3.5.1 Interpretation of financial statements Flashcards
what are 2 financial statements?
statement of comprehensive income (profit + loss account)
statement of financial position (balance sheet)
define revenue
money made from sales
define cost of sales with 2 examples
direct production costs e.g. raw materials + labour
define gross profit
profit before general overheads of the business
define selling expenses with example
expenses directly related to selling products e.g. advertising
define administrative costs with example
general overheads/ indirect costs of the business e.g. office salaries
define finance costs
interest
define operating profit
gross profit with selling + admin costs deducted
define net profit (profit for the year)
profit after all total costs deducted
what is net profit after tax commonly referred to as?
bottom line
why would shareholders be interested in statement of comprehensive income (profit + loss account)?
interested in profit - growing/ performing well? should dividends be increased?
why would managers + directors be interested in statement of comprehensive income (profit + loss account)?
will analyse data to understand the impact of their spending
why would employees be interested in statement of comprehensive income (profit + loss account)?
high profits - pay rise? pay related bonuses? job security?
why would suppliers be interested in statement of comprehensive income (profit + loss account)?
may check before agreeing contract terms - check invoices are paid on time
why would the government be interested in statement of comprehensive income (profit + loss account)?
business must, by law, produce one + ensure correct taxation payed
what is a statement of financial position (balance sheet)?
summary of firm’s assets, liabilities + capital
what does a statement of financial position (balance sheet) show?
value of assets which will equal liabilities + capital because any rise in total assets must be funded by an equal rise in capital/ liabilities
what is an asset?
something a business owns
what is the difference between a current asset and a fixed (non-current) asset? with examples
current = held for less than 12 months e.g. inventory, cash in bank
fixed (non-current) = held for more than 12 months e.g. equipment, warehouse
what is a liability?
something a business owes (a debt)
what is the difference between a current asset and long-term (non-current asset)?
current = payed off in less than 12 months e.g. overdraft, trade credit
long-term (non-current) = payed off in more than 12 months e.g. loans, mortgages
why would a shareholder be interested in a statement of financial position (balance sheet)?
dividends - how much is payed?
why would managers + directors be interested in a statement of financial position (balance sheet)?
too many current liabilities? what needs repaying?
why would suppliers + creditors be interested in a statement of financial position (balance sheet)?
look at liabilities - can they pay credit?
what is a statement of comprehensive income (profit + loss account?)
helps evaluate performance of a business
