Profit And Loss Accounts And Balance Sheets
Specification:
3.2 Profit and Loss Accounts and Balance Sheets • purpose of financial statements • components of financial statements • interpretation of data given on financial statements |
Candidates should understand the importance of a profit and loss account and balance sheet to the stakeholders when assessing the performance of
the business. Candidates should be able to identify the various components of a profit and loss account and balance sheet. Candidates should be able to make judgements on the performance of a business through interpretation of the information contained in simplified versions of the profit and loss accounts, balance sheet and by the application of gross and net profit margins and current and acid test ratios. Candidates will be given the relevant formulae for ratios, where appropriate, as part of the examination paper. |
Profit and Loss Accounts
Learning Objectives:
- To understand the components of a profit and loss account (D-E)
- To be able to perform the calculations needed for a profit and loss account (B-C)
- To evaluate the importance to stakeholders of a profit and loss account (A*-A)
- To understand the components of a profit and loss account (D-E)
- To be able to perform the calculations needed for a profit and loss account (B-C)
- To evaluate the importance to stakeholders of a profit and loss account (A*-A)
Starter Activity: If you were running a nightclub, what would your costs be, and where would your revenue come from?
How would you calculate your profit?
How would you calculate your profit?
A profit and loss account, or income statement, is a financial statement showing a business's revenues and costs and thus its profit or loss over a period of time.
Components of a profit and loss account (income statement)
Revenue:
The income received by a business from selling its goods and services over the period covered in the profit and loss account.
Costs of sales:
These are costs involved in directly supplying the good or service. Examples include wages of employees involved in production, raw materials and energy costs. )Also look at opening stock + purchases - closing stock)
Gross Profit:
GROSS PROFIT = REVENUE (income) - COST OF SALES (cost of supplying good or service)
Overheads (Expenses): Costs that do not alter when the level of production changes. Examples include salaries, insurance, interest on loans and building maintenance.
Net Profit:
NET PROFIT = GROSS PROFIT - OVERHEADS
Components of a profit and loss account (income statement)
Revenue:
The income received by a business from selling its goods and services over the period covered in the profit and loss account.
Costs of sales:
These are costs involved in directly supplying the good or service. Examples include wages of employees involved in production, raw materials and energy costs. )Also look at opening stock + purchases - closing stock)
Gross Profit:
GROSS PROFIT = REVENUE (income) - COST OF SALES (cost of supplying good or service)
Overheads (Expenses): Costs that do not alter when the level of production changes. Examples include salaries, insurance, interest on loans and building maintenance.
Net Profit:
NET PROFIT = GROSS PROFIT - OVERHEADS
Activity: Profit and Loss booklet
Profit and Loss Accounts
Please complete the 3 different Profit and loss activities
Who are a business's different stakeholders?
Why are they interested in your profit and loss account?
What are your different sources of finance?
Why would a bank and potential shareholders be interested in looking at your profit and loss account?
Why are they interested in your profit and loss account?
What are your different sources of finance?
Why would a bank and potential shareholders be interested in looking at your profit and loss account?
profit_and_loss_exam_q.doc | |
File Size: | 156 kb |
File Type: | doc |
Plenary: Annie Seed's Accounts
http://www.businessstudiesonline.co.uk/live/index.php?option=com_content&view=article&id=7&Itemid=12
http://www.businessstudiesonline.co.uk/live/index.php?option=com_content&view=article&id=7&Itemid=12
Interpreting Profit and Loss Accounts
Learning Objectives:
- To understand how to calculate gross and met profit margins (D-E)
- To analyse the data within a profit and loss account (B-C)
- To evaluate a profit and loss account and help make a decision regarding obtaining finance (A*-A)
- To understand how to calculate gross and met profit margins (D-E)
- To analyse the data within a profit and loss account (B-C)
- To evaluate a profit and loss account and help make a decision regarding obtaining finance (A*-A)
Starter: If a coat is worth £96 and in the sale it has 15% off, how much does the coat now cost?
The profit figure alone of a business might not tell us the whole story. Why might this be?
This means we use profit ratios to give us a better picture of a business's performance.
This means we use profit ratios to give us a better picture of a business's performance.
Gross Profit Margin:
If a business has gross profit for the year of £30,000 and its revenue was £120,000, what is its gross profit margin?
