3.4: Final Accounts
Stakeholders & Accounting Informartion
The Principles & Ethics of Accounting Practice
The Main Business Accounts
Business Managers
Workforce
Banks
Creditors (like suppliers)
Customers
Government & Tax Authorities
Investors & Potential Investors in Business
Local Community
Limitations to Stakeholders
Integrity
Objectivity
Professional Copetence & Due Care
Confidentiality
Professional Behaviour
Layout
Profit & Loss Account
The Balance Sheet
accounts are financial records of business transactions
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measure the performance of the business to compare against targets, previous time periods and competitors
assess whether the business is secure enough to pay wages and salaries
external users
assess whether the business is a good credit risk
assess whether the business is secure
calculate how much tax is due from the business
assess the value of the business and their investment in it
see if the business is profitable and likely to expand, which could be good for the local economy
- One set of accounts is of limited use
provide information for taking decisions such as new investments, closing branches and launching new products
control and monitor the operation of each department and division of the business
set targets or budgets for the future and review these against actual performance
determine whether the business is likely to expand or be reduced in size
determine whether jobs are secure
find out whether, if profits are rising, a wage increase can be afforded
find out how the average wage in the business compares with the salaries of directors
internal users
external users
decide whether to lend money to the business
assess whether to allow an increase in overdraft facilities
decide whether to continue an overdraft facility or a loan
assess whether the business is secure and liquid enough to pay off its debts
decide whether to press for early repayment of outstanding debts
determine whether they will be assured of future supplies of the goods they are purchasing
establish whether there will be security of spare parts and service facilities
determine whether the business is likely to expand and create more jobs
assess whether the business is in danger of closing down, creating economic problems
confirm that the business is staying within the law in terms of accounting regulations
establish whether the business is becoming more or less profitable
determine what share of the profits investors are receiving
decide whether the business has potential for growth
potetnial investors compare details with those from other businesses before making a decision to buy shares in a company
acutal investors decide whether to consider selling all or part of their holding
determine whether the business is making losses and whether this could lead to closure
- Accounts do not measure items which cannot be expressed in monetary terms
series of accounts needed to compare the performance over time
one year’s accounts are of limited value
external stakeholders should have access to the full set of accounts for a number of years
accounts do not indicate the state of technology or the ability and skills of the management team
reputation cannot be valued
the absence of ‘valuation of employees’
- The accounts of one business do not allow for comparisons
effective assessment of performance can only be made in comparison with other firms
one set of one business’s accounts will not allow for comparisons
- Business accounts will only publish the minimum information required by law
publishing detailed accounts data could assist competitors
published accounts are a summary
they do not ‘tell the whole truth’
- Accounts are historic
can be up to six months out of date at the time of publication
they never contain the future financial plans or budgets
- Window dressing
window dressing: presenting the accounts of a business in the best possible way which could potentially mislead users of accounts
companies try to make their businesses look more successful than they are
accounts are produced on a single day at the end of the financial year
timing of various transactions can be manipulated to influence the appearance of the accounts just before they are prepared
Methods
- Recording revenue expenditure as capital expenditure
- Selling assets just before the end of the financial year to make it appear that the business is more liquid than it is
- Encouraging early debt payments by offering discounts, whilst delaying payment to creditors
- Loans may be taken out just before the date of the accounts
- Inflating the value of intangible assets
accountants should act honestly in all dealings with clients
not allow bias, conflict of interest or the influence of other people
accountants should carry out their work with a proper regard for relevant technical and professional standards
should not disclose professional information unless they have specific permission
leads to most complaints to the professional accounting bodies
accountants shoul act honestly with tax authorities and all other stakeholder groups
being straightforward, honest and truthful in all professional and business relationships
common areas of conflict
recommending services because it pays a healthy fee to the accountant
giving in to pressure exerted by an important business client
no-one should undertake professional work which they are not competent to perform
update their level of professional knowledge
comply with all relevant legal obligations when dealing with a client’s affairs
should always act in a way that will not bring their professional body into disrepute
behave with courtesy and consideration towards all those with whom they come into contact in a professional capacity
have to comply with the International Financial Reporting Standards (IFRS)
detailed profit and loss account is produced for internal use
balance sheet: an accounting statement that records the values of a business’s assets, liabilities and shareholders’ equity at one point in time
at the end of the accounting period (1 year), accountants draw up the financial statements of the business
included in the annual report and accounts
profit and loss account: records the revenue, costs and profit (or loss) over a given period of time
liabilities: a financial obligation of a business that it is required to pay in the future
may be produced as frequently as managers need the information (1 month)
less detailed summary will appear in the published accounts (1 year)
- The Trading Account
shows how gross profit (or loss) has been made
gross profit: equal to sales revenue less cost of sales
- Appropriation account
- Profit & Loss Section
sales turnover figure is not the same as cash received
sales revenue/turnover: the total value of sales made during the trading period = selling price × quantity sold
calculates both the operating profit and the profit after tax
operating profit (net profit): profit before interest and taxation; gross profit minus overhead expenses
profit after tax: operating profit minus interest costs and corporation tax
overheads are costs or expenses of the business that are not directly related to the number of items made or sold
dividends: the share of the profits paid to shareholders as a return for investing in the company
shows how the profits after tax of the business are distributed
retained profit: the profit left after all deductions, including dividends
Uses
used to measure and compare the performance over time or with other firms
actual profit data can be compared with the expected profit levels
bankers & creditors will need the information to help them decide whether to lend money
assess the value of investing
low-quality profit: one-off profit that cannot easily be repeated or sustained
high-quality profit: profit that can be repeated and sustained
shareholders’ equity: total value of assets less total value of liabilities
2⃣ main sources
share capital: the total value of capital raised from shareholders by the issue of shares
the retained earnings of the company accumulated over time through its operations.
have to publish the income statement and the balance sheet for the previous financial year
the balance sheet is a statement of the estimated value
Fixed Assets
EX. land, buildings, vehicles & machinery
tangible assets
expected to be retained and used by the business for more than 12 months
Current Assets
EX. inventories, accounts payable & cash/ bank balanee
debtors: customers who have bought products on credit and will pay cash at an agreed date in the future
Current Liabilities
current liabilities: debts of the business that will usually have to be paid within one year
EX. accounts payable, bank overdraft & unpaid dividends or tax
Working Capital
calculated by the formula: current assets − current liabilities
Shareholders’ Equity
Non-current (long-term) liabilities
Cecilia Martínez A01197738