Unit 3.

4 Final
Accounts (Part 1)
Financial Records
A business keeps various types of financial
records to monitor its performance and ensure
that taxes are paid.
These include:
Trading and Profit and Loss Account
Appropriation Account
The above are known collectively as the
Income Statement
Balance Sheet
Also know as the Statement of Financial
Position
Cash-flow Forecast and Statement
Forecasts estimate the future, statements
record what has actually happened
Budgets
Budgets are then compared with what actually
happened to create a variance
Consider………
What are the problems that would immediately arise if
accounts were not kept?

Consider the stakeholder groups and individuals affected

Consider the following stakeholders and how they would use
accounting information and why it would be important for
them.

Business Manager
Workforce
Banks
Customers
Governments and Tax Authorities
Investors and Potential investors in a business
Local Community
Suppliers
Limitations of Financial Information
One set of accounts from one year ONLY is of limited use
(need to compare a series of years)
Accounts do not measure items which cannot be
expressed in monetary terms (e.g. state of technology,
skills and ability of staff etc.)
The accounts of one business do not allow for
comparisons (with other firms)
Business accounts will only publish the minimum
information required by law
Accounts are historic (can be up to six months out of date
when published)
Window dressing – trying to look better than they actually
are
Accounts become out of date immediately
Principles and Ethics of Accounting
Practice
1. Integrity – acting honestly with all clients, the tax
authority, and other stakeholder groups. (dont
publish fake information, or misleading info)
2. Objectivity – shouldn´t allow bias
3. Professional competence – no one should undertake
professional work which they are not competent to
perform
4. Confidentiality – do not disclose professional info
unless permission is granted
5. Professional behaviour – Accountants should always
act in a way that will not bring their business into
disrepute.
Activity 3.4.1Malaysia Tourist Flights
Ltd

Read the case study and answer Q1, 2,

3
Malaysia Tourist Flights Ltd
1. Stakeholders that might be interested in Leroy’s accounts include:
Banks and other creditors
Employees
Suppliers.

2. Leroy’s accounts might have been useful to the following stakeholders because:
Banks and other creditors – repayment, risk of default, interest, need for new finance
Employees – job security, wages, funds to improve working conditions
Suppliers – repayment, risk of default, continued business.

3. a. Accounts can be prepared ethically by:

Employing an auditor with an ethical reputation
Ethical practices by management.
b. FlyNow’s accounts might have the following ethical issues:
Sale of assets to boost cash flow and profits
Cash from recent loan
Over-valuation of airplanes
Quality of work done on the airplanes increasing their value
Delayed payments to creditors.
 Trading and
Profit & Loss
Accounts
You need to know what the TPL account
is, what it shows, how to construct one
Format of P&L Accounts for IB
A Trading and Profit & Loss and
Appropriation
Account (altogether called the
Income Statement) shows the
business's financial performance
over a given time period, e.g. one
year
It allows businesses to compare
their performance from one year to
the next or to compare with other
businesses
 The Trading Account – Calculates
the Gross Profit
(gross profit = sales revenue – cost of sales (cost of goods
sold)
Profit and Loss Account –
Calculates the amount of Net Profit
(the profit after all the expenses are deducted from the
sales revenue including tax and interest)
Appropriation Account –shows how
the profit is distributed (is the profit
distributed as dividends or retained profits)
Trading Account

Profit & Loss

Account

Appropriation
Account
Trading Account Sales
Money coming into
the business from
the sale of goods or
services. E.g. Desks

Cost of Sales
All the costs directly
involved in producing the
goods or service. E.g
Stock or Raw Material

Gross Profit
Profit before expenses
have been taken out
Sales – Cost of sales =
Gross Profit

Cost of sales = opening stock + purchases –

closing stock
How to calculate Cost of goods sold
(new to you! Not covered in GCSE)
Usually you’re given the VC of the goods and you multiply by
the quantity right? BUT, this is how it works in reality…….
A café buys cans of Coke for €1 each and sells them for €2.
Its starts the month with 200 cans (that were not sold last month).
This is called OPENING INVENTORY.
It buys in another 1500 during the month. This is called
PURCHASES of GOODS
At the end of the month there were 300 cans. This is called
CLOSING INVENTORY
How many cans were sold in the month?
Good sold = OI + Purchases – CI = 200 + 1500 – 300 =
1400
What was the Cost of Goods sold?
Cost of goods sold = Quantity sold X cost of one good
Cost of goods sold = 1400 X 1 = €1400
Practice:

A firm at the beginning of a trading period had $500 worth of

stock. It then bought more stock during this period valued at
$800.
It then closed the period with stock valued at $200. What is the
cost of sales?
Cost of sales = 500 + 800 –
200
COS
What=would
$1,100
the gross profit be if it sold 400 units of the product at $10
a piece?
Sales revenue: 10 x 400 = $4,000
Gross profit = 4000 – 1,100
GP = $2,900
Profit and Loss Account

Expenses Net Profit

All other costs incurred by the Profit after expenses have
business that are not directly been taken out
involved with the production of the Gross Profit – Expenses =
product (desks). For example Net Profit
salaries, heat, electric, rent
Appropriation Account

Dividends Retained Profit

A sum of money paid to The amount of earnings left after
shareholders decided by the all expenses and dividends have
company board of directors. The been paid
amount of dividend given depends
on the number of shares owned.
 Sales
Money coming into
the business from
the sale of goods
or services. E.g.
Uniform
Cost of Goods
Sold
All the costs directly
involved in producing
the goods or service.
E.g Stock or Raw
Gross Material
Profit
Profit before expenses
have been taken out
Sales – Cost of sales =
Gross Profit

