A level-readyAll subjects · Business · WBS13 Business decisions and strategy
Interpreting financial statements
Edexcel IAL Business · WBS13 Business decisions and strategy
To judge how competitive a business is, start with its two main financial statements. The statement of comprehensive income shows performance over a year; the statement of financial position shows what the business owns and owes at one date.
Statement of comprehensive income
Also called the income statement or profit and loss account. It covers a period, usually a year.
| Line | $000 | How it is found |
|---|---|---|
| Revenue | 8,000 | Sales x price |
| Cost of sales | (5,200) | Direct costs of the goods sold |
| Gross profit | 2,800 | Revenue - cost of sales |
| Other operating expenses | (1,600) | Overheads: rent, salaries, marketing |
| Operating profit | 1,200 | Gross profit - other operating expenses |
| Interest | (200) | Paid on loans |
| Profit for the year | 1,000 | Operating profit - interest |
Definitions as in Appendix 9 of the specification; tax is ignored here.
Statement of financial position
Also called the balance sheet. A snapshot at one date.
| Item | $000 |
|---|---|
| Non-current assets (property, machinery) | 9,000 |
| Current assets: inventory 900, receivables 600, cash 300 | 1,800 |
| Current liabilities (payables, overdraft): due within a year | (1,200) |
| Non-current liabilities (long-term loans) | (3,000) |
| Net assets | 6,600 |
| Share capital | 2,500 |
| Retained profits | 4,100 |
| Total equity | 6,600 |
Net assets = non-current assets + current assets - current liabilities - non-current liabilities = total equity. Capital employed = non-current liabilities + total equity.
Who is interested and why
| Stakeholder | Main interest |
|---|---|
| Shareholders | Profit for the year, dividends, ROCE, growth |
| Managers | Performance against targets; where costs can be cut |
| Lenders and banks | Liquidity and gearing: can loans be repaid? |
| Suppliers | Liquidity: will they be paid on time? |
| Employees and unions | Profit and security: can the firm afford pay rises, are jobs safe? |
| Government | Profit for tax purposes; compliance |
| Competitors | Comparing margins and performance |
Key information and limits
Look for trends over several years, compare with competitors, and turn raw figures into ratios (next lessons). Limits: statements are historical; they leave out non-financial factors such as brand strength, staff skills and customer satisfaction; values of assets may be estimates; and one date may not be typical (window dressing).
Worked example
Using the figures above, calculate capital employed and explain what it represents.
- Capital employed = non-current liabilities + total equity = 3,000 + 6,600 = 9,600 ($000), so $9,600,000.
- It is the long-term finance invested in the business, from lenders and owners, which is used to fund its assets and generate profit.
Answer: $9,600,000: the long-term funds used by the business.
Check yourself
- Revenue is $650,000 and cost of sales is $410,000. Calculate gross profit.
Show answer
$240000. 650,000 - 410,000 = $240,000.
- Gross profit is $240,000 and other operating expenses are $165,000. Calculate operating profit.
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$75000. 240,000 - 165,000 = $75,000.
- Non-current assets $500,000; current assets $120,000; current liabilities $80,000; non-current liabilities $150,000. Calculate net assets.
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$390000. 500,000 + 120,000 - 80,000 - 150,000 = $390,000.
- Using the same figures (non-current liabilities $150,000 and total equity equal to net assets), calculate capital employed.
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$540000. 150,000 + 390,000 = $540,000.
- Which statement shows a business's assets and liabilities at a particular date?
- The statement of financial position
- The statement of comprehensive income
- The cash flow forecast
- The sales budget
Show answer
The statement of financial position. The balance sheet is a snapshot.
- Which information would a bank be most interested in before lending to a business?
- The number of products it sells
- Its mission statement
- Its liquidity and existing long-term debt
- Its market research findings
Show answer
Its liquidity and existing long-term debt. Lenders want to know they will be repaid.
- Explain one limitation of using financial statements to judge a business's competitiveness.
Show answer
They are historical, showing past performance, and leave out non-financial factors such as brand strength, staff skills or customer satisfaction, so they may not show future competitiveness.. Name the limitation and why it matters for judging competitiveness.
Sources
Last updated 8 November 2026. Spotted a mistake? Tell us.