Finance and Accounting

Gross Profit

Revenue - cost of sales

Cost of sales

The direct cost of the goods that were sold during the financial year

Cost of Sales Formula

(Opening inventory + purchases )- closing inventory

Profit from operations

gross profit - overhead expenses (operating profit)

Expenses

The overhead costs that arise in operating the business, which are deducted from gross profit to calculate profit from operations

Profit before tax

profit from operations - interest costs

Profit for the year

profit before tax - profit

Dividends

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

Low-quality profit

One-off profit that cannot easily be repeated or sustained

High-quality profit

Profit that can be repeated and sustained

Why is financial reporting important

For taxes

For ensuring profitability

For raising capital

For lowering risks

For managing financial ratios

For investors

for internal decision making

for predictive strategies

for ensuring transparency

Trading Account

Gross Profit and Cost of Sales

Profit or Loss

Profit from Operations and Expenses

Appropriation Account

How profit is shared by dividends to company shareholders

Operating Profit

Revenue - (cost of sales + expenses)

Operating Profit Margin

Operating profit / sales revenue x 100

Statement of financial position

It is what shows a summary of a business's financial position at a specific point in time

Statement of profit and loss

A financial statement that summarizes the revenues, costs, and expenses incurred during a specific period.

Use of the statement of profit or loss

The actual profit can be compared with the budget levels of the business

Use of the statement of profit or loss

Prospective inspectors will use the profit performance of the business as a guide to whether to buy shares in it or not

Assets

What the business owns

Current Assets

Items that can or will be converted into cash within one year

Current Assets Examples

cash, accounts receivable, inventory

Non-current assets

Assets that cannot be converted into cash easily

Non-current assets examples

goodwill, property, plant , and equipment

Liabilities

What a company owes

Current Liabilities

liabilities due within a short time, usually within a year

Current Liabilites Examples

Short term loans,creditors,provisions

Non current liabilties

Amounts to be paid after the period of one year

Equity

The owners investment in the business

Equity Formula

Capital + Retained Profit

Shareholders equity

total value of assets - total value of liabilities

Share capital

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

Inventory

The stock of finished goods and semi-finished goods/work in progress, and raw materials

Net realizable Value

The amount for which the inventory can be sold minus the cost of selling it

Depriciation

The decline in the estimated value of a non-current asset over time

Reasons for depreciation

wear and tear

Technological change that makes this asset obsolete

Net book value

original cost - accumulated depreciation

Net book value definition

Assets that retain value after depreciation on the financial statement

Straight Line depreciation

A constant amount of depreciation is subtracted from the value of the asset each year

Formula for Annual depreciation

original cost of asset - expected residual value/expected useful life of asset