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Interpreting Profit and Loss Accounts
· This is a financial statement that shows a businesses revenues,
expenses and profit / loss over a period of time
· Gross profit = Sales ­ cost of sales
· Net profit = Gross profit ­ overheads
· Retained profit = Net profit ­ tax ­ dividends
· Trading account ­ shows the income earned by the business over a
trading period
· Appropriation account ­ the uses of net profit after taxation
· The following groups are interested in a businesses profit and loss
· - Shareholders
· - Managers
· - Employees
· - Inland revenue / government…read more

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Interpreting Balance Sheets
· Balance sheets are financial statements that record the assets and liabilities of a
business at a specific point in time
· Assets ­ items owned by a business
· Fixed assets ­ items owned by a business expected to be retained for at least one
year e.g. buildings
· Current assets ­ items that are expected to be turned into cash in the next year e.
g. cash, stock
· Liabilities ­ monies owed by a business
· Current liabilities ­ debts owed by the business payable within a year e.g. creditors
· Long term liabilities ­ debts owed by the business which wont be repaid within the
next year e.g. bank loan
· Balance Sheet Rules
· Assets = Liabilities
· Total Assets = Fixed assets + current assets
· Liabilities = Share capital + borrowings + other creditors + reserves…read more

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Capital and Revenue Expenditure and
· Capital expenditure ­ spending on items that can be used
time and time again in the production process (fixed assets)
· Revenue expenditure ­ meets current day-to-day expenses
e.g purchase of raw materials and the payment of wages
· Depreciation:
· The decrease in value of assets over time
· This is shown as an expense on the profit and loss account
· Fixed assets will be depreciated in value on the balance
· Two methods:
· - Straight line
· - Reducing…read more

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Working Capital
· Working capital measures the amount of money the
business has to pay day-to-day expenses
· Working capital = current assets ­ current liabilities
· Businesses need to be aware of their working capital and
ensure that they have enough cash to survive
· Control of Working Capital:
· Stock and debtor control ­ arranging appropriate credit
· Liquidity ­ need to manage assets to ensure that the
business has sufficient liquidity (ease of converting assets
to cash)
· Stock needs to be valued correctly
· Need to ensure are not holding excess stocks or excess cash…read more

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Window Dressing
· These improve the appearance of a companies
balance sheet
· Can borrow money for a short period of time
to improve cash position just before date of
balance sheet
· Use sale and leaseback Include intangible
assets e.g. goodwill / brands on balance sheet
· Capitalise expenditure ­ including things as
assets that could be classified as expenses…read more

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