GCSE Accounting and Finance“Don’t feel like a little fish in a big sea……… be ready for your exam”Introduction:This booklet has been designed to help you learn your final 4 topics over the Easter holidays:The Trading, Profit and Loss Account.The Balance SheetRatios to analyse how well a business is performingStakeholders: Who’s interested in the businesses accounts?This booklet is broken into 4 clear sections. Each section contains a reading part to give you allthe knowledge you will need and a questions part to test your knowledge.You must complete all the activities and hand this work in on the date shown below:Name:Due date:
Section 1: The Trading Profit and Loss Account – KEY INFOThe Trading, Profit and Loss Account calculates how much Profit or Loss a business makes overthe year.KEY TERMS:Profit = the amount of money a business has left after it pays all its costs.Sales Revenue/Turnover: This is simply the income received by a business from selling itsproducts.Cost of Sales: These are costs that from the production e.g. buying raw materials, andproduction worker wages.Gross Profit: This is the Sales Revenue value minus the cost of Sales.Expenses or Overheads: These are all of the other “non production” costs of the business i.e.costs that do not change even when the level of production does. E.g. Salaries of admin/officestaff, stationery, advertising etc.Net Profit: This is what’s left of businesses sales revenue once all of the costs have been paid.Example of a Trading, Profit and Loss Account:£ £Sales Turnover 47,800Less cost of Goods sold:Opening Stock 4,700add purchases 24,000less closing stock 6,000Cost of Sales 22,700GROSS PROFIT 25,100Less Expenses/Overheads:Wages and Salaries 8,100Advertising 2,300Rent and other bills 3,550Depreciation 1,20015,150NET PROFIT 9,950Taxation 2,025Profit after tax 7,925Dividends paid 4,000RETAINED PROFIT 3,925Sales turnover = money the businessmakes from selling its goodsNet Profit = Gross profit – expenses andoverheads.Retained Profit = Net profit – tax anddividends. Shows how much thebusiness keeps after paying all its bills.Gross Profit = Sales turnover – Cost ofSales
The Trading Profit and Loss Account has 3 parts:1. The Trading Account2. The Profit and Loss Account3. The Appropriation Account£ £Sales Turnover 47,800The TradingAccount =Sales toGross ProfitLess cost of Goods sold:Opening Stock 4,700add purchases 24,000less closing stock 6,000Cost of Sales 22,700GROSS PROFIT 25,100The Profitand LossAccount =GrossProfit toNet ProfitLess Expenses/Overheads:Wages and Salaries 8,100Advertising 2,300Rent and other bills 3,550Depreciation 1,20015,150NET PROFIT 9,950TheAppropriationAccount = NetProfit toRetained ProfitTaxation 2,025Profit after tax 7,925Dividends paid 4,000RETAINED PROFIT 3,925A Guide to the 3 parts:1. Trading Account:Its aim – to find the GROSS PROFITGROSS PROFIT = Sales – Cost of SalesCost of Sales = Opening Stock + Purchases – Closing Stock2. Profit and Loss AccountIts aim – to find NET PROFITNET PROFIT = Gross Profit – Expenses (overheads)3. Appropriation AccountIts aim – to find RETAINED PROFITRETAINED PROFIT = Net profit – taxation - dividends
A closer look at the Trading Account.The Trading Account is basically: Sales Turnover – Cost of Sales (i.e. how much it cost you tomake the goods) = GROSS PROFIT. In a nutshell Gross Profit tell us how much money is leftonce all direct production costs (mainly stock) has been paid.In the exam you might be asked to work out a Trading Account. It is simple enough to do:Using the example above:£ £Sales Turnover 47,800Less cost of Goods sold:Opening Stock 4,700add purchases 24,000less closing stock 6,000Cost of Sales 22,700GROSS PROFIT 25,100Who’s interested in the P&L?1. Managers: The more profit that a business makes, the more secure a managers job is.Also the manager’s pay may be linked to profit.2. Employees: If a business is making a loss then it may need to reduce some of its staff.So the employees want to see the level of profits rise.3. Shareholders: The shareholders receive a dividend (payment) from the businessesprofits. The more profit the business makes, the more dividend they get.4. Local community: A profitable business may expand and create new jobs.5. Government: The government want the business to create more jobs. Also thegovernment gets tax from a business. This tax comes from a businesses profits, so themore profit the business makes, the more tax the government gets.Sales Turnover = Money from SalesOpening Stock = Stock the business had left overfrom last year which it hadn’t sold. In this case £4,700Purchases = How much the business has spentbuying new stock this year. In this case £24,000Closing Stock = How much stock the business has leftunsold at the end of this year.Cost of Sales = Opening Stock + purchases – closingstock.Gross Profit = Sales Turnover – Cost of Sales
Trading Profit and Loss - ACTIVITIESActivity 1: Complete the Trading, Profit and Loss Account by adding the missingnumbers.Activity 2: Comparing profits over the years.1. Complete the missing parts of theTrading Profit and Loss account.2. Compare the retained profit figuresover the years, how is this businessdoing?Answer:
