Chapter 5.2: Statement of Financial Performance Flashcards
What is a Statement of Financial Performance?
It is a financial statement that shows how much income, expenses, and profit or loss a business has over a period of time.
What is the aim of a business organisation?
To make a profit.
How does a business earn an income?
By selling goods or providing services.
What does a business incur in earning that income?
Expenses.
What does a Statement of Financial Performance show?
All the income the business earns and all the expenses it incurred to earn this income.
What does the Statement of Financial Performance measure?
The profitability of a business.
What is the formula to calculate profit or loss?
Profit / Loss = Total Income - Total Expenses Note: Profit = Income > Expenses Loss= Income < Expenses
What does profitability refer to?
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.
What are the key things to note about the Statement of Financial Performance?
- 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.
What does the Statement of Financial Performance do?
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.
How is the profit or loss of a business calculated?
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.
Why is there a need to ensure that the income and expenses are related to the same period of time?
In order to adhere to / comply with the matching concept.
What is the matching concept?
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.
When does a business usually calculate its profit?
At regular intervals of time called the financial period.
How often do most businesses prepare their Statements of Financial Performance?
Monthly, quarterly (three-monthly), half-yearly and at least once a year.
Why is it important to know exactly which time period the profit is being calculated for?
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.
Is it important to indicate on the Statement of Financial Performance he financial period for which the Statement of Financial Performance is prepared?
Yes.
Revision: What is the accounting period concept?
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.
Is it necessary to follow a particular format on how the income and expenses are shown when preparing a Statement of Financial Performance?
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.
What are the two types business entities that I must learn in my POA course?
Sole Proprietorships and Companies.
Are the format of the Statement of Financial Performance for both forms of entities the same?
Yes.
How many types of Statement of Financial Performance must I know?
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.
What does the Statement of Financial Performance for a trading business comprise of?
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.
Trading Portion of the Statement of Financial Performance: What does the gross profit or gross loss measure?
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.