Net Profit Margin:
If the same business has net profit for the year of £12,000 and its revenue was £120,000, what is its net profit margin?
Are these figures good? This can only be answered by comparing the figure to either:
- the business's target for its gross/net profit margin
- the profit margins from earlier years
- the profit margins of other similar businesses
- the business's target for its gross/net profit margin
- the profit margins from earlier years
- the profit margins of other similar businesses
Which do you feel is the most valuable margin and why?
finance_test_on_profitability.docx | |
File Size: | 11 kb |
File Type: | docx |
Balance Sheets
balance_sheets_observation_worksheet.doc | |
File Size: | 216 kb |
File Type: | doc |
Learning Objectives:
- To identify and understand the components of a balance sheet (D-E)
- To calculate the figures found within a balance sheet (B-C)
- To evaluate a business's balance sheet and form a judgement on its finances (A*-A)
- To identify and understand the components of a balance sheet (D-E)
- To calculate the figures found within a balance sheet (B-C)
- To evaluate a business's balance sheet and form a judgement on its finances (A*-A)
Starter Activity: Please balance the numbers so that they are equal. Don't rock the boat!
A balance sheet sets out the assets and liabilities that a business owns on a particular date. It shows what a business owns and where that money has come from. Essentially, it is a snapshot of the business's financial position or value. It can also be used to measure the business's ability to pay its debts.
Components of a balance sheet: (For each of the below, come up with examples)
Assets: This is anything owned by the business
Fixed Assets (Non-current assets) - An asset that will normally be kept for many years
Current Assets - Assets that the business only expects to have for a short while (usually less than 1 year)
Fixed Assets (Non-current assets) - An asset that will normally be kept for many years
Current Assets - Assets that the business only expects to have for a short while (usually less than 1 year)
Liabilities: These are the amounts owed by the business
Current Liabilities - Debts that a business will pay within a year
Long-term Liabilities (Non-current liabilities) - Debts that will be paid back over many years
Current Liabilities - Debts that a business will pay within a year
Long-term Liabilities (Non-current liabilities) - Debts that will be paid back over many years
Total Equity:
The part of a company's money that belongs to shareholders. The balance sheet gets its name because this part of the statement must match with the net assets of the business.
The part of a company's money that belongs to shareholders. The balance sheet gets its name because this part of the statement must match with the net assets of the business.
If shareholders raised extra finance to buy new vehicles, what will happen to the value of the business's fixed assets?
What will happen to the value of the shareholder's total equity?
Why do you think PLC's have to produce this document every year?
Which stakeholders would show an interest in it and why?
What will happen to the value of the shareholder's total equity?
Why do you think PLC's have to produce this document every year?
Which stakeholders would show an interest in it and why?
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Liquidity Ratios
Liquidity is being able to pay your debts over the next few weeks and months. If you cannot do this, then a business may be forced to stop trading.
Current Ratio: This compares current assets with current liabilities. This shows whether a business has enough assets that it may sell for cash to pay its short term debts.
CURRENT ASSETS
CURRENT RATIO = --------------------------------
CURRENT LIABILITIES
The answer to a ratio calculation is always written as a ratio e.g 2:1 or 2.7:1
What do you think it means if a business has a current ratio of 2:1 compared to a ratio of 0.8:1?
A good figure is said to be higher than 2:1.
S+C: What do you think the potential problems are of having a large current ratio?
Current Ratio: This compares current assets with current liabilities. This shows whether a business has enough assets that it may sell for cash to pay its short term debts.
CURRENT ASSETS
CURRENT RATIO = --------------------------------
CURRENT LIABILITIES
The answer to a ratio calculation is always written as a ratio e.g 2:1 or 2.7:1
What do you think it means if a business has a current ratio of 2:1 compared to a ratio of 0.8:1?
A good figure is said to be higher than 2:1.
S+C: What do you think the potential problems are of having a large current ratio?
Plenary: On the big whiteboards, write down 3 things you have learnt today.
Ratio Analysis
ratio_analysis_slides.ppt | |
File Size: | 232 kb |
File Type: | ppt |
balance_sheets_observation_worksheet.doc | |
File Size: | 216 kb |
File Type: | doc |
cathy_and_johnny_finance_questions.doc | |
File Size: | 229 kb |
File Type: | doc |
balance_sheet.doc | |
File Size: | 161 kb |
File Type: | doc |