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Select your languageSuggested languages for you: What image comes to mind when you hear the term ‘financial statements'? Perhaps just a piece of paper with a ton of digits representing the monies in a business. Reviewing, assessing, and comparing financial statements, however, is crucially important for owners, shareholders, and interested parties in a business. Without financial statements, it would most likely be impossible to make any definitive statement about a company and its financial well-being. So what exactly are financial statements? Let's take a closer look. Financial Statements: DefinitionTo understand what is included in a financial statement, let's first take a look at its definition. A financial statement is a collection of data and figures organised according to recognised accounting principles. Financial statements present various data and figures such as revenues, expenses, profits, losses, assets, liabilities, and equity. All of these data are organised according to accounting principles - rules and guidelines that companies must follow when reporting financial data.
Why do businesses prepare financial statements?There are numerous reasons why businesses prepare financial statements:
What financial statements are there?There are two main financial statements:
Financial Statements: Income statementThe income statement shows the profit earned and loss sustained by a business over a particular period (usually 12 months). It shows all revenues earned and expenses incurred during the specified period. The income statement provides information on revenues that a business has incurred over a particular period of time. Revenue is money a company has earned from its sales. At Sainsbury's, all the money customers pay when buying groceries, home articles, etc. is considered revenue for the company. The income statement also provides information on expenses that a business has incurred over a particular period of time. An expense is money a company has spent to operate. Expenses can include costs related to manufacturing and selling products, interest, taxes, and any other expenses. At Pret, all money the company spends on coffee ingredients such as coffee beans, milk, sugar, etc. is an expense associated with daily production. The income statement matches all the revenues and expenses to show a profit or loss made by a business. This way it can arrive at a net profit which is the final feature of the income statement. Net profit is the profit made by a business after all of its expenses have been subtracted from revenues. Financial Statements: Balance sheetThe balance sheetshows the assets and liabilities of a business at a specific point in time (usually the end of the financial period). It consists of assets, liabilities, and equity. The balance sheet provides information on assets that a business possesses at a specific point in time. An asset is everything that a company owns. At Amazon, all the warehouses a company owns are assets. The balance sheet also provides information on liabilities that a business owes at a specific point in time. A liability is everything that a company owes. Any loans and interest payments a company owes to a bank are liabilities. The balance sheet matches all the assets and liabilities to show the equity of a business. This way it can arrive at total equity which is the final feature of the balance sheet. Total equity is a business's capital that belongs to shareholders. This is the money remaining after the business has subtracted liabilities from its assets. Interpretation and analysis of financial statementsDifferent people involved or interested in a business might want to find out about its financial performance. In order to do so, they need to interpret and analyse its financial statements. There are several ways to interpret and analyse financial statements: Financial Statements: Comparing with previous yearsComparing financial statements with those from previous years is typically the first thing owners, shareholders, managers, and others do to analyse the financial performance of a company. For example, looking at the income statements from previous years, one can see whether a firm’s profits have increased or decreased. Financial Statements: Comparing with competitorsAnother way to examine the financial performance is to compare the financial statements of a business with its competitors. For example, by looking at the balance sheets of competitors, one can assess whether a debt a firm owes is relatively big, small, or typical for businesses in the industry. Financial Statements: Calculating financial ratiosTo deeply analyse the financial performance of a business, it may be useful to take figures from its financial statements and calculate financial ratios that compare the relationship between two or more elements of financial data sourced from a business's financial statements. For example, one can take figures from the income statement to calculate the net profit margin - a ratio showing net profit as a percentage of revenue. As you can see, financial statements are very helpful when analysing the financial performance of a business. The data and figures they include allow us to find out about the profitability and value of a business, which can be useful for managers and potential investors. Financial Statements - Key takeaways
Frequently Asked Questions about Financial StatementsA financial statement is a set of data and figures reflecting the financial conditions of a company. Financial statements are important as they are required by law and can help the managers to make major business decisions as well as convince investors to invest in their business. Financial statements can be interpreted and analysed in several ways:
There are two main types of financial statements: the income statement, and the balance sheet. The income statement shows the company's losses and profits over a period of time, whereas the balance sheet depicts what the company owns or owes to others at a specific point in time. In addition, there is the cash flow statement, showing the movement of cash in and out of the company. Yes, businesses must prepare financial statements as it is obligatory in most countries. Final Financial Statements Quiz
Answer A balance sheet shows what the company owns and owes to others at a certain point in time. Show question
Question What are the three main components of a balance sheet? Show answer Answer assets, liabilities, and equity Show question
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Answer Liabilities are what the company owes to creditors and banks such as bank loans or unpaid bills. Show question
Answer Equity is anything invested in a company by its owners. Show question
Question What is included in total assets? Show answer Answer Fixed assets and current assets Show question
Question What are fixed assets? Give some examples. Show answer Answer Fixed assets are a company’s possessions that are not going to be sold. They tend to last for a long time and are used to produce goods or services. e.g. building, land, computers, equipment. Show question
Question What are current assets? Give some examples. Show answer Answer Current assets are a company’s possessions that are used in production. They tend to be held for a short period of time. e.g. Cash, inventory, stock, accounts receivable Show question
Question What is included in total liabilities? Show answer Answer current and long-term liabilities Show question
Question What are current liabilities? Show answer Answer Current liabilities are what a business owes in the short-run (due within one year) Show question
