Financial Statements Review

Vocabulary flashcards covering the components of financial statements, accounting formulas, asset types, and depreciation methods based on the provided lecture notes.

Financial statements

Documents that summarise the financial results and position of a business.

Statement of Profit or Loss

Also known as an income statement or profit and loss account, it shows the financial performance of a business over a period of time.

Statement of Financial Position

Also known as a balance sheet, it records the net wealth of a business at a specific moment in time.

Revenue

The income earned from selling goods or services, calculated as $\text{selling price} \times \text{quantity sold}$.

Cost of sales

The cost of the goods that were actually sold during the year, calculated as $(\text{Opening inventory} + \text{Purchases}) - \text{Closing inventory}$.

Gross profit

The profit made from trading activities, calculated as $\text{Revenue} - \text{Cost of sales}$.

Profit from operations (Operating profit)

Calculated by subtracting overhead expenses from gross profit ($\text{Gross profit} - \text{Expenses}$).

Overhead expenses

Costs not directly related to the number of goods produced or sold, such as rent, management salaries, and marketing.

Profit before tax

Calculated by subtracting interest costs from operating profit ($\text{Operating profit} - \text{Interest}$).

Profit for the year

The profit remaining after deducting corporation tax from profit before tax ($\text{Profit before tax} - \text{Tax}$).

Appropriation account

The section of the profit and loss statement that shows how profit is distributed between dividends and retained earnings.

Dividends

The portion of profit for the year paid out to shareholders.

Retained earnings

Profits kept in the business for future use rather than being distributed as dividends; also referred to as reserves.

High-quality profit

Profit generated from regular business activities, such as selling products or services.

Low-quality profit

Profit generated from one-off events, such as the sale of an asset.

Shareholders’ equity

The owners’ claim on the business, representing its net wealth; calculated as $\text{Assets} - \text{Liabilities}$.

Assets

Resources owned by a business, categorized into non-current and current assets.

Liabilities

Debts owed by a business, categorized into non-current and current liabilities.

Non-current (fixed) assets

Long-term assets with a physical existence, such as land, buildings, vehicles, and machinery.

Intangible assets

Assets that cannot be physically seen but add value, such as patents, trademarks, copyrights, and goodwill.

Goodwill

The reputation and brand value of a business, which may arise when a business is purchased for more than the value of its net assets.

Current assets

Assets expected to be used, sold, or converted into cash within one year, such as inventories, trade receivables, and cash.

Trade receivables

Amounts owed to the business by customers who have purchased goods or services on credit.

Current liabilities

Short-term debts that must be paid within one year, such as trade payables, bank overdrafts, and unpaid dividends.

Trade payables

Amounts owed by the business to suppliers for goods or services purchased on credit.

Working capital

Also known as net current assets, it measures short-term financial health and is calculated as $\text{Current assets} - \text{Current liabilities}$.

Share capital

The money invested by shareholders when they buy shares in the company.

Non-current liabilities

Long-term debts that must be repaid after more than one year, such as long-term bank loans and debentures.

Window dressing

Presenting accounts in a way that makes a business appear financially stronger than it actually is.

Historical cost

An accounting principle where inventory is valued at its original purchase price.

Net realisable value (NRV)

The expected selling value of inventory after selling costs, calculated as $\text{Estimated selling price} - \text{Cost of selling}$.

Prudence (conservatism)

The accounting principle that requires inventory to be valued at the lower of historical cost or net realisable value.

Depreciation

The reduction in the value of non-current assets over time due to wear and tear or technological obsolescence.

Net book value (NBV)

The remaining value of an asset in the accounts, calculated as $\text{Original cost} - \text{Accumulated depreciation}$.

Straight-line method of depreciation

A method that spreads the depreciation charge equally over an asset's useful life using the formula: $\frac{\text{Original cost} - \text{Residual value}}{\text{Useful life (years)}}$.

Residual value

The estimated value of an asset at the end of its useful life.