Financial statements

• What are the three main financial statements?

  Income statement, statement of financial position, cash flow statement
• What is the purpose of the income statement?

  • Shows profit or loss over time
  • Records revenues and costs
  • Typically covers one year
• What is another name for the income statement?

  Profit and loss account
• What key information can be found on the income statement?

  Gross profit and net profit
• Who uses the income statement?

  Sole traders, private and public companies
• How is gross profit calculated?

  Revenues minus costs of goods sold
• What does the gross profit margin ratio indicate?

  Efficiency in generating profit from sales
• What is net profit also known as?

  Profit for the year
• What is the statement of financial position also referred to as?

  Balance sheet
• What does the statement of financial position record?

  • What the company owns (assets)
  • What the company owes (liabilities)
  • What is owned by the company (equity)
  • Snapshot at a specific point in time
• Why is the statement of financial position called a "photo"?

  It captures a snapshot at a specific time
• What types of assets are shown on the statement of financial position?

  Current and non-current assets
• What are liabilities classified as on the statement of financial position?

  Current and non-current liabilities
• What does equity represent on the statement of financial position?

  Retained profits and share capital
• How is working capital calculated?

  Current assets minus current liabilities
• What does the cash flow statement record?

  Cash flowing in and out of a business
• What is the purpose of a cash flow forecast?

  • Predicts future cash flows
  • Helps inform business decisions
  • Assesses short-term cash position
• What does the cash flow statement indicate about a business?

  Its liquidity and cash position
• What might a poor liquidity position suggest?

  Need for additional sources of finance
• How does the cash flow statement relate to other financial statements?

  Reflects changes in income and position statements
• What happens when a debtor pays their debt?

  It results in cash inflow for the business
• How does taking a loan affect the financial statements?

  Creates a liability and affects cash flow
• What does paying interest on a loan represent in the cash flow statement?

  Cash outflow from the business