Question What are long-term liabilities? Show answer Answer Long-term liabilities are what a business owes in the long run (not due in the near future) Show question
Question What is the formula to calculate the overall wealth of a business? Show answer Answer Net assets = fixed assets + current assets - current liabilities - long-term liabilities Show question
Question What is the equation of a balance sheet? Show answer Answer Net assets = Total Equity Show question
Question What is not a fixed asset? Show answer
Question What is a long-term liability? Show answer Answer Bank loans of more than a year Show question
Question What is dividend payment? Is it a liability or an asset? Show answer Answer Dividends are profits distributed to shareholders. Dividends are a current liability. Show question
Question Is stock traded on a stock exchange a fixed or current asset? Show answer
Question What is an income statement? Show answer Answer An income statement is a type of financial statement that shows a company's financial situation during a specific period. Show question
Question What does an income statement show? Show answer Answer The income statement reveals a company's revenue, expense, and profit during a certain period of time. Show question
Question What are the features of an income statement? Show answer Answer Features of an income statement include revenue, cost of sale, gross profit, overheads, operating profit, tax and interest payments, and net profit. Show question
Question Is an income statement a type of financial statement? Show answer Answer Yes, an income statement is a type of financial statement. Show question
Question What's the difference between the income statement and the balance sheet? Show answer Answer It's important to understand that the income statement gives the overall financial picture of a company throughout a period of time, as opposed to the balance sheet, which provides an overview of the business' finances on a specific date. Show question
Question Does the income statement show the financial situation of a company on a certain date? Show answer Answer No, income statement shows how well a company is doing throughout a certain period in time. Show question
Question Under which act is every company in the UK required to disclose their income statement? Show answer Answer Every company in the UK is required by law to publish their income statement under the Companies Act. Show question
Question When is income statement important for managers? Show answer Answer The income statement is often crucial when managers decide whether they want to expand into new areas or increase their manufacturing capabilities. Show question
Answer Revenue refers to the income the business makes by selling goods or services. The income statement shows the revenue made over a certain period. Revenue includes the total income made throughout that period. Show question
Answer Cost of sales includes every cost that a company makes in the process of producing goods and services. These costs involve the salaries that a business has to pay to its workers, including the cost of raw materials, and the cost of the building and its maintenance. Show question
Answer Gross profit is the difference between the revenues and the cost of sales. Show question
Question What's the formula for gross profit? Show answer Answer The formula for gross profit is, gross profit= revenue- the cost of sales. Show question
Answer These are similar to fixed costs as they do not change in the short term. Regardless of the volume of production, these costs will remain steady. Such costs include the building where the manufacturing occurs, interest paid on loans, insurance costs, etc. Show question
Question Define operating revenue. Show answer Answer Operating revenue is the difference between a company's gross revenue and its overheads. Show question
Question What is the formula of operating revenue? Show answer Answer The formula for operating revenue is: Operating revenue = Gross profit – operating revenue. Show question
Answer Net profit is one of the most important measurements of how well a business is doing. It's the final feature of an income statement, and it basically shows all the money that's left for the business to take home. Show question
Question What are the financial statements? Show answer Answer Financial statements are a collection of data and figures organised according to recognised accounting principles. Show question
Question What are the accounting principles? Show answer Answer rules and guidelines that companies must follow when reporting financial data Show question
Question What are the three reasons why companies prepare financial statements? Show answer Answer
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Question Are financial statements obligatory in the UK? Show answer
Question What financial statements are there? Show answer Answer
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Question What is the income statement? Show answer Answer The income statement shows the profit earned and loss sustained by a business over a particular period (usually 12 months). It shows all revenues earned and expenses incurred during the specified period. Show question
Question What is the final feature of the income statement? Show answer
Answer Net profit is the profit made by a business after all of its expenses have been subtracted from revenues. Show question
Question What is the balance sheet? Show answer Answer The balance sheet shows the assets and liabilities of a business at a specific point in time (usually the end of the financial period). It consists of assets, liabilities, and equity. Show question
Question Give an example of an asset. Show answer Answer For example:
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Answer A liability is everything that a company owes. Show question
Question What is the final feature of the balance sheet? Show answer
Question What is the total equity? Show answer Answer Total equity is a business's capital that belongs to shareholders. This is the money remaining after the business has subtracted liabilities from its assets. Show question
Question Give an example of a way to interpret and analyse financial statements. Show answer Answer Any of:
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Question What are the financial ratios? Show answer Answer Financial ratios compare the relationship between two or more elements of financial data sourced from a business's financial statements. Show question
Question The income statement reveals a company's revenue, expenses, and profits... Show answer Answer during a certain period of time. Show question
Question ___ refers to the income the business makes by selling goods or services. The income statement shows the revenue made over a certain period. Show answer Discover the right content for your subjectsNo need to cheat if you have everything you need to succeed! Packed into one app!
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You have used your liabilities and equity to purchase your assets. The balance sheet shows your firm's financial position with regard to assets and liabilities/equity at a set point in time.
Which statement shows the financial position of a business enterprise?A balance sheet (also known as a statement of financial position) is a summary of all your business assets (what your business owns) and liabilities (what your business owes). At any point in time, it shows you how much money you would have left over if you sold all your assets and paid off all your debts.
What is statement of financial position?A statement of financial position is another name for a balance sheet. It is used to provide an overview of a business's financial position at a given point in time.
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