Theme 3 - 3.5.1 - Interpretation Of Financial Statements Flashcards
Whats another name for the statement of comprehensive income ?
Profit and loss account
Is the profit and loss account a legal document ?
Yes, it must be published each year by Ltd or plc companies - this document shows if the business has made a profit or loss during the year
Whats the key information on a profit and loss account ?
- Revenue - is the money into the business through ordinary trading - this is aka turnover or income - sales revenue = quantity x price
- Gross profit - Revenue - cost of sales —> cost of sales is the cost of the stock
- Expenses - they are costs that have nothing to do with stock or the making of the product
E.g. petrol, advertising - Operating profit - Gross profit - expenses
his is a true measure of how much profit the business has made over the year before tax is deducted
What do shareholders want to know ?
They want to know the final product figure which dividends will be paid out on
What do investors want to know ?
They want to know the profitability of the business - is it worth investing or will it be a risk ?
What do the employees and managers need ?
They may wish to know the expenses of the business
What is the statement of financial position or balance sheet ?
This is the document that needs to be published as part of the annual business accounts
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
So basically where did the money in the business get spent on ?
What are the key things on a balance sheet ?
Current assets - these are items that the business owns that will pay business in under 1 year: Stock - 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 is already cash
Non current assets (fixed assets) - They are items that a business owns but that will pay the business back after 1 year —> e.g. machinery, vehicles, property
Current liabilities - here are items that the business owes that needs to paid within 1 year , e.g. trade payables, this means that payments need to be paid to suppliers
Non current liabilities - These items, the business needs to pay, but that is not due for total payment within one year, e.g loan - 10 year loan etc
What are the limitations of financial statements?
Financial statements, reflect past performance which may not be an accurate indicator of future performance
Non financial factors - they dont take into account things such as customer satisfaction, employee morale, in these statements there is just numbers
Different accounting policies - companies may use different accounting policies, making comparisons difficult
Window Dressing - Companies may manipulate their accounts to appear more profitable or stable than they actually are —> this is a very thin line to fraud
How will people use the statement of financial position ?
Governments will use the financial information to calculate the amount of 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
