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Financial statements
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Two key financial documents show how a business is doing: one shows profit over a year, the other what it owns and owes on one day.
Statement of comprehensive income
Shows the profit or loss over a period, usually a year.
Statement of financial position
Shows what the business owns and owes on a particular date.
Non-current assets: kept for more than a year, such as buildings and machinery.
Current assets: inventory (stock), trade receivables (customers who owe money) and cash.
Current liabilities: owed within a year, such as trade payables and overdrafts.
Non-current liabilities: owed after more than a year, such as long-term loans.
Capital employed = total equity + non-current liabilities (the long-term finance used).
Non-current assets: kept for more than a year, such as buildings and machinery.
Current assets: inventory (stock), trade receivables (customers who owe money) and cash.
Current liabilities: owed within a year, such as trade payables and overdrafts.
Non-current liabilities: owed after more than a year, such as long-term loans.
Capital employed = total equity + non-current liabilities (the long-term finance used).
Using the statements
Profit is needed to reward owners, to reinvest (retained profit) and to attract finance.
The income statement shows whether the business is profitable; the statement of financial position shows whether it can pay its debts.
Managers, shareholders and lenders use both to judge performance and make decisions.
The income statement shows whether the business is profitable; the statement of financial position shows whether it can pay its debts.
Managers, shareholders and lenders use both to judge performance and make decisions.
Revenue is £150 000, cost of sales £90 000 and expenses £35 000. Find the operating profit.
- Gross profit = 150 000 − 90 000 = £60 000
- Operating profit = 60 000 − 35 000
Answer: £25 000
Statement of comprehensive income: revenue − cost of sales = gross profit; − expenses = operating profit. Statement of financial position: non-current and current assets, current and non-current liabilities, capital employed.
The interactive lesson includes the diagrams for this topic.
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