3.5

Question 1

Financial statements

Answer 1

Written records that convey the business activities and the financial performance of a company

Question 2

Profit and loss statement

Answer 2

A financial document showing the comapnies revenue or income over the year and their costs and expenditure

Question 3

Why is profit and loss statement useful for a business?

Answer 3

• Legal requirement
• Sums up performance of business to stakeholders
• Can be compared with previous years performance
• Investors/lenders need to see one before making deals
• Can help to forecast future profits and helps with planning

Question 4

Stakeholder interest in P&L account

Answer 4

Shareholder- want to know final profit figure that the dividends will be paid out
- Investors - want to know the profitability of the business - is it worth investing or will it be a risk
- Employees and managers - may wish to know the expenses of the business

Question 5

Balance sheet

Answer 5

A statement of financial position
- Shows how much a business is worth
- Show’s business assets, liabilities and how it is financed
- Snapshot (can be window dressed)
- Shows sources of funds and uses of them (can’t just disappear)
- Plc’s and Ltd’s have to publish these

Question 6

Capital employed

Answer 6

Measure of the value of assets - current liabilities (must equal net assets)

Question 7

Non current assets

Answer 7

• Long term (fixed)
• Intangible assets e.g. trademark
• Tangible assets e.g. property

Question 8

Current assets

Answer 8

• Short term
• Inventories
• Trade and other receivables
• Cash

Question 9

Non current liabilities

Answer 9

• Long term
• Borrowings
• Retirement benefit obligations
• Provision for liabilities (money set aside for the future)
• Other non-current liabilities (for repairs etc)

Question 10

Current liabilities

Answer 10

• Short-term
• Borrowings (short term loans)
• Current tax liabilities (corp tax)
• Provision for liabilities (to pay borrowings, tax etc)

Question 11

Uses and limitations of balance sheet

Answer 11

+/ - Evaluate performance of business
- Evaluate potential to an investor
- Summary valuation of the business

-/ - Value of assets stated may not be the same as the amount they will sell it for
- Intangibles may include goodwill which is hard to put value on
- Static snapshot of one day and the next day it may change

Question 12

Why would stakeholders be intersted in balance sheet

Answer 12

• Govt use financial info to calculate tax
• Investors decide if capital is used effectively
• Directors and senior managers use to assist medium - long term planning
• Creditors determine ability to pay bills
• Potential investors decide if it’s a good investment