Chapter 5.2: Statement of Financial Performance

Question 1

What is a Statement of Financial Performance?

Answer 1

It is a financial statement that shows how much income, expenses, and profit or loss a business has over a period of time.

Question 2

What is the aim of a business organisation?

Answer 2

To make a profit.

Question 3

How does a business earn an income?

Answer 3

By selling goods or providing services.

Question 4

What does a business incur in earning that income?

Answer 4

Expenses.

Question 5

What does a Statement of Financial Performance show?

Answer 5

All the income the business earns and all the expenses it incurred to earn this income.

Question 6

What does the Statement of Financial Performance measure?

Answer 6

The profitability of a business.

Question 7

What is the formula to calculate profit or loss?

Answer 7

Profit / Loss = Total Income - Total Expenses Note: Profit = Income > Expenses Loss= Income < Expenses

Question 8

What does profitability refer to?

Answer 8

Whether a business earns enough income to cover its expenses. A business is profitable when the sales revenue it earns from selling products and income from other activities are more than all the expenses it incurred to earn the income.

Question 9

What are the key things to note about the Statement of Financial Performance?

Answer 9

1. The Statement of Financial Performance measures the profitability of a business. 2. The Statement of Financial Performance is prepared for a specified time period. 3. The Statement of Financial Performance is a formal report.

Question 10

What does the Statement of Financial Performance do?

Answer 10

It tells the story of how a business makes its profit. A trading business buys goods and then sells them. A service business provides services; it does not buy or sell any goods. Their Statements of Financial Performance will be different because the ways the two types of businesses make their profits are different.

Question 11

How is the profit or loss of a business calculated?

Answer 11

It is calculated for a specified period of time. To find the profit or loss from 1 January to 30 June 20X2, only the income and expenses related to this period is used. Income and expenses before 1 January 20X2 or after 30 June 20X2 must not be included.

Question 12

Why is there a need to ensure that the income and expenses are related to the same period of time?

Answer 12

In order to adhere to / comply with the matching concept.

Question 13

What is the matching concept?

Answer 13

For any given financial period, only the income earned and expenses incurred during the period should be recorded. Income earned and expenses incurred before or after the financial period should not be included. The business must also identify all the expenses incurred to generate the income earned during the financial period.

Question 14

When does a business usually calculate its profit?

Answer 14

At regular intervals of time called the financial period.

Question 15

How often do most businesses prepare their Statements of Financial Performance?

Answer 15

Monthly, quarterly (three-monthly), half-yearly and at least once a year.

Question 16

Why is it important to know exactly which time period the profit is being calculated for?

Answer 16

So that the correct values of income and expenses are used. For example, if a business calculated profit every six months and has a financial year from 1 Jan to 31 Dec, then the profit is calculated for the period from 1 Jan to 30 Jun and from 1 Jul to 31 Dec.

Question 17

Is it important to indicate on the Statement of Financial Performance he financial period for which the Statement of Financial Performance is prepared?

Answer 17

Yes.

Question 18

Revision: What is the accounting period concept?

Answer 18

The life of a business is divided into equal periods. Financial statements are prepared at regular intervals of the life of the business rather than at the end.

Question 19

Is it necessary to follow a particular format on how the income and expenses are shown when preparing a Statement of Financial Performance?

Answer 19

Yes. The fixed format is to help all stakeholders, who are interested in the profitability of the business, understand the Statement of Financial Performance. As the Statement of Financial Performance will be read by the public, it is laid out in a formal style.

Question 20

What are the two types business entities that I must learn in my POA course?

Answer 20

Sole Proprietorships and Companies.

Question 21

Are the format of the Statement of Financial Performance for both forms of entities the same?

Answer 21

Yes.

Question 22

How many types of Statement of Financial Performance must I know?

Answer 22

Two… one for the trading business and the other for the service business. Note: A trading business buys goods and then sells them. A service business provides services; it does not buy or sell any goods. As such, their Income Statement will be different because the ways these two types of businesses make their profits are different.

Question 23

What does the Statement of Financial Performance for a trading business comprise of?

Answer 23

Two portions: (1) The trading portion which shows the gross profit or loss. (2) The profit and loss portion which shows the profit or loss for the period.

Question 24

Trading Portion of the Statement of Financial Performance: What does the gross profit or gross loss measure?

Answer 24

It measures the trading performance: the ability of a business to sell its goods higher than its costs of costs. This is not the final or overall indicator of how profitable a business is.

Question 25

What is the formula to calculate gross profit or gross loss?

Answer 25

Gross Profit / Gross Loss = Net Sales Revenue - Cost of Sales Note: Net Sales Revenue = Sales Revenue - Sales Returns

Question 26

Is the gross profit or gross loss the final or overall indicator of how profitable a business is?

Answer 26

No.

Question 27

Profit and Loss portion of the Statement of Financial Performance: What does the profit or loss portion of the statement of financial performance show?

Answer 27

The profit or loss for the period. This is the final and overall indicator of how profitable a business is.

Question 28

What is the formula to calculate profit or loss?

Answer 28

Profit / Loss = Total Income - Total Expenses = Gross Profit + Other Income - Total Expenses Note: Total Income = Net Sales Revenue + Other Income Total Expenses = Cost of Sales + Other Expenses

Question 29

Give some examples of expenses.

Answer 29

Advertising, office expenses, general expenses, insurance expense, motor vehicle expenses, rental expense, utilities, repairs, salaries, discount allowed, etc.

Question 30

Give some examples of other income.

Answer 30

Commission received, discount received, interest received, rent received, etc.

Question 31

Does the Statement of Financial Performance of a service business have a trading portion?

Answer 31

No. It only has one measurement of profitability of profit or loss for the period.