Essay about Generally Accepted Accounting Principles and Assets

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NOTES FOR FINANCE AND ACCOUNTS ASSESMENT:

1. Current Assets- section of the balance sheet shows the assets a business owns which are either cash, cash equivalents, or are expected to be turned into cash during the next twelve months.

2. Fixed Assets - is not consumed or during the normal course of business, such as land, buildings, equipment, machinery, and other such items.

3. Current Liabilities - represent amounts that are owed by the business and which are due to be paid within the next twelve months.

4. Long term liabilities - represents the amounts that the business owes which can be paid at a future period or 12 months away from the date or the balance sheet.

5. Debtors – are people or other firms who owe money to the firm.

6. Creditors - is an expression used in the accounting world to specify a party who has delivered a product, service or loan, and is owed money by one or more debtors.

7. Net Assets - Total assets minus total liabilities of an individual or a company.

8. Capital Employed - is the value of the assets that contribute to a company’s ability to generate revenue.

2. What does the BALANCE SHEET show?
Outline the headings. A balance sheet is a statement of the total assets and liabilities of an organisation at a particular time

3. *Turnover – revenue owned over a year

*revenue - The income generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expenses are deducted. Revenue is shown usually as the top item in an income (profit and loss) statement from which all charges, costs, and expenses are subtracted to arrive at net income. Also called sales, or (in the UK) turnover.

*Cost of Sales- The purchase price of merchandise.

*Gross Profit- The cost of making sales deducted from the sales figure

*Operating Expenses - An expense incurred in carrying out an organization's day-to-day activities, but not directly associated with production. Operating expenses include such things as payroll, sales commissions, employee benefits and pension contributions, transportation and travel, amortization and depreciation, rent, repairs, and taxes. These expenses are usually subdivided into selling expenses and administrative and general expenses.
*Gross Profit formula: GP/TURNOVER X 100 * This shows the gross profit as a percentage of turnover * It can be called gross profit margin * It shows how well a business is managing its purchases of stock

*Gross Profit formula: GP/TURNOVER X 100 * This shows the gross profit as a percentage of turnover * It can be called gross profit margin * It shows how well a business is managing its purchases of stock

*Net Profit – All expenses have been deducted to give the net profit.

4. What does the profit and loss account show?
It shows business’ finance performance over a given time period such as one year. It specifically shows the revenue and costs of a business over a period of time. It also helps banks or lenders to decide if it is worth investing.

5 AND 6 current assets
Current ratio = ----------------------------------- Current liabilities * This ratio is shown to x:1. This shows how many assets a business has compared to its liabilities.

This shows how easily it could pay off its creditors if asked to do so.

*The Current Ratio – the proportion of assets to liabilities.
*A current ratio of 2:1 means the firm has sufficient liquidity to cover its liabilities twice over.
*A current ratio of 0.75:1 would suggest that the firm is unable to meet its liabilities and could be in a weak financial position.
*A ratio below 1 does not mean the firm will collapse but it will be in a vulnerable position.
*A ratio of above 2 would not be good as the money should be being used elsewhere in the business.
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