Financial Statements Flashcards
What is an Income Statement?
An income statement shows the business’ financial performance over a given time period e.g. one year.
The income statement shows the business has made a gross profit
of £320,000 before considering other expenses. It shows a
net profit of £110,000 has been made.
An Income Statement shows
Sales revenue - the amount of money received for selling goods or services
Gross profit - the profit made from buying and selling goods. Gross profit is calculated by deducting cost of sales from sales revenue
Profit for the year - the profit made after all other operating expenses have been deducted from the gross profit
Purpose of an Income Statement
- shows the profit/loss made by the company from the buying and
selling of goods - can be used to compare gross profit and profit for the year
over different years of trading to identify any trends and to aid
decision making - comparisons can be made with similar companies in the same
industry - can be used to compare expenses and sales over the years or
between department to see if there are any areas where they can
be minimised or improved
Statement of Financial Position
A statement of financial position shows the value of a business on a particular date.
A balance sheet shows:
assets
- what the business owns
liabilities
- what the business owes
Non-current Assets
Non-current assets show the current value of major purchases that help in the running of the business, like delivery vans, premises or PCs.
Non-current assets are usually owned for longer than a year.
Current Assets
Current assets show the cash or near-cash available to the firm. This includes inventory (stock) ready to sell, money owed to them by debtors and cash in the bank.
The value of current assets is likely to change in the short term.
Current Liabilities
Current liabilities are any debts a business owes that will need to be paid back within a year (short-term debts).
Net current Assets
Net current assets show the value of the company once all current
liabilities have been taken from the assets.
Non-current Liabilities
Non-current liabilities usually include long-term loans such as a long-term bank loan or debentures that do not need paid back within a year.
Equity and reserves
Equity and reserves show the money that has been invested by the owners and any profit that has been kept by the business
(retained profits).
Net worth
Net worth adds together the businesses equity and reserves, and its net assets. This shows the overall worth of the business on the day the statement of financial position was drawn up.
Purpose of Statement of Financial Position
- A statement of financial position shows the overall value of the
business. It is a legal requirement for all limited companies to
prepare a statement of financial position. - Investors and potential investors can use a statement of financial
position to determine whether they will get a good return on their
investment. - Suppliers and creditors can use it to determine the level of risk
involved in lending or supplying to the business. - A statement of financial position can be used to
analyse ratios which can be compared with previous years or those
of competitors. This will better aid future decision-making. - A statement of financial position can be used to show the value of
all current assets, non-current assets, liabilities and non-current
liabilities.
Who uses financial information?
Many groups of people are interested in the published accounts of a company. The information they provide may influence future decisions. For example:
- lenders will be looking at the solvency of a business
- rivals are interested in monitoring the profits earned by
competitors
- banks can use them to make lending decisions government (HMRC)
use financial information to calculate tax payments
- owners will look at financial statements to help them make
decisions
- employees will use them to ensure their jobs are secure
