Financial Statement

Question 1

Purpose of the statement of profit or loss

Answer 1

• Can be used to measure and compare the performance of a business over time or with other firms
• Bankers and creditor of the business will need the info to help decide whether to lend money to the business
  .

Question 2

The impact of a change on the statement of profit or loss

Answer 2

An increase in price : demand is inelastic - Revenue, gross profit, operations profit, profit before tax, and retained earnings will all increase.

Increase in direct cost per unit - Cost of sales will increase thus reducing gross profit and profit for the year

Question 3

Working capital

Answer 3

Current assets - current liabilities

Question 4

Reserves

Answer 4

Shareholders equity - share capital

Question 5

Relationship between the financial statements

Question 6

Net realizable value (NRV)

Answer 6

The amount for which the existing inventory can be sold - cost of selling it

Question 7

Annual depreciation

Answer 7

Original cost of asset - expected residual value / expected useful life of asset (years)

Question 8

Evaluation of straight line method

Answer 8

• The method requires estimates to be made regarding both life expectancy and residual value. Any errors in these estimates lead to inaccurate depreciation charges being calculated

Question 9

Impact of depreciation on the SFP and the statement of profit or loss

Answer 9

• It is a business expense so it will reduce profit from operation on the statement of profit or loss.
• It reduces the net book value of a non-current asset. The value of non-current assets on the SFP will fall as a consequence.