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  2.  
  3. PEARSON (PEARSON)
  4.  
  5. Business
  6.  
  7. Unit 3 - Business decisions and strategy

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Summary Financial Statements
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Describes statement of comprehensive income and statement of financial position (balance sheets), and explains why stakeholders are interest in them. Also explains profit quality.

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  • September 28, 2020
  • 3
  • 2019/2020
  • Summary

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Theme 3 Topic 13
Financial Statements
Statement of Comprehensive Income
 A financial statement showing the income and expenditure (therefore profit or loss) of a business
over a period of time (usually a year)

Purpose of the Statement of Comprehensive Income:

 Helps a firm to evaluate their performance in comparison with profit objectives
 Allows comparisons to be made:
- Over time
- Within the firm
- With competitors
 Show potential investors that the firm is successful and able to repay loans
 Enables judgements to be made about profit quality and profit utilisation

Key Information

 Revenue – money received from selling goods and services.
 Cost of sales – direct production costs of the business e.g. raw materials or labour
 Gross profit – revenue minus cost of sales (revenue – cost of sales)
 Selling expenses – indirect costs linked to selling of the product e.g. advertising or distribution
 Admin expenses – general overheads e.g. salaries, IT and stationary supplies
 Operating profit – gross profit minus other expenses (gross profit – other expenses)
 Finance costs – interest paid on any loans
 Profit for the year – operating profit minus finance costs (operating profit – finance costs)
 Profit for the year (net profit) after taxation – profit left after taxation, last item on the statement of
comprehensive income. Represents profit available which can be reinvested/given to shareholders.

Equations

Gross Profit Margin = Gross Profit x 100
Revenue

Operating Profit Margin = Operating Profit x 100
Revenue

Net Profit Margin = Net Profit x 100
Revenue

Stakeholder Interest

 Shareholders – interested in profit made by the business, especially after taxation. Rising profits
indicate improved performance = increase in share price and higher dividend payment.
 Managers and directors – responsible for running of business so interested in measuring
performance particularly revenue and profits. Financial rewards are often linked to improved financial
performance.
 Employees – interested in the amount of profits made as they may demand pay rises as a result of
improved performance. Many businesses rewards their employees through profit share schemes.
 Suppliers – if a business is profitable, the supplier should be more confident that they will be paid and
may offer trade credit.
 The government – interested in the amount of profit made by a business – determines how much tax
the business will pay. Revenue figures for a business are used by the government to measure
economic growth.

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