Lecture 2 - Understanding Financial Statements.

Question 1

List some users of financial statements…

Answer 1

• Owners
• Shareholders
• Employees
• Suppliers.
• Government
• Competitors.

Question 2

What are the 4 Primary financial statements?

Answer 2

• Statement of profit or loss
• Statement of financial position
• Statement of changes in equity
• Statement of cash flows.

Question 3

What is the statement of profit or loss and meaning (income statement):

Answer 3

• 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

Question 4

Within the statement of profit or loss what are the 3 key sections:

Answer 4

• Gross profit
• Operating profit
• Profit for the year.

Question 5

Gross profit: Equation and meaning.

Answer 5

Revenue - Cost of sales

Represents the profits made after deducting the the direct costs which have helped raise the revenue.

Question 6

Operating profit: Equation, meaning and examples of operating costs.

Answer 6

Gross profit - Operating expenses.

Takes account of business expenses which are not directly incurred with generating the revenue.

Examples:
- Electricity, insurance, wages and depreciation.

Question 7

What can operating profit also be known as?

Answer 7

PBIT (Profit before interest and tax)

EBIT (Earnings before interest and tax)

OP doesn’t take into account taxes, finance income and expenses.

Question 8

Profit for the year: Equation and meaning.

Answer 8

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”

Question 9

What is the statement of financial position?

Answer 9

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).

Question 10

What is the statement of Changes in equity?

Answer 10

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.