The uses of income statements
This information contained on the profit and loss account can be used in a number of ways:
- It is used to compare the performance of a business over time or with another business.
- Predictions in profits can be made.
- Helps creditors to decide whether to lend money or not.
- Gives a futuristic vision to investors.
- Low-quality profit – one off profit that cannot easily be repeated or sustained
- High-quality profit – profit that cannot be repeated and sustained
The balance sheet - what it shows about a business
- Balance sheet – an accounting statement that records the values of business ’assets, liabilities
and shareholders’ equity at one point of time.
- Asset – an item of monetary value owned by a company
- Liability – A financial obligation of a business that it is required to pay in the future.
- Shareholders’ equity – Total value of assets – total value of liabilities.
- Share capital – the total value of capital raised from shareholders by the issues of shares.
The balance sheet records the net wealth or shareholders’ equity of a business at one moment of time.
The aim of most businesses is to increase the shareholders’ equity by raising the value of business
Shareholders’ equity comes from 2 main sources:
- The capital obtained by the purchase of shares
- The retained earnings of the company which are accumulated
- Non-current assets – Assets to be kept and used by the business for more than one year (fixed
- Intangible assets – items of value without any physical presence
- Current assets – assets that are likely to be turned into cash before the next balance sheet
- Inventories – Stocks held by a business in the form of materials, work in progress and finished
goods. - Accounts receivables (debtors) – The value of payments to be received from customers who
have bought goods on credit. Also known as 'Trade receivables'
- Current liabilities - debts of the business that will usually have to be paid within one year.
- Accounts payable (creditors) - value of debts for goods bought on credit payable to suppliers.
Also known as 'Trade payables'
- Non-current liabilities - value of debts of the business that will be payable after more than one
Non-current of fixed assets
The most common examples of fixed assets are; land, buildings and machinery. These are tangible
assets. Intangible assets include:
The reputation and prestige of a business that has been operating for some time also give value to
the business over and above the value of its physical assets.
Goodwill- Arises when the Business is valued at or sold for more than the balance-sheet value of its
These are important to a business. The most common examples are inventories, accounts payable
(debtors who have bought goods on credit) and cash.
Typical current lia