A Business, Unit 5, Chapter 30, Accounting fundamentals

Income Statement

records the revenue, costs and profit (or loss) of a business over a given period of time

Gross Profit

Sales revenue - cost of sales

Revenue

total value of sales made by a business in a given time period = selling price × quantity sold

cost of sales

direct cost of goods that were sold during the financial year

Operating profit

Gross Profit minus overhead expenses

Profit for the year (profit after tax)

Operating profit - interest costs and corporation tax

Dividends

the share of the profits paid to shareholders as a return for investing in the company

retained earnings (profit)

The profit left after all deductions, including dividends, have been made. This is 'ploughed back' into the company as a source of finance

Low quality profit

One-off profit that cannot easily be repeated or sustained

High quality profit

Profit that can be repeated and sustained

Non-current assets

assets to be kept and used by the business for more than one year. Used to be referred to as 'fixed assets'

Intangible assets

items of value that do not have a physical presence, such as patents and trademarks

current assets

Assets likely to be changed into cash within a year before next balance sheet date

Inventories

stocks held by the business in the form of materials, work in progress and finished goods

Trade receivables (debtors)

the value of payments to be received from customers who have bought goods on credit

Current Liabilities

debts of the business that must be paid within the next accounting period within one year

Accounts payable (creditors)

Value of debts for goods bought on credit payable to suppliers. Also known as trade payables

Non Current Liabilities

value of debts of the business that will be payable after more than one year

Statement of financial position (balance sheet)

An accounting statement that records the values of a business's assets, liabilities and shareholders' equity at one point in time

Shareholders' Equity

total value of assets - total value of liabilities

assets

an item of monetary value thatvis owned by business

liability

Financial obligations a business that it is required to pay in the future

Share capital

The total value of capital raised from shareholders by the issue of shares

intellectual capital or property

the amount by which the market value of a firm exceeds its tangible assets less liabilities - an intangible asset

Goodwill

Arises when a business is valued at or sold for more than the balance sheet value of its assets

Cash Flow Statement

record of the cash received by a business over a period of time and the cash outflows from the business

Gross Profit margin

This ratio compares gross profit (profit before deduction of overheads) with revenue. Gross Profit margin %= (gross profit ÷revenue)×100

Operating Profit Margin

This ratio compares operating profit (formerly this ratio was referred to as the net profit margin) revenue operating profit margin %=( operating profit÷ revenue) ×100

liquidity

ability of firm to pay its short term debts

current ratio

current assets/current liabilities (liquidity)

Acid Test Ratio

liquid assets/current liabilities

liquid assets

current assets - inventories (stock)

window dressing

presenting the company accounts in a favorable light - to flatter the business performance

...

...