Interpretation Of Financial Statements/ Ratio analysis Flashcards
Statement of comprehensive income: Key information
Used to evaluate the performance of a business and is of interest to many stakeholders. Contains the following information:
Revenue
Cost of sales
Gross profit= revenue - cogs
Selling expenses
Administrative expenses- indirect costs such IT expenses
Operating profit= gross profit - operating expenses (measures how much profit or loss the business has made over the year before tax is deducted)
Finance costs- if the business borrows money it will have to pay interest to the lender
Profit for the year (net profit)= operating profit - cost of finance
Net profit after tax-=the amount of money left over after all expenses have been paid
Statement of comprehensive income: Stakeholder interest
The statement of comprehensive income can be used to help evaluate the performance of a business, thus it is likely to be of interest to stakeholders.
Shareholders- likely to be interested in the profit made by the business particularly net profit
Managers and directors- as they are responsible for running the business they are likely to use key information to set annual targets in revenue or net profit.
Employees- if employees want a wage increase the may be able to use key information to argue that the company can afford it
Suppliers- a supplier is likely to check the creditworthiness of a business before accepting an order from them on trade credit
The government- it is required by law that companies produce a statement of comprehensive income. This is used by tax authorities to help assess how much tax a business has to pay.
Statement of financial position: Assets
The statement of financial position (balance sheet) provides a summary of a firm’s assets, liabilities and capital.
Assets= liabilities + equity
Non current assets- assets not expected to be sold within 12 months (long-term resources):
Goodwill- the amount the business is worth above the value of net assets
Other intangible assets- brand name, copyrights
Property, plant, equipment- tangible assets
Investments
Curren assets- liquid assets, either cash or expected to be converted into cash within 12 months:
Inventories/ stock
Debtors- people that owe money and will pay within a year
Cash at bank- money held by banks
Statement of financial position: Liabilities
Liabilities= assets - equity
Curren assets- any money owed by the business expected to be repaid within 12 months:
Short-term borrowing/loans
Trade- trade creditors owed by the business to suppliers
Dividend payable
Current tax liabilities- corporation tax, employees’ income tax
Non- current liabilities- any amount of money owed by the business for more than one year
Long-term borrowing/loans
Provisions
Statement of financial position: Net assets
Net assets= total assets - total liabilities
Equity- represents the value that would be returned to shareholders if all assets were liquidated and all debts were paid
Net assets is the same value as shareholder’s equity
Share capital- the mount of money paid by shareholders for their shared when they were originally issued (doesn’t represent current value of those shares on stock market)
Share premium account- the difference between the value of new shares issued by the company and their nominal value.
Retained earning- same as retained profit/ amount of money kept by business for future use
Statement of financial position: Stakeholder interest
The statement of financial position can be used to help evaluate the performance of a business, stakeholders are likely to be interested in this.
Shareholders- might use the balance sheet to see the asset structure and how the funds raised by the business have been put to use. They can see if their investment is growing.
Managers and directors- important for senior managers as they can see the firm’s financial position and monitor capital levels to ensure there’s no overspending. If the business decides to raise some finance they will have to consider the capital structure.
Suppliers and creditors- will be most interested in the solvency (ability of a business to meet it debts). They are not likely to offer trade credit to a business with only a limited amount of capital.
Others- employees might use it to assess whether the business can afford to offer higher wages. Government agencies responsible for gathering national statistics might also extract information from the balance sheet,
