Interpreting financial statements

A business will produce a range of financial information to support its stakeholders in decision
making. Two key documents that all companies are required to produce are the statement of
comprehensive income and balance sheet.

Key information in the statement of comprehensive income

£m

Revenue 300

Cost of sales (45)

Gross profit 255

Other operating expenses (65)

Operating profit 190

Exceptional expenses (40)

Exceptional income 10

Tax (35)

Profit for the year (net profit) 125

What we can find from a statement of comprehensive income:

✓ Changes in sales revenue

✓ Changes in direct cost of sales
✓ How well a business is managing its operating costs
✓ The profitability of a business
✓ Unusual incomes/expenses during the year.

Shareholders – will be interested in the profit Managers – use revenue, gross profit and
for the year as this may indicate potential operating profit to measure performance and
return form shareholders. set targets.

Stakeholder interest in the statement of

comprehensive income.

Government – to identify the level of taxation Employees – the profitability of the business
the business needs to pay to HMRC. may indicate the potential for remuneration
and rewards.
Statement of Financial Position
£m

Non-current assets 70

Intangible non-current assets 10

Tangible non-current assets 60

Current assets 55

Inventories 30

Receivables 25

Current liabilities (35)

Borrowings (30)

Payables (5)

Net-current assets 20

Non-current liabilities (50)

Long-term loan 40

Provisions 10

Net-assets 40

Retained profit 30

Share Capital 10

Total Equity 40

What we can find out from a statement of financial position:

✓ The value of a business (equity)

✓ The current assets a business holds
✓ Short term liabilities the business will need to pay within the year.
✓ The liquidity of a business
✓ The long term debts of a business.
✓ How a business has been financed.

Shareholders – may analyse the asset Managers – use the current financial position to
structure of the business to see how their analyse liquidity and the level of risk associated
investment has been spent. with the debt.

Stakeholder interests in the statement of

financial position

Suppliers and creditors – will be interested to see whether the business will be able to pay its
debts and support any decisions around credit agreements.