Topic 28 - Financial Statements

Question 1

Purpose of Income Statement

Answer 1

• To compare with competitors
• To compare with previous years
• For legal reasons
• To aid decision-making
• To calculate gross profit
• To calculate sales revenue
• To calculate profit for the year
• To calculate cost of sales
• To calculate expenses

Question 2

Purpose of Statement of Financial Position

Answer 2

• Shows the overall value of a business
• Shows the items a business owns
• Shows the items a business owes

Question 3

Features of Income Statement

Answer 3

• Sales revenue - the amount of money made from selling goods or services
• Cost of sales - the amount of money spent on selling goods
• Gross profit - the profit made from buying and selling
• Expenses - running costs of the business
• Profit for the year - the profits made after expenses have been deducted from gross profit

Question 4

Features of Statement of Financial Position

Answer 4

• Non-current assets - items owned for more than one year
• Current assets - items owned for less than one year
• Non-current liabilities - long-term debts of the business
• Current liabilities - items owned for less than one year
• Working equity - the ability to pay short-term debts
• Net assets - the overall value of the business
• Equity and reserves - shows how the business as been financed

Question 5

Users of Financial Statements

Answer 5

• Owners - to assess profits and inform decision-making
• Employees - to ensure their jobs are secure
• HMRC - to ensure the business is paying the correct amount of tax
• Trade unions - to assess if their members are due a pay rise
• Competitors - to measure their success against each other
• Investors - to assess the potential for investment
• Lenders - to decide whether or not to give a loan