6.4 Analysing The Financial Performance Of A Business

Question 1

What is an income statement?

Answer 1

A financial statement showing a business’s revenues and costs and thus its profit or loss over a period of time

Question 2

What is a statement of financial position?

Answer 2

Sets out the assets and liabilities that a business has on a particular day

Question 3

Why do businesses prepare financial statements?

Answer 3

• Legislation, it is required to do so
• To help business managers make decisions
• To guide investors

Question 4

What are the main components of the income statement?

Answer 4

• The revenue earned by the business - revenue is also known as ‘sales income’
• The costs of production that have been paid by a business
• The amount of profit earned by the business or the loss it has made

Question 5

What are the main components of a statement of financial position?

Answer 5

• Assets (current and non-current)
• Liabilities (current and non-current)
• Working capital (net current assets)
• Capital employed

Question 6

What is an asset?

Answer 6

Anything that is owned by a business

Question 7

What are the two different types of assets?

Answer 7

Non-current and current assets

Question 8

What are non-current assets?

Answer 8

An asset that a business keeps for many years and creates revenue for the business and enables it to earn profits (e.g shops and vehicles)

Question 9

What are current assets?

Answer 9

Assets that business keep for a short time (normally less than a year) and are used to settle debts usually (e.g cash and inventories of raw materials)

Question 10

What is a liability?

Answer 10

A sum of money that is owed by a business to another business or an individual

Question 11

What are the two types of liabilities?

Answer 11

Current and long-term (non-current) liabilities

Question 12

What is a current liability?

Answer 12

Any debts a business owes that will need to be paid back within a year (e.g overdraft,trade credit)

Question 13

What is non-current liabilities?

Answer 13

Money borrowed that is paid back is more than a year (e.g mortgages or a long-term bank loan

Question 14

What is something to note with the statement of financial position?

Answer 14

It is a snapshot in time

Question 15

How do you make judgements on businesses performances (in income statements) ?

Answer 15

• Current performance
• Performance against previous years
• Performance against competitors
• Performance from the perspective of a range of stakeholders

Question 16

What happens if your gross profit margin and net profit margin is higher

Answer 16

The higher the gross profit margin and net profit margin is the greater the financial performance