Interpretation of Financial Statements (Edexcel A Level Business)
Revision Note
Written by: Lisa Eades
Reviewed by: Steve Vorster
Using The Statement of Comprehensive Income
The Statement of Comprehensive Income is also known as the Profit and Loss Account
It shows the income and expenditure of a business over a period of time - usually a year - and calculates the amount of profit made (see sub-topic 2.3.1)
An Example of a Statement of Comprehensive Income for Head to Toe Wellbeing Ltd
The extract from the statement of comprehensive income for Head to Toe Wellbeing Ltd shows figures for both 2022 and the previous year, allowing comparison over time
Stakeholder Interest in the Profit & Loss Account
The profit and loss account is a very useful source of information for stakeholders to evaluate the performance of a business
Shareholders
Interested in profits earned, business growth and dividend payments
Employees
Interested in profits earned and potential for wage increases and job stability
Managers & Directors
Interested in key performance data such as an improvement in sales revenue and net profit
Suppliers
Interested in the continued success of the company they are supplying
This information is also used by suppliers to determine the level of trade credit offered to businesses
Government
Used to determine how much tax is payable
Local community
Interested in the stability of the business and what this may mean for jobs in the community
Another interest is to see if the firm is generating enough profit to perhaps approach them for local sponsorship
Using the Statement of Financial Position
The Statement of Financial Position contains the financial information required to draw conclusions about the liquidity of the business
Liquidity is the ability of a business to meet its short term commitments (e.g. payments to creditors) with its available assets
A business that cannot pay its bills will usually fail very quickly, even if they are profitable
Managing liquidity is a key way to manage risk in a business and helps a business prepare for the unexpected
The Statement of Financial Position shows the financial structure of a business at a specific point in time
It identifies a businesses assets and liabilities and specifies the capital (money) used to fund the business
The Statement of Financial Position is also known as the Balance Sheet
An Example of a Statement of Financial Position for Packer Sports Ltd
Stakeholder Interest in the Balance Sheet
Stakeholders will use the Balance Sheet alongside the profit and loss account to perform ratio analysis and compare performance over time or with other businesses
How Stakeholders use the Balance Sheet
Stakeholder | Interest in the Balance Sheet |
---|---|
Shareholders |
|
Managers & Directors |
|
Suppliers & Creditors |
|
Employees |
|
Examiner Tips and Tricks
Information found in the profit and loss account and balance sheet can be used in a range of answers.
For example, if you are answering a question about sources of finance, you might be able to use the capital structure of the business to recommend whether a business should borrow or look at an alternative source.
If a business already relies heavily on borrowing, it may be more sensible to recommend seeking to raise more share capital.
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