Analysing The Financial Performance Of A Business
Overview
Two shops on the same street report a profit of 150,000 last year. The first took 1,480,000 in sales to earn it; the second took 620,000. The owners could stand side by side and both say truthfully that they made 150,000, and one of them is running a far better business than the other. A single profit figure tells you almost nothing on its own. It only starts to mean something when you set it against the revenue that produced it, against last year, and against what somebody else in the same trade achieved.
This lesson teaches you to read financial statements rather than admire them. You will learn what an income statement and a statement of financial position each contain and what question each one answers, the difference between an asset and a liability and why a statement of financial position is only a snapshot, and the two calculations the specification requires: gross profit margin and net profit margin. Then you will use them the way the exam does, comparing one year with the next and one business with another, and reading the same figures from the point of view of an owner, a lender, an employee and a supplier, who all want different things from the same page.
Objectives
- Purpose of financial statements.
- Components of financial statements.
- Interpretation of data given on financial statements.
Mind map
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Lesson Note
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Lesson Evaluation
Congratulations on completing the lesson on Analysing The Financial Performance Of A Business. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- A business has revenue of 325,000 dollars, cost of sales of 85,000 dollars, wages of 28,000 dollars and rent of 16,000 dollars. What is its gross profit? A. 196,000 dollars B. 212,000 dollars C. 240,000 dollars D. 325,000 dollars Answer: C
- Which one of the following is a current liability? A. A delivery vehicle B. Money owed by a customer C. A bank overdraft D. A five-year bank loan Answer: C
- A business has net profit of 84,000 and revenue of 700,000. What is its net profit margin? A. 8.33 per cent B. 12.00 per cent C. 16.00 per cent D. 83.33 per cent Answer: B
- Which statement shows what a business owns and owes at one particular moment? A. The income statement B. The cash flow forecast C. The statement of financial position D. The break-even chart Answer: C
- A business's gross profit margin is unchanged but its net profit margin has fallen. What is the most likely cause? A. Its selling prices have fallen B. The cost of the goods it buys has risen C. Its expenses have risen D. Its revenue has fallen Answer: C
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