GCSE Business Studies Unit 2 Developing a Business Financial Statements

Learning Outcomes Students should be able to: complete simple financial statements for a sole trader explain and interpret an income statement and a statement of financial position, show and explain their importance to a business prepare an income statement that includes: sales revenue cost of sales expenses gross and net profit and loss prepare a statement of financial position that includes: current and non-current assets equity current and non-current liabilities Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk Financial Statements There are two main financial statements used in business, these are prepared on an annual basis. They are: Income Statement Statement of Financial Position Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk Income Statement Calculates Gross Profit: Sales Revenue – Cost of Goods Sold = Gross Profit/Loss Calculates Net Profit: Gross Profit – Expenses = Net Profit/Loss Images © thinkstockphotos.co.uk

Income Statement for Year ending December 2018 £ Sales Revenue 278,000 Less Cost of Sales Opening Inventory 36,000 Add Purchases 108,000 144,000 Less Closing Inventory 33,000 Cost of Goods Sold 111,000 Gross Profit 167,000 Images © thinkstockphotos.co.uk

Income Statement for Year ending December 2018 £ Gross Profit 167,000 Less Expenses Wages 33,000 Heat and Light 5,000 Administration 2,000 Loan Interest 42,000 Net Profit 125,000 Images © thinkstockphotos.co.uk

Statement of Financial Position The statement of financial position is a snapshot showing what a business: Owns (what it did with the money invested) Owes (where it got the money from) If a statement of financial position is correct then Total Assets = Total Equity & Liabilities Images © thinkstockphotos.co.uk

Statement of Financial Position Main sections: Assets - are owned by the business, classified as: non current current Equity - is owed by the business to the owner, includes: capital net profit drawings Liabilities - are owed by the business, classified as: Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk Assets Non Current Assets The long term assets owned by the business needed for the day-to-day running.   Examples include: Land & Buildings/Premises Machinery Fixtures and Fittings Equipment Vehicles Current Assets The short term assets owned by the business, these will change within one year: Closing Inventories Trade Receivables Bank Cash Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk Equity Capital money invested in business by the owner raised from personal savings, family and friends or another source of finance Net profit money made by the business through trading this money belongs to the owner, so is owed to them Drawings money taken out of the business by the owner for their personal use this will provide the sole trader with an income Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk Liabilities Non Current Liabilities Items that a business owes, that are not due for repayment within one year Examples include: Bank loan Mortgage Current liabilities The short-term borrowings that will be paid back within a year: Overdraft Trade Payables Images © thinkstockphotos.co.uk

Statement of Financial Position as at December 2018 £ Non Current Assets Premises 100,000 Machinery 34,000 Vehicles 16,000 150,000 Current Assets Inventory 33,000 Trade Receivables 12,000 Bank 6,000 Total Assets 201,000 Images © thinkstockphotos.co.uk

Statement of Financial Position as at December 2018 £ Equity 100,000 Add Net Profit 125,000 225,000 Less Drawings 60,000 Total Equity 165,000 Non Current Liabilities Loan 20,000 Current Liabilities Trade Payables 16,000 Total Equity and Liabilities 201,000 Images © thinkstockphotos.co.uk

Interpreting Financial Statement Key Points Sales revenue decreased/increased? Gross profit fallen/risen? Net profit fallen/risen? Value of non current assets increased/decreased? Value of current assets increased/decreased? What has happened to inventory, trade receivables and the cash position? Current liabilities increased/decreased? What has happened to trade payables or overdraft? Suggest factors that may have caused the above things to happen. Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk Pupil Activity Working individually you have thirty minutes to answer the following past paper questions: 2013 Question 3d 2015 Question 3ci & ii 2016 Question 3e Images © thinkstockphotos.co.uk

Learning Check Can you: complete simple financial statements for a sole trader prepare an income statement that includes: sales revenue cost of sales expenses gross and net profit and loss prepare a statement of financial position that includes: current and non-current assets equity current and non-current liabilities explain and interpret an income statement and a statement of financial position, show and explain their importance to a business Images © thinkstockphotos.co.uk