Interpreting Financial Statements (3.5.1) Flashcards
Why do businesses produce financial statements?
Produce financial statements to show stakeholders how well or not well the company is doing
What type of companies have to by law publish these statements to the general public?
Private or public limited companies
What does a statement of financial position show?
Shows all the assets and liabilities a company has, showing stakeholders exactly what it owns and owes. Shows the income and expenditure of a business over a period of time usually a year and calculates the amount of profit made
What is another name for a statement of financial position?
Balance Sheet
What is a Current Asset?
Short-term assets turned into cash in one year
What is a Non-Current Asset?
Long-term assets that cannot be turned into cash
What is Current Liability?
Short-term debt owed within a year
What is Non-Current Liability?
Long-term debt not owed within a year
What are the two type of ratios a business could use to create a balance sheet?
Current Ratio and Acid Test Ratio
What are the formulas for Current Ratio and Acid Test Ratio?
Current Ratio=Current Assets/Current Liabilities
Acid Test Ratio=Current Assets-Inventory/Current Liabilities
What are the equations for Gross Profit, Operating Profit and Net Profit (Profit for the year)?
Gross Profit=Revenue -Cost of goods sold
Operating Profit=Gross profit-Operating costs
Net Profit=Operating Profit-Tax and dividends
What does the statement of financial position also show?
Contains financial information required to draw conclusions about the liquidity of the business.
What is liquidity?
Liquidity is the ability of a business to meet its short term commitments with its available assets.
What will happen to a business if they can’t pay off their bills?
If a business can’t pay its bills it will usually fail very quickly, even if they are profitable
What is a profit or loss account?
A Profit and Loss Account (also known as an Income Statement) is a financial report that summarizes the revenues, costs, and expenses incurred during a specific period, usually a fiscal quarter or year. It provides an overview of a company’s financial performance by showing whether it made a profit or suffered a loss during that period.
Why is a profit and loss account a very useful source of information for stakeholders?
Allows them to evaluate the performance of a business. Each stakeholder has a different interest in wanting this info. e.g. Employees want increase in profit so wage increases, Suppliers interested in continues success etc…
What’s the difference between the balance sheet and profit and loss account?
BS-Shows the financial position of a company at a specific point in time. Lists assets, liabilities, and equity.
P+L-Summarizes the company’s financial performance over a period of time (usually a quarter or year), showing how much profit or loss was made during that period. Lists revenues, costs, and expenses
Why do stakeholders have an interest in both the balance sheet and profit and loss account?
This is because stakeholders will use the two alongside each other to perform ratio analysis and compare performance over time or with other businesses
What are financial statements and what is negative about them?
Financial Statements provide a snapshot of how the business is currently performing. However, the raw data of financial statements can sometimes be difficult to interpret to make an accurate assessment.
