Financial Statements (A Level) (Cambridge (CIE) A Level Business): Flashcards

False.

The Annual Report reflects only senior management's view. It gives no insight into morale, satisfaction or staff concerns, or what it is like to work in the business.

The report does not show whether the business pays its suppliers fairly or on time. It also gives little indication of future purchasing levels.

The statement of profit or loss shows the income and expenditure of a business over a period of time, usually a year, and identifies the amount of profit made.

Cost of sales is the cost of producing or buying in the goods actually sold by a business during a time period, including raw materials, packaging and direct labour.

Gross profit is calculated using this formula:

Gross profit = Sales revenue − Cost of sales

Expenses are the non-direct costs a business incurs during normal operations, also called overheads.

False.

Depreciation is one of a business's expenses, alongside salaries, rent and advertising. Expenses are deducted after gross profit has been calculated.

Profit from operations is calculated using this formula:

Profit from operations = Sales revenue − (Cost of sales + Expenses)

Profit for the year is the profit remaining after tax has been deducted, which is available to be distributed to shareholders or retained in the business.

Profit for the year = Profit from operations − Taxation

Retained earnings are profit kept within the business to be used as a source of finance for future investment or growth.

The three parts are the trading account, the profit and loss account and the appropriation account.

False.

The appropriation account shows how profits are distributed, such as dividends paid and profit retained. Operating profit is found in the profit and loss account.

True.

The figures are linked, because each profit figure is calculated from the figures above it. Correcting one figure therefore means recalculating every figure below it.

Both gross profit and profit from operations rise by $10,000, because cost of sales and expenses are unchanged.

A tax refund reduces the taxation figure, so profit for the year increases by the amount of the refund.

Retained profit falls, because it is calculated as profit for the year minus dividends.

The statement of financial position is a snapshot of a business's financial position at a given point in time, showing what it owns, what it owes and how it is funded.

The statement of financial position is often called the balance sheet.

It contains the financial information needed to draw conclusions about the liquidity of the business.

Non-current assets are items owned by a business for the long term, such as machinery and buildings.

Current assets are items a business owns that can be converted to cash quickly, usually within 12 months, such as inventory, trade receivables and cash.

False.

It is a non-current liability. Current liabilities are debts due within 12 months, such as trade payables and overdrafts.

Net current assets are calculated using this formula:

Net current assets = Current assets − Current liabilities

Net assets are calculated using this formula:

Net assets = (Non-current assets + Current assets) − (Current liabilities + Non-current liabilities)

Capital employed is the total finance invested in the operations of a business.

True.

For example, a lower inventory valuation reduces current assets, which lowers total assets and net assets.

It increases non-current liabilities, so total liabilities rise and net assets fall.

Dividends are subtracted from profit and also reduce retained earnings in the statement of financial position.

Sales revenue can increase cash or receivables in the statement of financial position.

Depreciation is an expense that reduces the value of assets, such as machinery, in the statement of financial position.

Depreciation is an accounting technique that recognises that the value of non-current assets falls over time, reflecting wear and tear, ageing or obsolescence.

Knowing how quickly assets lose value helps a business budget for future replacements. This avoids sudden financial strain and lets it schedule replacements to avoid disrupting production.

False.

Depreciation is an expense recorded in the statement of profit or loss, so it reduces reported operating profit.

Net realisable value is the anticipated selling price of inventory minus the selling costs.

Net realisable value = Anticipated selling price − Selling costs

Inventory should be valued at its purchase price (historic cost) or, if it is lower, at its net realisable value.

Valuing inventory at the lower of historic cost and net realisable value follows the principle of conservatism.

False.

Over-valuing assets means insufficient expenses are recorded, so profit is reported higher than appropriate and the business's net worth is overstated.

Differences can arise from errors in recording deliveries, theft, loss or damage.

It involves estimating the value of partially-completed goods. This is somewhat subjective and depends on how close to completion the goods are.

True.

Market prices change with supply and demand, economic conditions and the cost of extracting or processing raw materials, so the value of inventory can change frequently.

Residual value is the scrap value of an asset at the end of its useful life.

Annual depreciation is calculated using this formula:

Annual depreciation = (Historic cost − Residual value) ÷ Life expectancy

Under the straight-line method, the reduced value of an asset recorded each year in the statement of financial position is its net book value.

Some assets, such as vehicles, depreciate rapidly in the early years and more slowly later. Equal annual deductions therefore ignore market value.