6.4 Analysing The Financial Performance Of A Business

Question 1

What is an income statement?

Answer 1

A financial statement showing a business’s revenues and costs and thus its profit or loss over a period of time

Question 2

What is a statement of financial position?

Answer 2

Sets out the assets and liabilities that a business has on a particular day

Question 3

Why do businesses prepare financial statements?

Answer 3

• Legislation, it is required to do so
• To help business managers make decisions
• To guide investors

Question 4

What are the main components of the income statement?

Answer 4

• The revenue earned by the business - revenue is also known as ‘sales income’
• The costs of production that have been paid by a business
• The amount of profit earned by the business or the loss it has made

Question 5

What are the main components of a statement of financial position?

Answer 5

• Assets (current and non-current)
• Liabilities (current and non-current)
• Working capital (net current assets)
• Capital employed

Question 6

What is an asset?

Answer 6

Anything that is owned by a business

Question 7

What are the two different types of assets?

Answer 7

Non-current and current assets

Question 8

What are non-current assets?

Answer 8

An asset that a business keeps for many years and creates revenue for the business and enables it to earn profits (e.g shops and vehicles)

Question 9

What are current assets?

Answer 9

Assets that business keep for a short time (normally less than a year) and are used to settle debts usually (e.g cash and inventories of raw materials)

Question 10

What is a liability?

Answer 10

A sum of money that is owed by a business to another business or an individual

Question 11

What are the two types of liabilities?

Answer 11

Current and long-term (non-current) liabilities

Question 12

What is a current liability?

Answer 12

Any debts a business owes that will need to be paid back within a year (e.g overdraft,trade credit)

Question 13

What is non-current liabilities?

Answer 13

Money borrowed that is paid back is more than a year (e.g mortgages or a long-term bank loan

Question 14

What is something to note with the statement of financial position?

Answer 14

It is a snapshot in time

Question 15

How do you make judgements on businesses performances (in income statements) ?

Answer 15

• Current performance
• Performance against previous years
• Performance against competitors
• Performance from the perspective of a range of stakeholders

Question 16

How do you calculate gross profit margin?

Answer 16

Gross profit / revenue x 100

Question 17

How do you calculate net profit margin?

Answer 17

Net profit / revenue x 100

Question 18

NOTE:

Answer 18

The higher the gross profit margin and net profit margin is the greater the financial performance