Expenses
All other costs incurred by
the business that are not
directly involved with the
production of the product
(desk). For example wages,
heat, electric, rent
Profit for
Period
Profit after expenses
have been taken out
Gross Profit – Expenses
= Net Profit
Activity 3.4.4 Karachi Traders

Complete the activity

Why not create an excel spreadsheet to help
you with workings!
You have 40 minutes!
Balance Sheet (3)
What is a balance sheet, what information is shown
on one and how do we construct one?
What does the balance sheet tell us?
 Balance Sheets
The balance sheet is a picture of a company’s
financial situation at a moment in time – a
snap shot
The idea behind it is simple – it records where
the business got its money from and what it
has done with it
It shows what a business owns (assets),
what it owes (liabilities) and how it paid
for this
Assets = liabilities + equity
 Balance sheets should
always [Link] of it
as two separate
documents. The top part
(above line) shows the
company’s assets and
liabilitiesThe bottom half
(below line) shows where
the money has come from
to purchase the [Link]
assets and Equity should
always match!
 Fixed Assets Depreciation
(Non- The value a good
Current) loses over time. Eg a
Items that are car is not worth the
bought to be same in 1 year after
used by a it was purchased
business over a Current
long period of Liabilities
Current
time Short term debts
Assets that usually owed
E.G Till, Vehicle
Items that are for less than a
defined as short year
term E.G – Wages, Bills
possessions. Working Capital
[Link]-Term
Stock, Cash This shows how much
Liabilities money the business is
Long Term debts likely to have within
payable over a long the next 12
period of time. months because it
E.G Bank loan or shows what will be
Mortgage left when they sell all
Net Assets of their current assets
(total assets – and then pay their
Current current liabilities
Liabilities) – Current assets –
long term Current Liabilities
 Financed By
This section
highlights how you
have financed your
business for the year

Share Capital
Capital which a
business raises from
the sale of shares

Retained Profits
Profit ploughed back
into the business
from previous year.
Can be seen on P&L
Account
Equity
Share Capital +
Retained Profits
Different types of Intangible Assets
Marketing Related Intangible Assets – logo,
trademarks, phrases, symbols
Customer Related Intangible Assets – customer
loyalty and good relationships
Artistic Related intangible assets – ownership
rights to musical works, video, photographs
Contract related intangible assets – construction
permits, broadcasting rights, etc.
Technology related intangible assets – patents
Goodwill - The goodwill amounts to the excess of the
"purchase consideration" (the money paid to purchase
the asset or business) over the total value of the assets
and liabilities.
Activity 3.4.5 Understanding
Balance Sheets

Copy the table and indicate which

category each item falls into…
Complete activity 3.4.6Mauritius
Telecom
Spend a minute just looking at difference between
the two years and think about what has changed
Answer questions 1 to 3 in your books
Activity 3.4.6 - Mauritius Telecom
Trade receivables – the value of payments to be received from customers who have
bought goods on credit. AKA debtors or accounts receivable.
Inventories - stock held by the business in the form of raw materials, work in
progress and finished goods
Current assets – Items of value owned by the organisation that have a value and
are expected to be used or turned into cash within the short term (12 months)
Shareholders’ equity - This is capital originally paid into the business when the
shareholders bought shares (share capital) or the retained earnings/profits of the
business that the shareholders have accepted should be kept in the business.

Increase in FA of R219m, stock of R51m, total CL R1296m

Decrease in receivables, cash, total assets, total NC liabilities, shareholders equity,
total equity and liabilities
Causes??? Speculate…
Activity 3.4.6 - Mauritius Telecom

a. Accounting information might be useful to a potential investor

because it provides information about:
• Potential profits – opportunity for dividends, growth of investment,
reward for investment
• Cash flow and debt – risk and future sustainability, potential for
increase in interest payments
• Value of the business and parts of the business – see if valuation is
correct, share price fair, impact of depreciation on pre tax profit.
b. Accounting information might be useful to creditors because it
provides information about:
• Potential repayment – foresee cash flow issues, gearing ratio
• Cash flow and debt – risk, see above
• Value of assets for securing loans.
Higher Level Only - Depreciation

L.O. Understanding depreciation

Calculating straight line and reducing
balance methods
Knowing pros and cons of each
method
Depreciation of Assets – HL Only
Depreciation is…. (P272)

Calculating straight line method… (P273) Go to

Formula? Inthinking
Pros/cons?
site for
How is this shown on final accounts?
answers
Calculating units of production method…. (P274)
Formula for calculating rate of depreciation? (NB! Rate will probably
be given in exam formula booklet but learn anyway!
Pros/cons?
How is it different to straight line method?
Activity - Worked example

Suppose a firm has purchased a new photocopier for $5,000 with a scrap value of $500
in 5 years' time when it is expected to be replaced. The total expected units of
production (output from the machine) is 300,000.
The units of production rate (or the depreciation per unit) for the firm is calculated as:
($5,000 – $500) / 300,000
$4,500 / 300,000 = $0.015
Therefore, if the firm produced 60,000 units of output from the photocopier in Year 1,
the depreciation expense would be:
$0.015 × 60,000 = $900
If the firm produced 90,000 units of output from the photocopier in Year 2, the
depreciation expense would be:
$0.015 × 90,000 = $1,350
Hence, the greater the level of production, the higher the depreciation expense.