3.5.1 Interpretation Of Financial Statements Flashcards
Finance cost
Interest paid by a business on any borrowed money.
Finance income
Interest received by a business on any money held in deposit accounts
What is a statement of financial position) (balance sheet)
Which shows the assets, liabilities and capital of the business
Statement of comprehensive income ( profit and loss account )
Which starts with the profit or loss for the year and then shows other items of comprehensive income such as gains made on currency transactions
What does a statement comprehensive income contain?
- revenue
- cost of sales
- gross profit
- selling expenses
- administrative expenses
- operating profit
- finance costs
- profit for the year
- profit for the year after tax
What is revenue
This is the money, the business receives from selling goods and services. It is sometimes called turnover. Revenue must not include VAT. This is because VAT does not belong to the business.
What is cost of sales
This refers to the production cost of the business. More specifically, is released to direct costs such as raw materials and labour.
What is gross profit
This is the cost of sales subtracted from the revenue. It is the profit made before the deduction of general overheads.
What is selling expenses?
A business is likely to incur a range of expenses that are directly related to the selling of its products.
What is administrative expenses?
These are the general overheads or indirect costs of the business. Examples might include office, salaries, expenses, claims, by senior staff, stationary supplies, IT expenses, accountancy, fees, and telephone bills.
What are operating costs ?
If the selling and administrative costs are subtracted from the gross profit, we get the operating profit. The operating profit is the profit generated from the firms core activities. It does not include any income from financial investments made by the business.
What is finance cost?
- If a business borrows money, it will have to pay interest to the lender. The amount paid will be entered in the statement of comprehensive income as a financial cost. However, a business may also receive interest if it has money in deposit accounts.
What is profit for the year?
If the cost of finance is subtracted from the operating cost the net profit for the year is determined. This is the profit before taxation.
What is the profit for the year after tax?
- This is the amount of money that has been left over after all the expenses including taxation have been deducted from the revenue. It is often referred to as the bottom line. The money belongs to the owners of the business. In the case of a limited company it belongs to the shareholders. However, it may not necessarily be distributed to the shareholders. Some of it might be retained.
Why are shareholders interested in the statement of comprehensive income?
Shareholders are likely to be interested in a profit made by the business particularly profit for the year after tax. This is an effective guide to the performance of a business, but no means the only guide
Why are mangers and directors interested in the statement of comprehensive income?
They are likely to use key information in the statement of comprehensive income to monitor progress.
Why are employees interested in the statement of comprehensive income?
If employees or their representatives are seeking a wage increase in, might be helpful to have access of to the information in a statement of comprehensive of income when presenting a claim
