3.5.1 Interpretation Of Financial Statements Flashcards
1
Q
What is the statement of comprehensive income?
A
- Also known as profit & loss account
- It shows the income & expenditure of a business over a period of time
2
Q
What is the stakeholder interest in a profit & loss account?
A
- Shareholders-Interested in profits earned, business growth & dividend payments
- Employees- Interested in profits earned, & potentialy for wage increases & job stability
- Managers & Directors- Interested in key performance data such as an improvement in sales revenue & net profit
- Government- Used to determine how much tax is payable
3
Q
What is the statement of financial position?
A
- Shows the financial structure of a business at a specific point in time
- Contains financial information required to draw conclusions about liquidity of the business
It identifies a businesses assets & liabilities & specifies the capital (money) used to fund the business
The Statement of Financial Position is also known as the Balance Sheet
4
Q
Define liquidity.
A
- The ability of a business to meet its short term commitments (e.g. payments to creditors) with its available assets
- A business that cannot pay its bills will usually fail very quickly, even if they are profitable
5
Q
Why would shareholders be interested in the balance sheet?
A
- Used to identify the asset structure of the business & how their investment has been put to use
- Used to calculate the working capital of the business & determine its solvency
- Used to determine the rough value of a business, which helps a judgement on whether their investment is growing
6
Q
Why would managers & directors be interested in the balance sheet?
A
- Used to identify the financial position of a business at a given point in time
- Useful to assess the working capital position of the business & determine if there are enough liquid current assets to pay its bills
- Provides information on capital structure of the business, which helps guide decisions on whether to raise further funds through borrowing or via other means (e.g. share issue)
7
Q
Why would employees be interested in the balance sheet?
A
- Is the business financially stable or are jobs at risk?
- Has the businesses performance improved or worsened?
- What is the business spending its money on?
