Key Idea: Final accounts show how a business is performing and what financial position it is in. In 3.4, IB mainly wants you to understand the income statement, the balance sheet, what they reveal to stakeholders, and how to interpret them properly.
📄 Income statement: **Income statement —** shows revenue, costs and profit over a period of time. **Focus —** business performance. **Main outputs —** gross profit and net profit. **Question it answers —** did the business make profit or loss?.
📋 Balance sheet: **Balance sheet —** 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]
🏢 Balance sheet structure: **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.
🔍 What the figures may mean: **High gross profit but low net profit —** overheads are too high. **Low gross profit —** selling price may be too low or COGS too high. **Negative working capital —** short-term liquidity risk. **Net assets = equity —** use this as a check.
[Diagram: balance-sheet-equation]
Do not just copy figures. In exam answers, explain what the figure shows about the business and, where possible, compare it with another figure, another year, or a benchmark. Markschemes reward going beyond simple restatement.
For calculation/accounting questions, show every step clearly. IB markschemes often award marks for method as well as the final answer, so even if the final number is wrong, good working can still earn credit.
If you construct a balance sheet, use the IB prescribed format with clear headings and totals. Also always check that net assets = total equity at the end.
Tip: Example: High gross profit but low net profit means the business is making a good margin on sales, but expenses such as rent, wages or marketing are too high, so overall profitability is weaker than expected.
- State what the figure means
- Explain the likely reason behind it
- Link it to the business effect
Important: Common triggers are: construct an income statement, calculate COGS/gross profit/net profit, construct a balance sheet, explain what final accounts reveal, comment on financial performance, explain how stakeholders use final accounts, or discuss limitations of final accounts.
- Identify whether the question is about the income statement, balance sheet, stakeholder use or limitations
- Use the correct formula or accounting term
- Calculate carefully and show working if needed
- Explain what the figure means for the business
- Compare where possible and add a limitation if the question is analytical or evaluative