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
