LO4- Financial

Income statement and Financial statement of position

what is an income statement

An income statement is produced by a business for specific periods of time (usually 12 months) and produced at the end of the business’s financial year it includes:

• revenue

• profit

Why would a company produce an income statement?

• to calculate the total costs of expenses

• to calculate the profit/loss made in a year

• legal reasons

• tax reasons

• calculate cost of sales

• to compare with previous years and competitors

What is a statement of financial positions and what does it do?

A snapshot of a business financial health at a particular moment.

It communicates information about financial health of the business and indicates the relative liquidity of assets. (can be compared with competitors).

Which statement will need to go along side another statement?

Statement of financial position.

What in included in a Statement of financial position?

• Assets

• Liabilities

• Equity

Assets

• Current - Part of the business operating cycle and are likely to be sold for cash in the next year (cash in the bank and inventory). Can be used straight away.

• Non-current - Acquired for use of the business and unlikely to be sold (motor vehicle, premises and machinery).

Liabilities

• Non-current - things you don’t owe in a year (you owe it after a year) e.g bank loans and mortgages).

• Current - What you owe in a year (overdraft, trade payables and corporation tax).

Equity

The term used to describe how much a business is worth. It represents how much owners have invested into the business.

What is the purpose of an statement of financial position?

• A statement of financial position the overall value of the business. It’s a legal requirement for all limited companies to prepare a statement of financial position.

• Investors and potential investors can use a statement of financial position to see if they will get a good return on their investments.

• Supplies and creditors can use it to determine the revel pf risk involved in lending or supplying to the business.

• A statement of financial position can be used to analyse ratios which can be compared with previous years or those competitors. This will better aid future decision making.

• A statement financial position can be used to show the value of all the current, non-current assets and liabilities.

Who uses financial statements?

• Lenders will be looking at the solvency of a business.

• Rivals who are interested in , monitoring the profit earned by competitors.

• Banks can use them to make lending decisions.

• Employees may look at them to see if they want to work for that business.