Key Idea: Final accounts show how a business is performing and what financial position it is in. At HL, Topic 3.4 expects students to construct, interpret and judge income statements and balance sheets more confidently, including the treatment of intangible assets and depreciation-related issues seen in recent HL papers.
📄 Income statement: **Income statement —** shows revenue, costs and profit over a period of time. **Focus —** business performance. **Main outputs —** gross profit, net profit, profit before interest and tax. **Question it answers —** did the business make profit or loss?.
📋 Balance sheet: **Balance sheet / statement of financial position —** shows assets, liabilities and equity at one point in time. **Focus —** financial position. **Main outputs —** net assets and owner's equity. **Question it answers —** what does the business own and owe?.
[Diagram: income-statement-flow]
🏢 Structure and classification: **Non-current assets —** kept for more than one year. **Current assets —** cash or turned into cash within one year. **Current liabilities —** debts due within one year. **Non-current liabilities —** long-term debts. **Intangible assets —** non-physical assets such as patents, goodwill, software and brand value.
🔍 What the figures may mean: **High gross profit but low net profit —** overheads are too high. **Low gross profit —** price may be too low or COGS too high. **Negative working capital —** short-term liquidity risk. **Strong asset base but high debt —** financial position may still be risky. **Net assets = equity —** use this as a check.
[Diagram: balance-sheet-equation]
HL exam tip: Do not just copy figures. Explain what the figure shows about the business, and where possible compare it with another figure, another year or a benchmark.
Past-paper tip: Recent HL Paper 2 questions tested intangible assets, profit before interest and tax, profit margin, and straight-line depreciation. Be ready to calculate accurately, show working, use the correct sign, and explain why a method may be unsuitable in context.
Construction tip: If you construct a balance sheet, follow the IB prescribed format with headings, totals and date. If it does not follow the prescribed format, markschemes can cap the mark even if most numbers are right.
Example: A strong answer: High gross profit but low net profit means the business is making a good margin on sales, but overheads such as wages, rent or marketing are too high, so overall profitability is weaker than expected.
Important: Common triggers are: state types of intangible assets, calculate profit before interest and tax, calculate profit margin, calculate depreciation, explain a disadvantage of a depreciation method, construct an income statement, construct a balance sheet, explain what final accounts reveal, or discuss their limitations.
- Identify whether the question is about the income statement, balance sheet, depreciation or stakeholder use
- Use the correct formula or accounting term
- Calculate carefully and show working if needed
- Use the correct sign, label or percentage
- Explain what the figure means for the business
- Compare where possible and add a limitation if the question is analytical or evaluative