Activity 3: All Fruit LtdUsing the Information shown below, complete the Trading, Profit and Loss Account for All FruitLtd
Section 2: The Balance Sheet – KEY INFOThe Balance Sheet shows us how much the business is worth.The balance sheet is also record of what the businesses owns, owes and where it got its moneyfrom. There are 3 terms, which are essential for understanding the balance sheet, these are:1. Fixed Assets: These are things that the business will own for over 1 year e.g. premises,machinery and vehicles.2. Current Assets: These are things that the business will own for less than 1 year orreceive in less that 1-year e.g. stock, debtors and cash.3. Current Liabilities: These are debts that the business has but will pay for within 1 yeare.g. creditors and overdraft.4. Long Term Liabilities: These are debts that the business will have for a long time e.g.Long term loan, mortgage etcSo what does the Balance sheet look like? Here is one for a simple video shop.Balance Sheet for Top Videos Ltd, as at 31st March 2004£000 £000Fixed Assets:Premises (video shop) 60Machinery (Computer tills, security etc) 20Vehicles 1595Current Assets:Stock (videos) 8Debtors (people who owe us £) 5Cash (in bank) 518Current Liabilities:Creditors (people we owe money to) 3315Net Assets (what the business is worth) 80Shareholders Funds:Share Capital (money put in by shareholders) 6565Long term LiabilitiesBank Loan 1515Capital Employed (what the business is worth) 80
Sometimes though you might need to work out a more difficult balance sheet. For example:Picture House LtdBalance Sheet as at 31 December 2004(£000s)Fixed AssetsTangible Assets 500Investments 20520Current AssetsStocks 60Debtors 20Cash 100180Current LiabilitiesCreditors: amounts falling due within 1 year -100Net Current Assets (Working Capital) 80Net Assets Employed 600Long Term LiabilitiesCreditors: amounts falling due after 1 year -150Net Assets 450Capital & ReservesCalled up share capital 300Share Premium Account 30Other Reserves 20Profit and Loss Account 100Capital Employed. 450Tangible Assets examples include: land,buildings, machinery, vehicles etc.Investments are things that the business will ownfor more than a year, but that you cant touch e.g.share in another business.Debtors are people/ businesses who owe usmoney.Creditors are people/businesses who we owemoney to e.g. suppliers.Net Current Assets (working capital) = currentassets – current liabilitiesNet Assets employed = Fixed Assets + CurrentAssets – current liabilitiesNet Assets= Fixed Assets + Current Assets –current liabilities – long term liabilitiesThe Capital & Reserves part tells us wherethe business gets its money from. In thiscase it get money from selling shares(share capital/share premium), it haskept some money in Reserve fromprevious years (just in case) and it hasmade £100,000 Profit this year.
The Balance Sheet - ACTIVITIESActivity 1:Allocate each of the following to the correct place:NAME FIXED ASSET CURRENTASSETCURRENTLIABILITYLONG TERMLIABILITYDebtorEquipmentCreditor (over 1 year)Bank LoanCreditor (under 1 year)Delivery VanCash in BankOverdraftMortgageStocks of raw MaterialsInvestmentsFactoriesMachineryActivity 2: Create a Balance Sheet for the Local BakeryUsing the blank Balance Sheet on the next page create a balance sheet for the Local Bakerywith the figures below:Bakery Premises£60,000Ovens & other machinery£40,000 Delivery Van - vehicle £15,000Stock (pre-prepared food)£8,000.You are owed £5,000 You have £5,000 in cashin the bank.You owe £15,000 inbills.The business kept £28,000from the previous yearYou have £75,000 worth ofshare capital.The business got a bankloan for £15,000
TIP: usethe videoshopexampleto helpyou.Balance Sheet for Local Bakery Ltd, as at 31st March 2002Key £000 £000"a" Fixed Assets"b" Current Assets"c" Current Liabilities"d"=b-c Net Current Assets (Working Capital)"e"=a-d Net Assets"f"Financed by:Shareholders Funds"g"Long term Liabilities"h"=f+gCapital Employed
Activity 3: Complete the Balance Sheet shown below, and then answer the questions thatfollow:
Section 3: Ratio Analysis – Working out how a business is performing – KEY INFORatios are used to calculate how well a business is doing. In the exam you will be given the ratios so you don’t need to worryabout remembering them. You do need to know what they mean though and how to work them out.In the case of ratios, the students who do best are the ones who get the most practice. All the information you need to work theratios out can be found in the Trading, Profit and Loss Account and/or the Balance SheetKey Ratio’s:Ratio Name Formula to work it out What it means What to aim forGross Profit marginGross Profit Margin =Gross Profit x 100Turnover (sales)Gives a % answer.Shows how much Gross profit is made as a% of the overall sales. i.e. only looks atproduction costs.The higher the gross profitmargin, the better.Net Profit MarginNet Profit Margin =Net Profit x 100Turnover (sales)Gives a % answer.Shows how much Net profit is made as a %of the overall sales. i.e. includes all costsThe higher the net profitmargin, the better.Return on capitalEmployed (ROCE)ROCE =Operating Profit x 100Capital EmployedTip: another name for operatingprofit is Net Profit before interest& taxGives a % answer.Measures how good the business is in usingits capital to generate profits.It answers the key question: What %return will I get on the money I invest?The higher the ROCE thebetter
