3.4 Final accounts (Stakeholders and accounting information (Business…
3.4 Final accounts
Stakeholders and accounting information
Government and tax authorities
Investors and potential investors in business
Limitations of accounting information to stakeholders
One set of accounts is of limited use
Accounts do not measure items which cannot be expressed in monetary terms
The accounts of one business do not aloow for comparisons
Business accounts will only publish the minimum information required by law
Accounts are historic
Recording revenue expenditure as capital expenditure. Revenue expenditure like rent, is payable in the present year. Capital expenditure, e.g. spending on machinery, can be spread over several years through the process of depreciation.
Selling assets just before the end of the financial year to make it appear that the business is more liquid than it is. For example, sale and leaseback where a company sells some property but rents it back.
3.Encouraging early debt payments by offering discounts before the end of the financial year, whilst delaying payment to creditors, to improve liquidity.
Loans may be taken out just before the date of the accounts to improve the liquiity position, but may be repaid a few days later.
Inflating the value of intangible assets, such as brand namees and patents owned by the business.
The principles and ethics of accounting practice
professional competence and due care
The main business accounts
Recent layout changes
The profit and loss account - income statement or statement of comprehensive income
3 sections of a profit and loss account
this shows how
(or loss) has been made from the trading activities of the business. Not all sales are for cash in most businesses, the
figure is not the same as cash received by the business.
Profit and loss section
This section of the profit and loss account calcuates both the
profit before tax
of the business.
This final section of the profit and loss account (which is not always shown in published accounts) show how the profits after tax of the business are distributed between the owners - in the forms of dividends to company shareholders - and as
- equal to sales revenue less cost of sales
sales revenue (or sales turnover)
- the total value of sales made during the trading period = selling price x quantity sold
operating profit (net profit or profit before interest and taxation
- gross profit minus overhead expenses
profit after tax
- operating profit minus interest costs and corporation tax
- the share of the profits paid to shareholders as a return for investing in the company
- the profit left after all deductions, including dividends, have been made; this is 'ploughed back' into the company as a source of finance