Interpretation of financial statements Unit 60
Stakeholder interest
Managers and directors: The balance sheet might be used
Shareholders: Shareholders might use the balance sheet to
analyse the asset structure of the business. This shows how the
funds raised by the business have been put to use. For example,
shareholders in WellFed Ltd in Table 5 can see that more than
60 per cent of the assets (£97.7 million) are tied up in property,
plant and equipment. The balance sheet also shows the capital
structure of the business, i.e. the different sources of funds used
by the business. For WellFed Ltd nearly 67 per cent of the firm’s
funding comes from the shareholders.
The balance sheet can also be used to assess the solvency of
the business. A business is solvent if it has enough liquid assets
to pay its bills. The value of working capital will help to assess
solvency. The working capital of a business can be calculated
by subtracting current liabilities from current assets. For WellFed
the value of working capital is £1.7 million (£15.1 million – £13.4
million). This might be regarded as inadequate because the value
of current liabilities is only just covered by current assets.
Suppliers and financiers: Suppliers will be most interested
in the solvency of the business. Suppliers are not likely to offer
trade credit to a business that only has a limited amount of
working capital. WellFed Ltd only has a small amount of working
capital; as a result it might struggle to get generous trade credit
terms. However, this will also depend on WellFed’s trading
history and it past credit record. Banks and other lenders will be
interested in the balance sheet for the same reasons.
by the management of a business. For example, it is important
for senior managers to be aware of the firm’s financial position
at any given point in time. It will need to monitor working capital
levels to ensure that the business does not overspend. Also, if
the business is considering raising some more finance, it will
have to consider the current capital structure before choosing a
suitable source. For example, it might want to avoid borrowing
more money if the business is already in debt. Raising fresh
capital might be a better option.
FT
The statement of financial position can also be used to help
evaluate the performance of a business. It shows different
information from that of the income statement, and stakeholders
are likely to be interested in both statements together.
Worked example
sheet to assess whether a business can afford a pay rise or
whether their jobs are secure. The Office for National Statistics
might also extract information from the balance sheet to compile
national statistics.
Links
Information in this unit could be used in a range of answers.
For example, if you are discussing sources of finance for a
business you could explain how the capital structure of the
business might influence the decision. Businesses that already
have a large quantity of borrowings might be better to raise
fresh capital, for example. This unit could also be linked with
Internal finance (Unit 26), External finance (Unit 27), Planning
(Unit 29), Break-even (Unit 32), Profit (Unit 34), Liquidity
(Unit 35), SWOT analysis (Unit 46), Decision trees (Unit 54),
Ratio analysis (Unit 61) and Global competitiveness (Unit 75).
R
A
Gallagher & Sons Ltd is a manufacturer of sweets and
desserts. It supplies supermarkets and other large retailers.
Table 7 shows some financial information taken from the
statement of financial position.
Others: It is possible that employees might use the balance
Table 7 Extract from Gallagher & Sons Ltd, statement
of financial position, 2014
34.9
28.6
31.8
25.1
32.1
11.9
D
Current assets
Inventories
Trade and receivables
Cash and equivalents
Current liabilities
Trade and other payables
Borrowings
Other tax liabilities
2014
£ million
The working capital for Gallagher & Sons Ltd is given by:
Working capital = current assets – current liabilities
= £95,300,000 – £69,100,000
= £26,200,000
In this example, Gallagher & Sons Ltd has £26,200,000 of
working capital. This may be an adequate amount of working
capital for the business because current assets exceed current
liabilities by about 1.5 times. Working capital is discussed in
more detail in Unit 35.
The value of a business is roughly equivalent to the value of net
assets in the business. This means that shareholders can use
the balance sheet to see if their investment is growing. Between
2013 and 2014 the value of WellFed Ltd grew from £98.2
million to £108.7 million.
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Knowledge check
1.
2.
3.
4.
5.
How is gross profit calculated in an income statement?
How is operating profit calculated in an income statement?
Give three examples of selling expenses for a business.
What is meant by finance costs in an income statement?
What is the difference between non-current assets and
current assets?
6. Give two examples of intangible assets.
7. What information is needed from the balance sheet to
calculate working capital?
8. Give two examples of non-current liabilities.
9. What is meant by ‘retained earnings’?
10.Give two reasons why shareholders might be interested in
company accounts.
11.Why might the government be interested in company accounts?
Business decisions and strategy
Case study
SWANPOOL MARINE PARK
2014
(£000)
2013
(£000)
1,100
8,556
9,656
900
7,986
8,886
1,200
780
600
2,580
12,236
1,170
750
200
2,120
11,006
1,091
1,400
60
2,551
1,136
1,750
76
2,962
Total liabilities
2,050
833
2,883
5,434
2,160
841
3,001
5,963
Net assets
6,802
5,043
Shareholders’ equity
Share capital
Other reserves
Retained earnings
3,000
2,348
1,454
3,000
1,039
1,004
Total equity
6,802
5,043
Non-current assets
Intangible assets
Property and equipment
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Borrowings
Current tax liabilities
FT
Swanpool Marine Park, Cornwall, has experienced difficult
trading conditions since 2011. The business has also come
under fire from pressure groups representing animal rights.
Although the marine park has a good reputation for the care
of its dolphins, seals, sharks and other sea creatures, negative
publicity relating to the captive environment in which the
animals are kept has hit the park’s popularity. However, in
2014 the good weather in the UK saw a return to profit for the
park as visitor numbers rose sharply. The marine park hopes to
improve its image in the future by emphasising the work it does
protecting the environment and saving rare marine species. The
income statement and statement of financial position for the
business are shown in Tables 8 and 9 respectively.
Table 9 Statement of financial position for Swanpool
Marine Park as at 31.12.14
R
A
Non-current liabilities
Borrowings
Pensions
Table 8 Income statement for Swanpool Marine Park,
year ending 31.12.14
2013
(£000)
4,180
2,990
1,190
460
380
1,060
470
480
240
D
Revenue
Cost of sales
Gross profit
2014
(£000)
6,110
4,210
1,900
Selling expenses
Admin expenses
Operating profit
Finance costs
Net profit/loss
500
560
600
(360)
Taxation
Net profit/loss after tax
110
450
0
(360)
(a) Explain one reason why suppliers might want access to the
statement of financial position for Swanpool Marine Park.
(4 marks)
(b) Explain one reason why managers and directors might
want access to the income statement for Swanpool
Marine Park. (4 marks)
(c) Evaluate the performance of Swanpool Marine Park
between 2013 and 2014. (20 marks)
Key terms
Finance cost – interest paid by a business on any borrowed
money.
Finance income – interest received by a business on any
money held in deposit accounts.
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