3.5.1 Interpretation of Financial Statements

Key Financial Statements (Legal Requirement)

• Statement of comprehensive income (profit and loss account)
• Statement of financial position (balance sheet)

Statement of Comprehensive Income

🔗 How much profit a business has made from its operations during a certain period. Costs incurred as part of the future are excluded (E.G Capital investment).

🔗 Direct Costs - Costs incurred as a result of the production a product (E.G Raw materials, wages).

🔗 Indirect costs - Other costs incurred by the business itself (E.G Rent, tax).

🔗 Cash - Real and realised at the point of sale.

🔗 Profit - Generated when assets change in value.

🔗 Markup - The amount added to the cost price of goods

People Who are Interested in These Accounts

• Investors How much profit is the business creating from their investment

• Creditors A profitable company is likely to be a better credit risk than an unprofitable one

• Competitors Can compare cost structures to identify opportunities

• Workers Workers may be able to negotiate wages upwards in a more profitable business

• HMRC Accounts need to be checked to see the right amount of tax is being paid

Statement of Financial Position

Summarises a company's assets, liabilities and shareholders' equity at a specific point in time.

🔗 Current assets - Assets expected to be turned into cash within a year (e.g. cash, stock, debtors).

🔗 Non-current assets - Assets that the business expects to still hold in more than a 1 year (E.G Equipment, investments, property).

🔗 Current liabilities - Liabilities due to be paid within a year (E.G Trade creditors, tax, borrowings).

🔗 Long-term liabilities - Debts that are held by a business and are paid back over a long period of time (e.g. mortgages, long-term loans, pension obligations).

🔗 Total equity - Total worth of the business at the time of the snapshot (E.G Share capital and premium, retained profit).

People Who are Interested in These Accounts

• Shareholders
• Managers and directors
• Suppliers and creditors

$$Net assets = Total assets – Total liabilities$$ $$Total equity = Net assets$$