Lecture Notes Flashcards

Final Accounts and Stakeholders

Final accounts are published financial statements used by stakeholders (managers, employees, shareholders, etc.).
They differ from management accounting, which is for internal, confidential use.
Final accounts include:
- Profit and Loss account (Income Statement).
- Balance Sheet.

Profit is typically a primary business objective.
Basic Formula: profit = revenue - cost\ of\ making\ the\ products
Profit is the surplus after subtracting business costs from revenue.
A loss occurs if costs exceed revenue.
Ways to increase profit:
1. Increase revenue more than costs.
2. Reduce production costs.
3. Combine both strategies.

Profit and cash are distinct.
A business can report a profit but have limited cash due to sales on credit where cash is yet to be received.
The timing of cash flows is crucial; money from profitable sales might arrive months later, causing cash flow issues.
Causes of cash shortfalls:
- Over-trading: Rapid expansion that ties up funds in inventory or new assets.
- Credit Policies: Extended credit periods delay incoming cash.
- Large Asset Purchases: Buying expensive assets (machinery, property) can deplete cash reserves.
Insolvency: A business is insolvent if it cannot meet short-term debts, even with reported profits.
Managing cash flow is as vital as making a profit.

Summarizes revenues, costs, and expenses over a specific period (quarterly/annually).

Sales Revenue (Sales Turnover): Income from selling goods/services.
Cost of Goods Sold (COGS): Direct production costs (raw materials, labor).
Gross Profit: Revenue minus COGS. Gross\ profit = revenue - COGS
It's profit before fixed costs.
Expenses: Indirect production costs (rent, salaries, marketing, etc.).
Net Profit Before Interest & Tax: Profit (or loss) before deducting interest payments and taxes.
Tax: Compulsory deduction paid to the government from a business’s profit.
Net Profit After Interest & Tax: Actual profit after all costs are accounted for.
Belongs to the owners and can be distributed as dividends or retained for internal financing.
Dividends: Payments to shareholders from net profit after interest and tax.
Retained Profit: Net profit (after interest, tax, and dividends) kept within the business for its own use and serves as an internal source of finance.

Multiple practice problems building income statements from provided data (Newtown Garden Nursery Ltd, Samba Ltd, Aurelie).
Problem involving BGR Ltd and a decision on whether the company could open a new cinema based on retained profit.
Problem for Township plc to determine costs of goods sold and administrative expenses, and to determine if the company can distribute dividends to shareholders.

Scenario: Genesis Corporation wants to expand but isn't sure if retained profit is sufficient or whether to take a bank loan. Internal expansion cost: 50,000.
Income Statement (Year Ending December 31, 2020):
- Sales Revenue: 275,000
- Cost of Goods Sold: 170,000
- Gross Profit: 105,000
- Wages: 50,500
- Selling Expenses: 15,650
- Bills: 10,700
- Depreciation: 6,000
- Rent: 7,000
- Profit Before Interest and Tax: 15,150
- Interest: 8,750
- Tax: 6,000
- Net Profit: 400
Advice: The company cannot expand using retained profit alone, which is only 400. A bank loan is necessary. However, given existing interest costs, the company should also consider issuing new shares to finance the expansion.