Lecture 2 - Understanding Financial Statements. Flashcards
List some users of financial statements…
- Owners
- Shareholders
- Employees
- Suppliers.
- Government
- Competitors.
What are the 4 Primary financial statements?
- Statement of profit or loss
- Statement of financial position
- Statement of changes in equity
- Statement of cash flows.
What is the statement of profit or loss and meaning:
- A measure of financial performance.
- Summarises all revenue and expenses over a period and evaluates a businesses ability to be profitable.
- Prepared on an accruals basis
Revenue - Expenses = Profit/Loss
Within the statement of profit or loss what are the 3 key sections:
- Gross profit
- Operating profit
- Profit for the year.
Gross profit: Equation and meaning.
Revenue - Cost of sales
Represents the profits made after deducting the the direct costs which have helped raise the revenue.
Operating profit: Equation, meaning and examples of operating costs.
Gross profit - Operating expenses.
Takes account of business expenses which are not directly incurred with generating the revenue.
Examples:
- Electricity, insurance, wages and depreciation.
What can operating profit also be known as?
PBIT (Profit before interest and tax)
EBIT (Earnings before interest and tax)
OP doesn’t take into account taxes, finance income and expenses.
Profit for the year: Equation and meaning.
Operating profit + profit from other activities - net finances - Tax. (all expenses)
Can be compared to previous years to analyse performance.
Also, the balance on this account accumulated under the heading “retained earnings”
What is the statement of financial position?
Firstly, is a snapshot. Showing a businesses assets and liabilities and the difference is the equity which belongs to the owners.
Assets - Liabilities = Equity (capital)
Assets = Equity + Liabilities.
(Accounting equation).
What is the statement of Changes in equity?
Shows the change in the balance of equity for the beginning to the end of a reporting period.
3 main categories are:
- Share capital
- Share premium
- Retained earnings.