Revision Notes

Financial accounting

  1. A company publishes end of year accounts.
  2. Accounts made up of: Balance Sheet and also a Trading and Profit and Loss account.
  3. Balance Sheet has on it: assets (items owned by the firm); liabilities (owed by the firm) and capital (loans, shares and retained profit)
  4. Assets may be current (short term) such as stock, debtors, bank and cash. Long term (fixed) assets are: land, buildings, equipment and INTANGIBLE assets such as copyright, brands and goodwill.
  5. The Trading Account details sales and costs of sales (e.g. purchase of raw materials). Sales minus cost of sales = gross profit.
  6. Profit and loss account consists of Gross Profit minus expenses (such s wages, rent, rates, advertising), which gives net profit.
  7. Accounts (Balance sheet and Trading& Profit& Loss account) may be analysed. This is done by using ratios, which may be grouped as: profitability; liquidity; asset efficiency.
  8. Profitability ratios involve…profit and show profit as a percentage of either sales or investment (capital employed) thus gross profit: sales (x 100); net profit: sales (x 100) and net profit: capital employed.
  9. Liquidity (which refers to how quickly you can turn your assets into cash) ratios include: acid test ratio (current assets - stock: current liabilities) and) debtors/sales) x 365 to give debtor collection period. Thus the higher the debtor collection period the weaker the cash flow.
  10. Assets efficiency ratios show how efficient your assets are (assets includes stock, debtors, bank and cash also fixed assets) thus the ratios include: cost of sales/average stock (called stock turn) - the higher this is the lower the stock level; sales /net assets (shows the sales generated by the net assets i.e., the capital of the business) and gearing = borrowed funds/total capital.
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