3.5.1. Interpretation Of Financial Statements

Question 1

Statement of comprehensive income

Answer 1

Profit and loss account
Shows the income and expenditure of a business over a period of time. Shows costs associated with generating revenue.

Question 2

Statement of financial position (balance sheets)

Answer 2

-Shows how wealthy a business is.
-Shows the financial structure of a business at a specific point in time, identifying the businesses assets, liabilities and specifies capital used to fund the business.

Question 3

Types of assets

Answer 3

-Non-Current assets: used over and over again to generate profit.
Ie. Machinery, land, equipment, vehicles, patents etc

-Current assets: changed regularly. Short term
Ie. Stock, receivables(money owed to business by customers who brought on credit), cash etc.

Question 4

Liquidity

Answer 4

Firms ability to describe a firms ability to pay its bills and to finance short term spending.

Question 5

Capital on balance sheet

Answer 5

1.Banks- loans carry interest that needs to be repaid

2. Shareholders- sells shares to receive share capital.
3. Profits- total amount of retained profit that’s been kept in the business

Question 6

Stakeholders interest in balance sheets

Answer 6

-Bankers: keen to understand businesses reliance on debt for long term finance.

-Suppliers: interested in short term health of the business

-Staff: may look at reserves to assess whether the wealth of the business has gone up or down

Question 7

Gross profit

Answer 7

revenue- cost of sales

Question 8

Operating profit

Answer 8

Gross profit- overhead expenses

Question 9

Profit before and after tax

Answer 9

Interest earned in money - Interest on money
held by the business burrowed by business