1. 1.1 Financial Records
BST

2. Financial records
The financial records of a business are called its ACCOUNTS
They should be kept up to date and with great accuracy. This is the responsibility of the ACCOUNTANT

3. Accounts vs an Accountant
Definition: The financial records of a firm’s transactions
Accountants
Definition: Are professionally qualified people who have responsibility for keeping accurate accounts and producing the final accounts

4. Final Accounts/ Financial Statements
Definition:
Are produced at the end of the financial year (usually 31st March) and give details of the profit or loss made over the year and the worth of the business.

5. Documents
During the year there are a large number of financial documents that are created as the business buys and sells goods and services.
Receipts
Invoices
Credit notes
Purchase orders
Statement of Accounts

6. Documents continued… The documents will be used by Accountants to:
keep records about suppliers
keep records about customers
provide the data for final accounts

7. Methods of making payments
Payments for goods and services can be made in the following ways:
- Cash
- Cheque (will be extinct)
- Credit card
- Debit card
- Direct debit (electronic transfer)
Automatic Payments

8. Who is interested in the accounts?
Business owner (to see if the business has made a profit or loss, what to spend the money on)
Managers/ Employees of the business (to see if the business has made a profit so their jobs are safe)
IRD (to see what tax must be paid if the firm makes a profit)
Bank Managers (to see if the firm can pay back the loans)
Creditors (suppliers that the business owes money to. To see if they can pay them back)
Potential investors or buyers (wanting to see if the business is a good investment)
Customers – to assess the strength of the business
Competitors – to compare their performance
They all want to check on the company accounts to see the financial performance.

9. Cash Flow Importance of good cash flow
To ensure that a business is able to pay all their invoices (bills) on time
To continue to receive supplies (the stock) required to run the business efficiently

10. Not having a good cash flow…
Implications (negative impacts) of poor cash flow include:
Not enough cash - to meet day-to-day expenses
Employees- may not get paid on time
Creditors - may not get paid on time. Some may then take legal action to recover the debt.
Unable to repay - loans / mortgages back to bank

11. Methods to improve cash flow
Give customers less generous credit terms or insist they pay by cash
Sell unsold stock before ordering more
Sell any unused assets eg: old computers to get cash

12. Why Stakeholders are interested in cash flow?
Suppliers want to know if the business will be able to pay if offered credit. Suppliers require payment on time as they will have their own suppliers who will require payment by a certain date
The owners and other investors want to evaluate future growth potential
Employees are interested in the overall cashflow of the business so they continue to get paid
Creditors (banks) to see if the business can pay back their loans

13. What do financial accounts contain?
The Trading Account/ Statement
Income Statement
Balance Sheet
Cash Flow Statement

14. Terms to know
Trading Statement= shows how the gross profit of a business is calculated (before the expenses are listed)
Cost of Goods Sold = is the cost of producing or buying in the goods actually sold by the business during a time period
Sales Revenue = is the income to a business during a period of time from the sale of goods or services
Gross Profit = is made when sales revenue is greater than the cost of goods sold (before expenses are calculated) Gross Profit = Sales less Cost of Goods Sold

15. Income Statement
The Income Statement (sometimes referred to as “Profit and Loss Account”)…
Shows how net profit is calculated for the year
Net Profit = Is the profit made by a business AFTER all the costs (expenses) have been deducted.
Net Profit = Gross Profit less Expenses
Gross Profit = Sales less cost of goods sold

16. Retained Profits
This is profit that is reinvested back into the business after tax has been paid.
Used to expand the business, buy more machinery, upgrade computers etc

17. Balance Sheet
So far we have only looked at when a business makes a profit or a loss. However, the Income Statement does not tell us how much the business is worth in total.
Business owners are very interested in knowing how much their business is worth.
This information, along with other details is shown on the “Balance Sheet”.

18. Balance Sheet Definitions:
Balance Sheet = shows the value of a business’s assets and liabilities at a particular point in time.
Assets = Items of value which are owned by the business eg: building, vehicles, machines.
Liabilities = Items owed by the business eg: loan, mortgage, overdraft

19. Key Terms in the Balance Sheet
Equity = the worth or value the business owner has in their business (what is left over after all the liabilities have been paid)
Equity = Total Assets – Total Liabilities

20. Balance Sheet Issues
Insufficient working capital / short-term cash problems
This is a problem because it means the business has insufficient cash resources to meet its expenses or debt repayment in the short term.
Solution
To borrow on a long-term basis, so that the owner has the cash to pay for expenses now but repay the loan later, which means that the owners would end up paying more interest.

21. More Balance Sheet Issues
Low equity
This is a problem because it means that creditors have paid for more of the business assets than the owner. The business may not be able to repay its debts on time and have difficulty buying on credit or getting loans.
Solutions
The owner needs to invest more cash
Take out less profits from the business so they have a bigger percentage of the business assets.

22. Ratio Analysis of Accounts
There are many ratios which can be calculated from a set of accounts
These ratios are used to measure and compare PERFORMANCE and LIQUIDITY of a business
To improve ratios, owners need to put more cash into the business or decrease their expenses

23. Comparing ratios
Ratios are very useful as a quick way of comparing a firm’s performance and liquidity.
Results should be compared with:
- Other years
- Other businesses

24. Disadvantages of ratio analysis
Ratios are based on past results & will not predict future performance
Results over time are affected by inflation (rising prices) and comparisons between various years may be misleading
Different companies use different accounting methods, eg: when valuing their fixed assets which could lead to different ratios and comparisons