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