3-5-1-interpretation-of-financial-statements

Using the statement of comprehensive income

• The statement of comprehensive income is also known as the profit and loss account 

• It shows the income and expenditure of a business over a period of time — usually a year — and calculates the amount of profit made (see sub-topic 2.3.1)

Example of a statement of comprehensive income for Head to Toe Wellbeing Ltd

• The extract from the statement of comprehensive income for Head to Toe Wellbeing Ltd shows figures for both 2022 and the previous year, allowing comparison over time

Stakeholder interest in the statement of comprehensive income

• The profit and loss account is a very useful source of information for stakeholders to evaluate the performance of a business

  • Shareholders

    • Interested in profits earned, business growth and dividend payments

  • Employees

    • Interested in profits earned and potential for wage increases and job stability

  • Managers and directors

    • Interested in key performance data, such as an improvement in sales revenue and net profit

  • Suppliers

    • Interested in the continued success of the company that they are supplying

    • This information is also used by suppliers to determine the level of trade credit offered to businesses

  • Government

    • Used to determine how much tax is payable

  • Local community

    • Interested in the stability of the business and what this may mean for jobs in the community

    • Another interest is to see if the firm is generating enough profit to perhaps approach them for local sponsorship

Using the statement of financial position (balance sheet)

• The statement of financial position, sometimes called the balance sheet, contains the financial information required to draw conclusions about the liquidity of the business

  • Liquidity is the ability of a business to meet its short-term commitments (e.g. payments to creditors) with its available assets

  • A business that cannot pay its bills will usually fail very quickly, even if it is profitable

  • Managing liquidity is a key way to manage risk in a business and helps a business prepare for the unexpected

• The statement of financial position shows the financial structure of a business at a specific point in time

  • It identifies a business’s assets and liabilities and specifies the capital (money) used to fund the business

  • The statement of financial position is also known as the balance sheet

Example of a statement of financial position for Packer Sports Ltd

Stakeholder interest in the statement of financial position

• Stakeholders will use the statement of financial position alongside the statement of comprehensive income to perform ratio analysis and compare performance over time or with other businesses

 How stakeholders use the statement of financial position