing the number of administrative jobs performed. Any non-operating income received during the trading period can be added to the net profit after the expenses have been taken out. $000 Sales Revenue Cost of Goods Sold Gross Profit Expenses Rent Utilities Other overheads Net Profit before Interest and Tax Interest Tax Net Profit after Interest and Tax $000

Appropriation Account This section shows how the business’ remaining funds have been distributed. This includes the retained profit, dividends, and possibly taxes. Businesses can change how much shareholders receive and how much is retained for the business to use. Regardless of which layout they use, the most important thing is that the business is always consistent in their layout.

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$000 Sales Revenue Cost of Goods Sold Gross Profit Expenses Net Profit before Interest and Tax Interest Tax Net Profit after Interest and Tax Dividends Retained Profit Limitations of income statements include:    They only show past information, and the future may be very different Businesses may use window dressing to manipulate the figures to look better Difficult to compare because the layout can vary

Balance Sheets
Balance sheets essentially take a snapshot in time of the business’ assets. Assets Fixed assets are used by the business for over 12 months and last for a long time, such as machinery. Current assets only last less that 12 months and include debtors, cash and stocks. Liabilities Long-term liabilities must be repaid after 12 months, including mortgages and debentures. On the other hand, short term liabilities need to be repaid within a year, such as tax and interest.

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Net Assets This is also called assets employed. It is calculated by:

This section must balance with the capital employed section of the balance sheet.

Capital and Reserves This section incorporates share capital, retained profit and reserves. It serves to show the sources of funds for the business.

This will look different based on the type of business, such as a sole trader, who would not have shareholders, etc. Business XX – Balance Sheet as at 31 June XXXX $000 Fixed Assets Current Assets Stock Debtors Cash Total Current Liabilities Creditors Short-Term Borrowing Total Net Assets Share Capital Loan Capital Retained Profit Capital Employed $000

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Balance sheets are useful for assessing the working capital of the business, asset structure, capital structure and trhe capital employed. However, these are static documents and the business’ position is likely to change. Also, the value given to the assets may not be entirely accurate, as they are only estimates. The variance between the layout also makes it harder to compare different businesses. In addition, busineses that have assets that do not belong on the balance sheet may not give an accurate representation.

Solvency This is how well the business could pay their debts as they are due. If the current assets are greater than the current liabilities, then the business would be able to meet their liabilities. This is linking to liquidity, which is how well a business’ assets can be turned into cash.

Window Dressing
This is when the figures are manipulated to paint a picture of the business that is not entirely accurate.

    

A range of final accounts are more useful than a single document The data ignores human resources and other non-financial factors Only useful in comparison to competitors data Do not always report the whole truth Focus on past, and may not be relevant for the future

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