Ratio Name Formula to work it out What it means What to aim forCurrent RatioCurrent Ratio =Current AssetsCurrent LiabilitiesExamines the liquidity of the firm, bycomparing Current assets against currentliabilities.Measures if a firm can pay its debts.Ideal ratio is 1.5:1i.e. £1.50 worth of CurrentAsset to every £1.00 worthof current liabilityAcid Test RatioAcid Test Ratio =Current Assets - StockCurrent LiabilitiesExamines the liquidity of the firm, bycomparing Current assets against currentliabilities.Stock is removed as the firm cannotguarantee that it will be able to sell it.Ideal ratio is 1:1i.e. £1.00 worth of CurrentAsset to every £1.00 worthof current liability.Section 3: Ratio Analysis – Working out how a business is performing – ACTIVITIESActivity 1: MemoryCopy each ratio into the table below and write a description as to what the ratio shows and what the business should target eachratio to be.Ratio Name Description
Activity 2: Complete the ratio exercise below:
Section 4: Stakeholders – People interested in the Accounts– KEY INFOBusiness Accounts refer to the Balance Sheet and the Trading, Profit and Loss Account. Theseare very important to a variety of people.Anyone interested in the Business is known as a Stakeholder. It is very important tounderstand why each stakeholder is interested in the Businesses Accounts. For example:Stakeholder Why they are interested in the Businesses AccountsManager The more profit that a business makes, the more secure a managers jobis. Also the manager’s pay may be linked to profit.Banks If they have lent the business money they will be able to see if they canpay it back or not!Employees High profits mean that their jobs are more secure. Also if the businessmakes a large profit they might ask for a wage increase.Shareholders The shareholders receive a dividend (payment) from the businessesprofits. The more profit the business makes, the more dividend they get.Suppliers Will be interested if the business can pay for its supplies on time. Theyget this from the balance sheet.Customers Want to know if a business is financially sound. They will not put inorders or pay deposits if they are worried that the business might gobankrupt.InlandRevenueCollects tax on behalf of the government. Tax is charged on abusinesses profit. Shown in the P&L account.Look at what the 2 accounts show:Balance Sheet Headings Profit and Loss Account HeadingsFixed AssetsCurrent AssetsCurrent LiabilitiesL. Term LiabilitiesNet AssetsSales RevenueCost of SalesGross ProfitOverheadsNet ProfitShareholders FundsHow much profit isbeing made?How does profitcompare to sales?Compare sales toprevious year arethey increasing?Are currentliabilities morethan currentassets?Has thebusinessborrowed a lotof money?
Section 4: Stakeholders – People interested in the Accounts– ACTIVITYImportance of Business Accounts TaskGiving a friend Advice…A friend of ours called Chris is considering buying £10,000 worth of shares in aparticular company. Knowing that you study GCSE Business he has asked you to helphim decide whether this would be a good investment.Tasks1. Name 2 financial statements that Chris could usefully read.2. Explain 2 features of these financial statements that would be important to a shareholder.3. Explain 1 reason why Chris should look at financial information about a business over aperiod of several years.
Revision DictionaryTrading Profit and Loss Account termsSales revenue = the money the business makes from salesCost of sales = how much its cost the business to make the goods i.e. its production costs (e.g. materialsand production labour)Gross Profit = Sales – Cost of Sales. It shows how much profit a business makes after paying itsproduction costsExpenses/Overheads = All non production costs (i.e. all other costs except materials and production labour)Net Profit = Gross Profit – Expenses/overheadsRetained Profit= Net profit – tax - dividendBalance Sheet termsFixed Assets = These are things that the business will own for over 1 year e.g. premises, machinery andvehicles.Current Assets =These are things that the business will own for less than 1 year or receive in less that 1-year e.g. stock, debtors and cash.Current Liabilities =These are debts that the business has but will pay for within 1 year e.g. creditors andoverdraft.Long Term Liabilities =These are debts that the business will have for a long time e.g. Long-term loan, mortgageetc.Net current Assets = Current Assets – Current liabilities. Often called working capital as it shows how muchmoney the business has to use on a day-to-day basis.Net Assets = Fixed Assets + Current Assets – Current Liabilities.Capital = Describe where the business gets its money from. Capital is money the businessreceives by selling its shares.Reserves = Money that the business keeps in reserve from previous years profit just in case it needsit.Creditors = Are people the business owes money to i.e. SuppliersDebtors = Are people who owe our business money i.e. we have sold them goods on credit.Ratio Analysis termsAll terms covered in the sectionStakeholder termsAll terms covered in the section