Financial Statements
What the two main financial statements are for: the income statement showing profit over a period, the statement of financial position as a snapshot of what a firm owns and owes, and why each matters.
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The two financial statements
A business keeps financial statements so that owners, managers and other stakeholders can see how it is doing and make decisions. There are two main ones. The income statement covers a period of time, such as a year, and shows the revenue coming in, the costs going out and the profit or loss that results. The statement of financial position is different: it is a snapshot on a single date, showing what the business owns and what it owes. The things a business owns, such as cash, stock and vehicles, are its assets. The things it owes, such as loans and unpaid bills, are its liabilities. Taking the liabilities away from the assets shows the net worth. This module covers what these statements are for and what each one shows.
Statement words
Learn these before you match anything, and keep the period-based statement apart from the snapshot.
Income statement against position statement
The two statements answer different questions, so it helps to set them side by side.
How to read the two statements
Reach for the right statement for the question. If you want to know whether the firm made a profit over the year, turn to the income statement and follow revenue down through costs to profit. If you want to know what the firm is worth on a given day, turn to the statement of financial position and set what it owns against what it owes. One tracks performance across time, the other freezes a single moment, so name which you need and why before reading the figures.
Match the term to its meaning
- the income statement
- the statement of financial position
- an asset
- a liability
- shows revenue, costs and profit over a period
- a snapshot of what a firm owns and owes on a date
- something a business owns
- something a business owes
Which statement is this?
A document lists everything a firm owns and everything it owes on the 31st of December. Which financial statement is it?
- The statement of financial position.
- The income statement.
- A cash flow forecast.
- An invoice.
Why financial statements matter
Select the TWO real reasons a business produces financial statements.
- To assess how the business is performing
- To help stakeholders make decisions
- To guarantee the business makes future profit
- To replace the need to sell products
Net worth
A firm has assets worth 9000 pounds and liabilities of 4000 pounds. Subtract the liabilities from the assets to find its net worth, in pounds.
Order using a statement
Put the steps of using a financial statement in order, earliest first.
- The business records its finances over the year
- The figures are set out in a statement
- Managers and stakeholders read the statement
- Decisions are made from what it shows
Complete the facts
The statement showing revenue, costs and profit over a period is the _____ statement. The snapshot of what a firm owns and owes on one date is the statement of financial _____. Something a business owns is an _____. Something a business owes is a _____.
Match the example to what it shows
- cash and delivery vans
- a bank loan and unpaid bills
- revenue with the costs taken away
- assets with the liabilities taken away
- these are assets, what the firm owns
- these are liabilities, what the firm owes
- gives the profit on the income statement
- gives the net worth on the position statement
Spot the true statement facts
Tap the TWO statements that are true about financial statements.
- The income statement shows profit over a period
- The position statement is a snapshot of assets and liabilities
- An asset is something a business owes
- Financial statements guarantee future profit
Use the statements
Read each case and choose the best response, with a reason.
- A lender wants to know whether a firm made a profit last year before granting a loan. Which statement should it read?
- An owner wants to know what the business owns and owes right now. Which statement fits best?
- A student calls a bank loan an asset. How should this be corrected?
Explain the financial statements
A new investor wants to understand a firm accounts. Explain what the two main financial statements are and why they are useful.
- Explain the purpose of financial statements
- Explain what the income statement shows and over what time
- Explain what the statement of financial position shows and when
- Explain the difference between assets and liabilities
- Finish with a judgement on why an investor would want to see both statements