Statements

Question 1

Define FINANCIAL STATEMENTS

Answer 1

Financial statements are documents that provide information to various stakeholders about how a company has performed over a period of time. There are two: the statement of financial position and statement of comprehensive income.

Question 2

Define a STATEMENT OF COMPREHENSIVE INCOME

Answer 2

A statement of comprehensive income summarises a firm’s revenue and costs over a period of time to show whether the business has made a profit or a loss.

Question 3

What are the components of a statement of comprehensive income?

Answer 3

• Sales revenue
• Cost of sales
• Gross profit
• Expenses
• Operating profit
• Interest (+/-)
• Exceptional items (+/-)
• Profit for the year
• Taxation
• Profit for the year (after tax)

Question 4

What can a statement of comprehensive income be used to assess?

Answer 4

• Financial performance
• Cost structure
• Profit quality

Question 5

What are the advantages of a statement of comprehensive income?

Answer 5

• Shows how much revenue a business has generated
• Helps to assess profitability in 3 ways: gross profit , operating profit and net profit
• Provides details about costs and how successful managers have been in controlling them.

Question 6

What are the disadvantages of a statement of comprehensive income?

Answer 6

• Does not show what may happen in the future

- Analysis should be made over a number of years or against others in the industry

Question 7

Who uses the statement of comprehensive income and what for?

Answer 7

• Shareholders to identify the level of profit the business gains and therefore the amount they will gain in dividends.
• Competitors will assess the level of profitability
• Government, to ensure the business is paying the correct amount of corporation tax
• Employees, to measure their job security and the number of bonuses they may gain based on level of profit

Question 8

Define a STATEMENT OF FINANCIAL POSITION

Answer 8

A statement of financial position is a document providing a snapshot of a business’ assets, liabilities and net worth at a specific point in time. Shows where major sources of finance have come from and how the business spends what it has raised.

Question 9

What is the structure of a statement of financial position?

Answer 9

• Non current assets
• Current assets
• Current liabilities
• Net current assets (current assets - current liabilities)
• Non current liabilities
• NET ASSETS (total assets - total liabilities)
  Financed by:
• Share capital
• Retained profit
• TOTAL EQUITY (share capital + retained profit)

Question 10

What are the advantages of a statement of financial position?

Answer 10

• Shows the short term liquidity of the business (can it pay off daily debts?)
• Shows the long term liquidity of the the business (has it borrowed an excessive amount?)

Question 11

What are the disadvantages of a statement of financial position?

Answer 11

• It is a historical document and may not be a good indicator of future events
• Analysis should be done over several years or against other businesses in the industry

Question 12

Who uses the statement of financial position and what for?

Answer 12

• Managers will look at how much cash is in the business. They will assess whether the business can pay off short term debt and how highly geared it is.
• Shareholders will ask how highly geared the business is and how attractive shares are in this business compared with others.
• Suppliers will ask does the business have enough money to pay off short term debts owed?
• Lenders will ask if it is possible to lend additional finance to the business?

Question 13

What is the formula for capital employed?

Answer 13

Capital employed = non current liabilities + total equity