3.5.1 Interpretation of financial statements Flashcards
What are the alternative names for an income statement?
A statement of comprehensive income
Profit and loss account
What is an income statement?
A historical record of the trading of a business over a specific period that shows the profits or loss made by the business.
What is the structure of an income statement?
Revenue Costs of sales GROSS PROFIT Fixed overheads OPERATING PROFIT Net financing costs PROFIT BEFORE TAX Corporation tax PROFIT FOR THE YEAR
What are cost of sales also known as?
direct costs
What is the current rate of corporation tax?
19%
What is profit for the year also known as?
net profit
What is included in net financing costs?
- interest gained or lost on loans
What factors impact revenue?
demand
marketing
degree of competition
price
What factors impact the costs of sales?
running costs
new technologies
output (E.O.S/D.E.O.S)
suppliers
What factors impact gross profit?
production method
controlling of costs
What factors impact fixed overheads?
cost of rent
staff relations
What does operating profit give an insight into?
INTERNAL TRADING ACTIVITIES
What stakeholders are involved in the income statement and why?
Investors = worthwhile to invest, success? Staff = job security and performance? pay rise Government = level of tax, grant? ethical practices Suppliers = successful? Shareholders = controlling interest possibly? Banks = viable for loan Owner = reducing costs and direction of the business
What is a balance sheet also known as?
A statement of financial position
In layman’s terms, outline what a balance sheet shows?
The way capital has been raised and how that capital is used.
What is a balance sheet?
A financial document that takes a snapshot of the business’ assets and liabilities summarising a businesses net worth.
What two basic things make up a balance sheet?
assets and liabilities
How often can a business make a balance sheet?
anytime
Why would a business want to make a balance sheet before agreeing to a large-long term loan?
As a method of window dressing, the business would want to create a balance sheet before as it would improve liquidity ratios.
What is the structure of a balance sheet?
Non-current assets Current assets Current liabilities WORKING CAPITAL/NET CURRENT ASSETS Non-current liabilities NET ASSETS Financed By TOTAL EQUITY
What are examples of non-current assets?
land/building/plant and machinery/goodwill
What is goodwill?
How people perceive your brand
What are examples of current assets?
stock, debtors, cash,
What are debtors also called?
receivables
What are examples of non-current liabilities?
mortgage
What is the equation for working capital?
Current assets - current liabilities
How do you work out net assets?
(Non-current assets + net current assets) - NCL
What is another term for net current assets?
working capital
What two values should equal?
total equity and net assets
What do the profit margin equations show you?
Shows % of profit which is revenue
What does ROCE show you?
% of the capital got back from an investment
What is liquidity a measure of?
the ability to pay short-term debts
What things should you work out when asked to compare financial performance?
- ROCE
- Profit Margins
- Ratios (Acid/Current)
- Gearing
