Interpretation of Financial Statements (Edexcel A Level Business): Revision Note

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 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

  • The statement begins with revenue, the income from sales, before deducting the cost of sales to calculate gross profit

  • Operating expenses, such as rent, salaries and marketing costs, are deducted from gross profit to calculate operating profit

  • Finally, interest and any one-off costs are deducted to calculate profit for the year, the figure that shows how profitable the business has been overall

• Because it covers a full trading period, the statement allows stakeholders to see not just whether a business made a profit, but at which stage of its operations that profit was gained or lost

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

• 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 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 (opens in a new tab) and compare performance over time or with other businesses

How stakeholders use the statement of financial position