3.4 Financial documents

3.4.1 The purpose of statements of comprehensive income

Definition: A statement of comprehensive income is a financial statement that shows a business’s revenue, costs, and profit over a period of time. It is used to calculate net profit and assess the business's overall financial performance.

Main Features

  • Sales: The total revenue from goods or services sold.

  • Cost of Sales: The direct costs involved in producing all goods or services sold.

  • Gross Profit: The difference between sales and the cost of sales.

    • Formula: Gross Profit = Sales - Cost of Sales

  • Expenses: The operating costs not directly related to production

  • Operating Profit: Profit made by a business after all costs have been deducted from revenue.

    • Formula: Operating Profit = Gross Profit - Expenses

The use of statements of comprehensive income in decision-making

  • These statements help businesses assess profitability, make comparisons, set targets, and make informed decisions about pricing, cost control, and investment.

  • Finance managers analyse and interpret this data in order to make beneficial changes or set new strategic objectives.

The nature of profit and its importance

  • Profit is the financial gain remaining after all expenses are deducted from revenue.

  • Profit is required for business survival, growth, reinvestment, rewarding shareholders, and attracting investors.

3.4.2 The purpose of statements of financial position

Definition: A statement of financial position is a financial document that shows the financial structure of a business (assets, liabilities, and capital) at a specific point in time.

Main Features

  • Assets - Items that are owned by a business

    • Current assets - Cash and items (assets) that can be turned into cash relatively quickly, usually within a year.

    • Non-current assets - Long-term assets that a business will use for over a year.

  • Liabilities - Items that are owed by a business

    • Current liabilities - Short-term debts or financial obligations that a business must usually pay within a year.

    • Non-current liabilities - Long-term debts or financial obligations that are usually due in more than a year.

  • Capital employed - The total amount of capital used to run a business.

Interpreting a statement of financial position

  • A statement of financial position (also known as a balance sheet) shows a company's financial health at a specific period of time by displaying its assets and liabilities.

  • It can be useful in determining the financial stability of a business.

  • Interpretations  can be made from the statement regarding how a business finances its activities, what it owns, and what it owes.