3.5.1 Interpretation of financial statements

Question 1

define finance cost

Answer 1

interest paid by a business on any borrowed money

Question 2

define finance income

Answer 2

interest recieved by a business on any money held in deposit accounts

Question 3

what are the two types of financial statements:

Answer 3

statement of financial position
statement of comprehensive income

Question 4

what does the statement of comprehensive income consist of?

Answer 4

profit and loss account
starts with the profit and loss for the year, revenue, costs and comprehensive income like gains made on currency transactions
-indicates if a firm is profitable ->+ net profit

Question 5

what does a statement of financial position consist of?

Answer 5

balance sheet
shows assets and liabilities of a firm at a particular point of time, shows how much firm is worth -> useful for stakeholders

Question 6

define revenue

Answer 6

the money the business recieves from selling goods and services

Question 7

define cost of sales

Answer 7

refers to the production costs of a business like costs of raw materials

Question 8

define gross profit

Answer 8

the cos - from revenue, profit made before deduction of general overheads

Question 9

define selling expenses

Answer 9

expenses that are directly related to the selling of its products.

Question 10

define non current assets

Answer 10

assets that are not expected to be sold within 12 months

Question 11

define goodwill

Answer 11

non physical asset, the amount the business is worth above the value of assets

Question 12

what are some other intangible assets?

Answer 12

brand names, copyrights, patents and trademarks

Question 13

explain why property, plant and equipment are non current assets?

Answer 13

tangible assets the business own

Question 14

define investments

Answer 14

the financial assets owned by the company

Question 15

define current assets

Answer 15

assets owned by the business which are expected to be turned into cash within 12 months

Question 16

what are categories of current assets?

Answer 16

Inventories
Trade and other recievables like trade debtors (owed to the bus)
cash at bank/on hand

Question 17

define current liabilities

Answer 17

any money owed by the business that is expected to be repaid within 12 months

Question 18

what are the categories of current liabilities?

Answer 18

Borrowings
Trade and other payables - money owed by the bus to other businesses
dividends payable - money put away to pay shareholders
current tax liabilities - corporation tax, income tax and other tax owed by the business with 12 months

Question 19

define non current liabilities

Answer 19

money owed by the company that doesnt have to be repaid within 12 months
e.g. mortgages

Question 20

what are the categories of non current liabilities?

Answer 20

other loans & borrowings
retirement pension obligations
provisions - made if a business is likely to incur expenditure in the future

Question 21

define net assets

Answer 21

the value of all assets minus the value of all liabilities
same value as shareholders equity

Question 22

define equity

Answer 22

the amount of money owed to shareholders, contains share capital & reserves

Question 23

what are some categories inc in equity?

Answer 23

share capital - the money paid by shareholders for their shares when they were originally issued
share premium account - diff between the value of new shares issued bt the company and their nominal value
other reserves
retained earnings

Question 24

define capital

Answer 24

the money introduced by the owners to the business

Question 25

define admin expenses

Answer 25

the general overheads of the business

Question 26

define operating profit

Answer 26

profit after selling and administrative costs are minused from gross profit

Question 27

define profit for year

Answer 27

the cost of finance taken away from operating profit
-before tax

Question 28

define profit for year after tax

Answer 28

the amount of money left over after all expenses have been deducted from revenue

Question 29

what info does a statement of comprehensive income contain?

Answer 29

Revenue, cos, gross profit, selling expenses, admin expenses, operating profit, finance costs, profit for year before and after tax

Question 30

what info does a statement of financial position contain?

Answer 30

assets, liabilities, capital, non-current assets, current assets, current liabilities, non current liabilities, net assets and equity

Question 31

who would be interested in the SOCI?

Answer 31

STAKEHOLDERS
SHAREHOLDERS
Managers
Loan providers
suppliers
employees

Question 32

who would be interest in the SOFP?

Answer 32

STAKEHOLDERS,
SHAREHOLDERS
MANAGERS
LOAN PROVIDERS

Question 33

Why are stakeholders int in SOCI?

Answer 33

COMPARE across several years -> look for trends

Question 34

why are shareholders int in soci?

Answer 34

see how profitable it is, high profit = high dividends
trends show how risky an invesment is and how much of a bus profit is spend on dividends
good firms = one which inc revenue and keeps costs low

Question 35

why are managers int in soci?

Answer 35

int in revenue and expenses of firm over time to see changes -> figure out why
compare between departments to identify where reductions can be made
compare with competitors to indicate if firms costs are too high

Question 36

why are loan providers int in soci?

Answer 36

int in operating profit as this is where the interest on loans is paid from
-be unwilling to lend if bus has low operating profit as there is risk bus cant pay back the interest

Question 37

why are suppliers int in soci?

Answer 37

check if firms revenue is enough to pay its suppliers
new supplier wont sell if they are unlikely to get paid

Question 38

why are employees int in soci?

Answer 38

to look at profitability as cont trading and maintain employment
-use info to base of negotiations for higher salaries

Question 39

why are shareholder int in sofp?

Answer 39

shows worth of firm
compare fp of same date across years to pick out trenfs to eval financial perf.
indicator of whether profit is likely to increase or decrease
an increase in reserves -> increase in profits-> higher divedends
int in sources of finance -> if has to pay lods of lenders back -> little profit after interest is paid

Question 40

why are managers int in the sofp?

Answer 40

assess whether bus has financial flexibility to acquire capital - consider if bus can cope w borrowing more money to raise capital rather than selling non c assets -> cope w more debts

Question 41

what is and why is solvency important?

Answer 41

solvency is the bus ability to pay its debts
-can help assess whether current assets are larger than current liabilities = solvent, other way = insolvent

Question 42

what is and why is liquidity important?

Answer 42

the ability of the business to turn assets into cash
-CA more liquid than NCA, bus w low value of current assets -> low liquidity

Question 43

why are different stakeholders int in liquidity and solvency?

Answer 43

mangers & owners: assess if its about to go bankrupt -> make changes to prevent
suppliers: see how liquid assets are -> as solvent firm w more liquid assets -> better at paying bills
loan providers: know the firms ability to pay back loans and interest