Finance and Accounting – Financial Statements Vocabulary

A set of vocabulary flashcards covering key terms and concepts related to financial statements, their components, valuation principles and depreciation methods.

Financial Statements

Formal records that summarise a business’s financial activities; primarily the Statement of Profit or Loss and the Statement of Financial Position.

Statement of Profit or Loss (Income Statement)

Report that summarises revenue, expenses and profit for an accounting period.

Trading Account

First section of the income statement showing how gross profit is derived (Revenue – Cost of Sales).

Profit or Loss Section

Middle section of the income statement that calculates Operating Profit, Profit Before Tax and Profit for the Year.

Appropriation Account

Final section of the income statement showing how Profit for the Year is distributed between Dividends and Retained Earnings.

Revenue

Total sales value (Selling Price × Quantity Sold); not the same as cash received.

Cost of Sales (Cost of Goods Sold)

Opening Inventories + Purchases – Closing Inventories; the direct cost of items sold.

Gross Profit

Revenue minus Cost of Sales.

Profit from Operations (Operating Profit)

Gross Profit minus Overhead/Operating Expenses.

Profit Before Tax

Operating Profit minus Interest Charges.

Profit for the Year

Profit Before Tax minus Corporation Tax.

Dividends

Portion of profits paid out to shareholders.

Retained Earnings

Profit kept in the business after dividends; added to shareholders’ equity.

Statement of Financial Position (Balance Sheet)

Snapshot of a business’s assets, liabilities and shareholders’ equity at one moment in time.

Assets

Resources owned by a business expected to provide future economic benefit.

Liabilities

Present obligations of a business; amounts owed to external parties.

Shareholders’ Equity

Residual interest in assets after deducting liabilities (Share Capital + Retained Earnings + Reserves).

Share Capital

Funds originally invested in the company through the purchase of shares.

Reserves

Accumulated retained earnings and other equity accounts such as share premium or revaluation reserve.

Current Assets

Assets expected to be converted into cash within one year (e.g., Inventories, Trade Receivables, Cash).

Current Liabilities

Obligations due within one year (e.g., Trade Payables, Bank Overdraft, Tax Payable).

Working Capital (Net Current Assets)

Current Assets minus Current Liabilities; measure of short-term liquidity.

Non-current Assets (Fixed Assets)

Assets held for more than one year, such as land, buildings, machinery and intangible assets.

Non-current Liabilities

Debts payable after more than one year, including long-term loans, mortgages and debentures.

Intangible Assets

Non-physical assets that add value, e.g., patents, trademarks, copyrights and goodwill.

Goodwill

Value attached to a firm’s reputation and customer loyalty; recorded when a business is acquired for more than its net asset value.

Intellectual Capital

Collective value of a company’s intangible assets like patents, copyright and brand reputation.

Inventory Valuation

Recording inventories at cost or Net Realisable Value, whichever is lower.

Net Realisable Value (NRV)

Estimated selling price of inventory minus any costs of selling.

Depreciation

Systematic allocation of the cost of a tangible non-current asset over its useful life.

Straight-Line Depreciation

Method that spreads the depreciable amount evenly: (Cost – Residual Value) ÷ Useful Life.

Residual Value

Expected value of an asset at the end of its useful life.

Net Book Value

Carrying amount of an asset on the balance sheet (Cost – Accumulated Depreciation).

Window Dressing

Manipulating the presentation of accounts to give a more favourable picture of financial performance or position.

Liquidity

A business’s ability to meet short-term obligations as they fall due.

Bank Overdraft

Short-term borrowing facility allowing a negative bank balance; shown as a current liability.

Trade Receivables (Debtors)

Amounts owed to the business by customers who bought on credit; a current asset.

Trade Payables (Creditors)

Amounts the business owes to suppliers; a current liability.

Cost of Goods Sold Formula

Opening Inventory + Purchases – Closing Inventory; used to calculate Cost of Sales.

Ratio Analysis

Technique for evaluating performance, profitability and liquidity by comparing figures from financial statements.