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3.4 Financal Documents

The document discusses the purpose and components of statements of comprehensive income and financial position. A statement of comprehensive income is used to calculate profit and includes revenue, costs of sales, expenses, and operating profit. It is used for investment decisions, cost analysis, future forecasts, and comparisons. A statement of financial position shows the value of a business at a point in time and includes assets, liabilities, working capital, net assets, and capital employed to finance the business. It provides the value, structure, and capital of a company.

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Youmna Maty
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59 views2 pages

3.4 Financal Documents

The document discusses the purpose and components of statements of comprehensive income and financial position. A statement of comprehensive income is used to calculate profit and includes revenue, costs of sales, expenses, and operating profit. It is used for investment decisions, cost analysis, future forecasts, and comparisons. A statement of financial position shows the value of a business at a point in time and includes assets, liabilities, working capital, net assets, and capital employed to finance the business. It provides the value, structure, and capital of a company.

Uploaded by

Youmna Maty
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Purpose of statements of comprehensive income

 Businesses use the statement of comprehensive income to calculate the profit at the end of
the financial year.

Gross profit = revenue – cost of sales

Operating profit = gross profit - expenses

 Statement of comprehensive income:


financial document showing a firm’s income and expenditure in a time period.

Main features: -
o Sales revenue
o Cost of sales – ex. Raw materials or stock
o Gross profit
o Expenses – overheads/office supplies.
o Operating profit – it is the profit generated from the firm’s main activities.

Q. How is the income statement used in decision making?

 Investment decisions – if there is a high profit, encourage decision makers to use


more funds for investment. If not, investment plans may be postponed.
 Cost analysis – it is when the business decides to cut down on costs. For example, if
the cost of raw materials is too high, the business can negotiate with the supplier or
switch to a cheaper one.
 Basis for future forecasts
 Making comparisons – investors may use the income statement when deciding
where to invest their funds. Investors asses the performance of a particular business
by the income statement.

 Nature of profit and its importance:


o It is the driving force of most businesses.
o Profit levels affect the flow of money or investment into and out of different
industries.
o It is a measure of a business’s performance.
Purpose of statements of financial position

 A statement that shows the value of the business at a particular time.


 Assets must be equal to liabilities at end of trading year.
 Assets: things that the business owns.
 Liabilities: things that the business owes to others.

ASSETS:

 Non-Current Assets (fixed assets) – stay in the business for more than a year.
 Current assets – stay in the business within a year.

LIABILITIES:

 Non-Current liabilities – debts that will take more than a year to pay.
 Current liabilities – debts that have to be paid for within a year.

Working capital: finance used to operate day-to-day business activities.

Working capital = current assets – current liabilities

Net assets = working capital + fixed assets

Capital employed = net assets

Capital employed is the total money that the business used to finance it.

 The balance sheet shows the:


o Value of all assets, capital and liabilities.
o Asset structure of the business
o Capital structure of business
o Value of net current assets

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