Financial statements

Question 1

Financial statements

Answer 1

1. Income statement (Statement of Profit or Loss)
2. Balance sheet (Statement of Financial Position)
3. Cash flow statement (Statement of Cash Flows)

Question 2

Income statement

Answer 2

Also called: Statement of Profit or Loss, or Statement of Financial Performance.

Purpose: To measure of a company’s financial performance over a specific period (e.g. quarter or year).

• It records revenue and expenses to calculate the net profit or loss for that period.
• A part of financial accounting, where variable costing is used externally, and absorption costing is used internally, and is presented to the bank.

Use: Analysing profitability, assessing effectiveness, and comparing performance to e.g. aid decision-making.

Question 3

Balance sheet

Answer 3

Also called: Statement of Financial Position

Purpose: To provide a snapshot summary of a company’s asset, liabilities and shareholder equity. It represents a company’s financial position for a specific date.

• A part of financial accounting, which is presented to the “outside” world. Therefore, it is not too relevant for the manager.

Use: Analysing financial stability and liquidity, evaluating risk, and assessing value of businesses.

Question 4

Cashflow statement

Answer 4

Purpose: To show actual cash flows, identifying the cash that flows in and out of a company for a particular period.

• It is divided into operating, investing, and financing activities to show how cash was generated and used.

Use: Evaluating the ability to generate and manage cash (obligations), and assessing short-term financial health.