5.4 Accounting fundamentals

In this chapter you will examine :

• contents of an income statement including: revenue, cost of sales, gross profit, operating profit, profit for the year, retained earnings 

• contents of a statement of financial position including: noncurrent assets, current assets, current liabilities, working capital, net assets, non-current liabilities, reserves and equity 

• acid test ratio, current ratio 

• gross profit margin, profit margin 

• how each of these ratios is used 

• reasons for the results obtained 

• ways that businesses might try to improve ratio results, including reducing working capital problems 

• comparison of ratios results between businesses 

• limitations of these accounting ratios 

• identification of the kind of information that individual stakeholder groups might seek 

• limitations of the usefulness of published accounts: historical, may not reflect the future, may be out of date, does not reflect qualitative aspects of a business, 

• possibility of ‘window dressing’, may not have details of the performance of individual parts of a business 

• [Note: Knowledge of specific Accounting Standards is not required.]