2 Costs of sales or cost of goods sold At the moment a product is sold and its

2 costs of sales or cost of goods sold at the moment

This preview shows page 191 - 193 out of 254 pages.

2. Costs of sales (or cost of goods sold). (At the moment a product is sold and its income is ‘realized’, so too are its costs). 3. Gross profit – the difference between sales and cost of sales. 4. Operating expenses – selling, administration and general. 5. Operating profit – the differences between gross profit and operating expenses. 6. Non-operating revenues – other revenues, including interest, rent etc. 7. Non-operating expenses – financial costs and other expenses not directly related to the running of the business. 8. Profit before tax. 9. Provision for income tax. 10. Net income (or profit or loss). Accounting requirements of the Companies Acts A very sizeable majority of small businesses are either sole traders or partnerships. Such businesses have some latitude as to how they show their accounts, but obviously they would be prudent to follow guidelines. Limited companies do have to prepare accounts and file them with the Registrar of companies. The companies Act 1985 laid down standard balance sheet and profit-and-loss account formats, and various later companies Act have modified these. The formats Table 60. Example showing the structure for a profit-and-loss account Profit-and-loss account $ $ 1. Sales 140,000 2. Cost of sales Opening stock 18,000 Purchases 74,000 92,000 Less closing stock 22,000 Cost of goods sold 70,000 3. Gross profit 70,000 4. Operating expenses Selling 12,500 Administration 12,500 General 30,000 Total expenses 55,000 5. Operating (or trading) profit 15,000 6. Non-operating revenue Investment interest 1,000 Rents 500 Total 1,500 16,500 7. Non-operating expenses Higher Diploma In Sales and Marketing 191
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Module 5Managing Marketing Information Systems 2 Financial Analysis and Tools Loan interest paid 3,000 8. Profit before income tax 13,500 9. Tax at 25% 3,375 10. Profit after tax 10,125 Opening stock 18,000 Plus purchases 74,000 Equal goods available for sale 92,000 Less closing stock 22,000 Cost of goods sold 70,000 are similarly to those we have been looking at, but by no means as clear and understandable to the layman, as they are really designed for company auditor’s use. For example, logic would suggest that the balance sheet should look like table 61, with the assets clustered at the top and the liabilities at the bottom. Table 61. Example for a ‘logical’ balance sheet $ Fixed assets 230 Current assets, stock, debtors 140 Less creditors 100 Net current assets 40 Total assets less current liabilities 270 Creditors: amount falling 100 Due after more than 1 yr Share capital 100 Reserves 70 Total shareholders’ funds 170 270 Here we show how the shareholders’ funds alone have been used. The top portion of the balance sheet is a mishmash of long-term and short-term items and if assets and liabilities. For the purpose of analysis it makes no difference which layout you see. For management accounts makes no difference which layout you use. For management accounts it makes senses to use a layout that can be readily understood by managers!
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