Interpretation of Financial Statements (Edexcel A Level Business)

• 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)
   

An 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 Profit & Loss Account

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

1. Shareholders
   Interested in profits earned, business growth and dividend payments
    
2. Employees
   Interested in profits earned and potential for wage increases and job stability
   
   
3. Managers & Directors
   Interested in key performance data such as an improvement in sales revenue and net profit
   
   
4. Suppliers
   Interested in the continued success of the company the are supplying and this infromation is also used by suppliers to determine the level of trade credit offered to businesses
   
   
5. Government
   Used to determine how much tax is payable
   
   
6. 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

• The Statement of Financial Position 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 they are profitable
  • Managing liquidity is a key way to manage risk in a business - and helps a business to 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 businesses 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
    
    

An Example of a Statement of Financial Position for Packer Sports Ltd

Stakeholder Interest in the Balance Sheet

• Stakeholders will use the Balance Sheet alongside the profit and loss account to perform ratio analysis and compare performance over time or with other businesses
  
  

 How Stakeholders use the Balance Sheet

Stakeholder	Interest in the Balance Sheet
Shareholders	Used to identify the asset structure of the business and how their investment has been put to use Used to calculate the working capital of the business and determine its solvency Used to determine the rough value of a business which helps a judgement on whether their investment is growing
Managers & Directors	Used to identify the financial position of the business at a given point in time Useful to assess the working capital position of the business and determine if there are enough liquid current assets to pay its bills Provides information on the capital structure of the business which helps guide decisions on whether to raise further funds through borrowing or via other means (e.g. share issue)
Suppliers & Creditors	Used to judge the solvency of the business to determine the risk when offering firms trade credit Businesses with low levels of working capital may find it difficult to pay short-term debts and so suppliers may offer trade credit, but with stricter terms
Employees	Is the business financially stable or are jobs at risk? Has the businesses performance improved or worsened? What is the business spending its money on? How much are senior executives paid? How much tax is the business paying?