Interpretation of financial statements Flashcards
Define a statement of comprehensive income.
This used to be called the profit and loss account, so if you are googling for revision you may need to know that. This is part of the legal documents that must be published each year by ltd or plc companies.
This document shows if the business has made a profit or a loss during the year
What is revenue?
Revenue is money into the business through ordinary trading. It is also known as turnoaver or income.
Formula for sales revenue is
Q x P
Where Q = quantity and P = price
What is gross profit?
GP = Revenue – cost of sales
The cost of sales is the cost of the stock that is to be sold as part of ordinary trading for the business
Gross profit is used by the mangers of the business
What are expenses?
Expenses are costs to the business that have nothing to do with stock or the making of the product
Examples are;
Administration
Advertising
Petrol
What is operating profit?
Operating profit = GP-expenses
Operating profit is a true measure of how much profit (or loss) the business has made over the year – before tax is deducted
This information is used by potential investors of the business to see how hard their money would work if it was invested into the business
Explain stakeholder interest.
Shareholders – want to know the final profit figure which dividends will be paid out on
Investors – want to know the profitability of the business – is it worth investing or will it be a risk?
Employees and managers – may wish to know the expenses of the business
What is a statement of financial postion?
This is the other document that needs to be published as part of the annual business accounts. This document used to be called the balance sheet – for googling purposes.
This document shows what the business owns and owes on one day of the year.
It is often described as a snapshot of the business.
assets = liabilities + capital
In other words - What did the money in the business get spent on?
The two sides must balance – hence the term balance sheet
What are current assets?
Current assets are items that the business owns that will pay the business in under 1 year. Three things fall into this category:
Stock (inventory) because it will be sold and turned into cash within 1 year
Debtors – those that owe the business money, such as customers who will pay within 1 year
Cash - already is cash
What are non-current assets?
Fixed assets are items that a business owns but that will pay the business back after 1 year
Examples;
Machinery e.g. plant equipment
Vehicles e.g. company van
Property e.g. factory, warehouse that is owned by the business
What are current liabilities?
These are items that the business owes, that need to be paid by the business, within 1 year
What are long-term liabilities?
These are items that the business needs to pay, but that is not due for total payment within one year
Explain stakeholder interest in statements of financial position.
Governments will use the financial information to calculate the amount of tax (VAT and corporation tax) that a company has to pay
Shareholders will analyse the accounts and decide whether their investment capital is being used effectively
Directors and senior managers will use the accounts to assist their medium and long-term planning
Potential investors will analyse the accounts to determine whether or not the company would make a good investment
Creditors will use the accounts to ascertain the company’s ability to pay their bills
