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Unit 3 - Business finance/ assignment 3
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Unit 3 : business financeUnderstand how financial statements for a sole trader are prepared and used to analyse
and evaluate business performance
P5: Prepare and interpret financial statements for sole trader businesses.
P6: Explain ways to improve profitability, liquidity and efficiency in a given business
context.
M3: Assess business performance of a sole trader by manipulating financial data and making
suggestions for improving business performance.
D3: Justify recommendations for improvements to business performance for a sole trader,
arising from own preparation and interpretation of business financial data.
To begin with, Ahmed can prepare a trading account to find the gross profit of the business.
Below is an example of constructing a trading account to find the gross profit for the
company.
Trading Account
Administration and
Office
Expenses
Sundry Expenses 600 Gross profit 15,950
Rent and Taxes 1,350
Net profit 14,000
15,950 15,950
Statement of Financial Position reports the company’s assets, liabilities and equities. This
Financial statement can be used to compare company’s performance with other companies in
the same industry. The company can also use it to compare its previous year’s performance
with the current year. This is also true for the Comprehensive income.
Creditors such as banks also use these statements to decide whether to loan money to the
business or not. Similarly, investors use these statements to decide whether investing in the
company is a good idea or not. Using ratios such as Profitability ratios, Liquidity ratios and
Efficiency ratios.
Below is an example of the Statement of Financial position. Once we have the Net Profit
which we calculated from the comprehensive income, we can prepare the Statement of
Financial Position. We note down all the Assets and Liabilities and also put down the Net
Profit from the Income Statement. As can be seen below, the Assets = Liabilities. Since there
are no items which come under Equity part of the Balance sheet, the equation equals only
Assets = Liabilities.
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