Page 141 - Book-keeping for Secondary Schools Student’s Book Form One

Basic financial statements

Facilitate planning and evaluation enterprise's financial health and make
Planning and evaluation are among the informed decisions. The three common
main functions of management. Financial components of financial statements are:
statements are useful in evaluating the
performance of a business for the period. Income statement (profit or Loss
This can be done through comparing the statement)
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targets established at the beginning of The income statement presents the
the year with the actual results that are financial performance of a business
obtained from the financial statements. resulting from its operating activities over
Moreover, the performance of the current a specific period, for example, a quarter or
year can form the basis for setting plans a year. It provides a summary of revenues,
for the next year. expenses, and the resulting profit or loss.

The income statement follows the basic
Establish the riskiness of the business formula:
Different stakeholders dealing with the
business, for example, banks, customers, Profit = Revenues - Expenses
and suppliers will need to be sure about Key figures included in the income
the risk associated with the business. In statement are:
this context, a risk may be defined as the (i) Revenues (sales, service income),
probability that actual results will differ (ii) Cost of goods sold (COGS) -
from the expected results. Traditionally, applicable for businesses selling
risk has been defined in terms of the products,
possibility of danger, loss, injury or (iii) Gross profit (revenues - cost of goods
other negative outcomes. For example, sold),
customers would want to be assured of (iv) Operating expenses (selling, general,
steady supplies of goods, while banks and administrative expenses),
and suppliers would want to be sure of (v) Operating income (gross profit -
the ability of the business to settle their operating expenses),
debts. Since financial statements provide (vi) Other income and expenses (interest
the results of business performance, they income, interest expenses), and
are usually considered as a reliable source (vii) Profit or loss for the period.
of information. The information will help
stakeholders to have answers for their Statement of financial position
questions including the risks associated (balance sheet)
with the business. The statement of financial position presents

Types of financial statements the financial position of a business at a
Financial statements are used by various specific point in time, usually the end of a
stakeholders, including investors, creditors, quarter or a year. It shows what the resources
management, and regulators, to assess the of the business (assets), what it owes to

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