This is a comprehensive and detailed note that Includes notes on who uses financial statements, the income statement, the statement of financial position and the statement of cash flows.
*Essential!!
* Precise!!
* For you!!
Who uses financial information?
Investors - Interested in their potential profits in the security of investment.
Employees and trade union representatives
o Interested to know if an employer can offer secure employment and possible
pay rise.
Lenders - Need to know if they will be repaid.
Government agencies and tax authorities
o Need to know how the economy is performing and how profitable companies
are.
Suppliers and customers - Suppliers will need to know if they will be paid and
customers may need to know that a company can continue to supply them.
The Public - May wish to assess the effect of the organisation on the economy,
environment and community.
The income statement:
The purpose of the income statement is to describe the financial performance of an
organisation over a period of time (usually 12 months).
Financial performance is assessed by giving a summary of how the business incurs
revenues and expenses through both operating and non-operating activities
May be known as profit or loss account.
Useful for:
Helping investors and lenders plan ahead.
Informing prospective business partners or investors how successful the busines is.
Enabling the calculation of tax payable to the tax authorities.
Gross profit - The excess of sales revenue over the cost of goods sold in the period.
Operating profit - What is left of the gross profit after all other ‘operating’ income
and expenses have been accounted for.
Net profit before tax is what is left of operating profit after financing income. or
expenses have been deducted.
Net profit after tax is what is left of net profit after taxation has been accounted for.
The Statement of Financial Position:
The purpose is to provide a snapshot of the financial position of an organisation at a
particular point of time (usually the end of the 12 month period).
The financial position of an organisation contains details of all of its assets, liabilities
and capital (all those accounts with balances that were not included in the income
statement).
May be known as a balance sheet.
Useful for:
Helping investors and lenders understand how financially safe a company is.
Informing prospective business partners or investors how the business is financed.
The Statement of Financial Position uses the following structure:
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