3.5.1 Interpretation of financial statements Flashcards
define finance cost
interest paid by a business on any borrowed money
define finance income
interest recieved by a business on any money held in deposit accounts
what are the two types of financial statements:
statement of financial position
statement of comprehensive income
what does the statement of comprehensive income consist of?
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
what does a statement of financial position consist of?
balance sheet
shows assets and liabilities of a firm at a particular point of time, shows how much firm is worth -> useful for stakeholders
define revenue
the money the business recieves from selling goods and services
define cost of sales
refers to the production costs of a business like costs of raw materials
define gross profit
the cos - from revenue, profit made before deduction of general overheads
define selling expenses
expenses that are directly related to the selling of its products.
define non current assets
assets that are not expected to be sold within 12 months
define goodwill
non physical asset, the amount the business is worth above the value of assets
what are some other intangible assets?
brand names, copyrights, patents and trademarks
explain why property, plant and equipment are non current assets?
tangible assets the business own
define investments
the financial assets owned by the company
define current assets
assets owned by the business which are expected to be turned into cash within 12 months
what are categories of current assets?
Inventories
Trade and other recievables like trade debtors (owed to the bus)
cash at bank/on hand
define current liabilities
any money owed by the business that is expected to be repaid within 12 months
what are the categories of current liabilities?
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
define non current liabilities
money owed by the company that doesnt have to be repaid within 12 months
e.g. mortgages
what are the categories of non current liabilities?
other loans & borrowings
retirement pension obligations
provisions - made if a business is likely to incur expenditure in the future
define net assets
the value of all assets minus the value of all liabilities
same value as shareholders equity
define equity
the amount of money owed to shareholders, contains share capital & reserves
what are some categories inc in equity?
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
define capital
the money introduced by the owners to the business
define admin expenses
the general overheads of the business
define operating profit
profit after selling and administrative costs are minused from gross profit
define profit for year
the cost of finance taken away from operating profit
-before tax
define profit for year after tax
the amount of money left over after all expenses have been deducted from revenue
what info does a statement of comprehensive income contain?
Revenue, cos, gross profit, selling expenses, admin expenses, operating profit, finance costs, profit for year before and after tax
what info does a statement of financial position contain?
assets, liabilities, capital, non-current assets, current assets, current liabilities, non current liabilities, net assets and equity
who would be interested in the SOCI?
STAKEHOLDERS
SHAREHOLDERS
Managers
Loan providers
suppliers
employees
who would be interest in the SOFP?
STAKEHOLDERS,
SHAREHOLDERS
MANAGERS
LOAN PROVIDERS
Why are stakeholders int in SOCI?
COMPARE across several years -> look for trends
why are shareholders int in soci?
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
why are managers int in soci?
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
why are loan providers int in soci?
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
why are suppliers int in soci?
check if firms revenue is enough to pay its suppliers
new supplier wont sell if they are unlikely to get paid
why are employees int in soci?
to look at profitability as cont trading and maintain employment
-use info to base of negotiations for higher salaries
why are shareholder int in sofp?
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
why are managers int in the sofp?
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
what is and why is solvency important?
solvency is the bus ability to pay its debts
-can help assess whether current assets are larger than current liabilities = solvent, other way = insolvent
what is and why is liquidity important?
the ability of the business to turn assets into cash
-CA more liquid than NCA, bus w low value of current assets -> low liquidity
why are different stakeholders int in liquidity and solvency?
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
