Business Btec Unit F

• What is statement of comprehensive income??

  It is a financial report which records sales revenue, expenses, how much profit and loss a business made
• Purpose and use of the statement of comprehensive income

  - accurate calculation of the profit and loss a business made

  - records sales, costs and profit over a period of time (usually a yr.)
• What are cost of sales?

  These are direct costs attributable to the production of the goods sold in a company
• Cost of sales


  opening inventory - closing inventory
• Expenses


  Not directly attributable to providing trade??
• What is an opening inventory?

  Stocks, materials that a business possesses when starting a business year
• What is a closing inventory?


  Stocks, materials that a business has left at the end of the business year
• What is depreciation?


  An accountancy concept used to spread the costs of an asset over its usual life (some assets last for few yrs. and their value drops as these age, e.g. machinery, equipment, vehicles)
• Adjustments for depreciation


  - depreciation value is added to the statement of comprehensive income (in expenses)

  - important that a fixed rate is given a realistic value

  - if asset is depreciated too quickly then profit will fall

  - if asset is depreciated too slows than profit will inflate
• Types of depreciation calculation

  1. Straight line depreciation

  2. Reducing balance depreciation
• What is straight line depreciation?

  The asset is depreciated by a set amount each year. 2 decisions needs to be made:

  - expected life of the asset

  - the worth of the asset at the end of it expected life
• Straight line depreciation calculation


  (historical value - residual value) / expected life
• What is reducing balance depreciation?

  The asset is depreciated by a set % of its remaining value each year (% decided by an accountant)
• Reducing balance depreciation calculation

  (E.g.) Van price £16000, 20% depreciation, historic value 1st yr. £16000

  Yr.1. 16000x0.20=3200 16000-3200=£12800 (current value)

  Yr.2. 12800x0.20=2560 12800-2560=£10240 (current value)

  Yr.3. 10240x0.20=2048 10240-2048=£8192 (net book value)
• What are prepayments?


  Payments done in advance
• What are accruals?


  Expenses paid after the usage of the product (e.g. utility bills: electricity)
• Adjustment of prepayments


  - can be taken out of expenses (on comprehensive income statement)

  - shown as current assets (on statement of financial position)

  - these aren't shown on the statement of comprehensive income
• Adjustment of accruals


  - expenses added to the expenses on the statement of comprehensive income

  - shown as current liabilities on the statement of financial position

  - these are shown on the statement of comprehensive income
• What is the statement of financial position?


  It's a snapshot of the business net worth at a particular time (end of financial year)

  - shows what the business owns

  - shows what the business owes
• Assets


  Products/goods/money owned by the business
• Types of assets


  1. current assets

  2. non-current assets

  - tangible

  - intangible
• What are non-current assets?

  Items the business keeps to trade (e.g. vans, computers)

  - products likely to stay within the business for longer than 1 yr.
• Intangible assets


  - add value to the business (e.g. brand image)

  - doesn't have physical presence

  - value can change over time
• Amortization


  Depreciation of intangible assets
• Tangible assets


  - give realistic value (e.g. equipment, vehicles, premises, fixture&fittings)

  - depreciated on annual basis

  - shown on the statement by: historic cost, % of depreciation, current value
• Net book value


  Cost of the asset before it has been depreciated
• What are current assets?

  Items owned by the business that can be converted into ash in the short-term

  - value of these likely to change with every transaction

  (e.g. inventories, prepayments, trade receivables, money as cash or in bank)
• What are liabilities?


  Money owed to others:

  -suppliers

  -accruals

  -bank
• Current liabilities


  Short-term debts, paid within a yr. (e.g. paying creditors such as suppliers and overdraft)
• Non-current liabilities


  Long-term debts, paid over a longer period of time (e.g. loan, mortgage)
• Net-current assets (working capital)

  Ability to meet short-term debts (day to day expenses)
• Net-current assets calculation


  current assets - current liabilities
• Net-assets calculation


  (non-current+current assets) - (non-current+current liabilities)
• Fixed assets


  Items used by the business to generate income
• What is profitability ratios?


  Financial method used to assess a business's ability to make profit compared to its expenses over time
• Types of profitability ratios


  1. gross profit margin

  2. mark up

  3. profit margin

  4. ROCE (return on capital employed)
• What is gross profit margin?


  It shows how much gross profit is made compared to revenue (any falls in the figure, can mean increased costs and decreased revenue)
• What is mark up?

  It shows what % if cost of sales is added to reach the selling point
• What is profit margin? (net profit)


  It shows how much profit is made compared to sales (any falls in the figure can mean increased expenses)
• What is ROCE?


  It shows annual % that an investor receives on their capital invested (average in UK is 10%)