3.5.1 interpretation of financial statements Flashcards
define profit
Profits are the surplus of revenue over costs
formula for profit
total revenue – total costs = Profit
define profitability
Profitability measures the financial performance of a business by comparing profits achieved to a second variable e.g. revenue
State 3 measures of profitability
Gross profit margin
Operating profit margin
Profit for the year (net profit) margin
What is the purpose of a statement of comprehensive income?
To summarise a business’ trading activities and expenses to show whether it has made a profit or loss
Forms part of a business plan
Used by investors e.g. banks to see the ability of a business to repay loans before lending money
What is the purpose of a statement of financial position
To summarise the net worth of a business at a given point in time (what it owns and owes)
Forms part of a business plan
Used by investors e.g. banks to see the health of a business before lending money
define sales revenue
Money coming in from sales
sales revenue formula
Quantity sold x selling price
define cost of sales
Costs directly linked to the production of the goods or services sold e.g. raw materials
gross profit formula
Sales revenue – cost of sales
define Other operating expenses
All other costs associated with the trading of the business e.g. salaries and marketing expenditure
operating profit formula
Gross profit – expenses
define interest
Interest paid on debt or received
Profit for the year (net profit) formula
Operating profit - interest and taxation and taking account of exceptional items (tax will still need to be paid)
for the following stakeholders name the Potential interest in a statement of comprehensive income
suppliers
managers
owners
government
local community
employees
shareholders
society
customers
creditors
SMOGLESS CC
suppliers-Credit agreements, degree of risk, cost/price negotiations
managers - Decision making e.g. suppliers & budgets, financial incentives (self & employees
owners -Strategic decisions e.g. investment in R&D or new markets, managers’ efficiency
government-Tax liability, exploitation of customers or employees
local community -ob security, CSR e.g. ability to support local causes
employees- Job security, wage negotiations, financial incentives
shareholders- Dividend payments, managers’ and owners’ efficiency and decision making
society -Tax liability, job security, fines or cost savings due to environmental actions
customers- Exploitation, reliability of supplies
creditors-Degree of risk, willingness to extend credit terms, use of debt factoring
non current assets are
Long term or fixed assets
current assets are
Short term assets
inventories are
The value of stock held
receivables are
Cash owing from credit sales
cash and cash equivalents are
Cash in hand or at the bank
total current assets are
All current assets added together
current liabilities are
Money owed to be repaid in the short term
net current assets are
Total current assets minus current liabilities
non current liabilities are
Long term debts
