14. Financial statements

• Types of financial statements:

  1. Income statement
  2. Statement of financial position
• An income statement summarises the trading performance of a the business for an accounting period to allow the owner to:

  • Analyse and evaluate trading performance of the business for an accounting period
  • Determine tax due to HMRC
  • Business planning
• The statement of financial position summarises the book value of the assets liabilities and the net worth of a business at the end of the accounting period
• What is the formula for calculating the net worth ?

  net worth = total assets - total liabilities
• Assets owned by the business are generally group into current assets and non-current assets
• Liabilities are amounts owed by the business
• Gross profit is the difference between sales revenue and cost of sales
• Net profit is the difference between gross profit and total expenses
• If net profit is negative it is known as a net loss
• Sales revenue is the total amount of money received from selling goods and services
• Opening inventories is the amount of inventory that is available at the beginning of the accounting period
• Purchases is the amount of money that a business spends on goods and services
• Closing inventories is the final inventory available at the end of the accounting period
• Cost of sales is the cost of goods sold, which is the cost of purchasing raw materials and the cost of manufacturing the product.
• What is the formula for calculating cost of sales?

  Opening inventory + add purchases - closing inventory
• Total expenses are the overheads that occur in the day-to-day running of the business
• Depreciation is the loss in value of a non-current asset over time due to wear and tear and obsolescence, considered as an expense on the income statement
• Most important data in an income statement:

  • Cost of sales
  • Gross profit
  • Total expenses
  • Net profit
• Accruals are a liability to the business at the year end, and amount that is due for payment at the year end but is not actually paid until after the year end
• Non-current assets are long term assets that a business owns and uses in its operations to make further profits, they usually have a life span of several years and depreciate over time
• Current assets are the items that a business owns to help it trade, they are listed in order of liquidity and they normally include: closing inventories, trade receivables, prepayments, cash at bank and cash in hand
• Total assets = non-current assets + current assets
• Opening equity is the accumulation of capital from previous accounting periods, which represent the total capital invested in the business by the sole trader
• Drawings are the sole traders wages, drawings are not considered an expense but a reduction in capital
• Closing capital at the end of the accounting period is the addition of opening capital and profits adjusted for drawings, to yield a closing balance as the year ends, this represents the cumulative capital invested in the business by the owner
• Non-current liabilities are the long term liabilities of the business and are not due for payment until after 1 year
• Examples of non-current liabilities ?

  • Mortgage
  • Long term business loan
• Current liabilities are the debts of the business at a given time that are payable within 1 year.
• Examples of current liabilities?

  • Trade payables
  • Bank overdraft
  • Accruals