Analysing the financial performance of a business study guide

A set of documents – the income statement, balance sheet and cash flow statement – that summarise a business’s financial performance and position over a specific period.

The income statement shows a business’s revenues, costs, and profits over a specific period.

An asset is a resource owned by a business that is expected to provide future economic benefit.

A financial statement that lists a company's assets, liabilities and equity as of a specific date.

Revenue minus cost of goods sold (COGS).

ROA is a profitability ratio that measures how efficiently a company uses its assets to generate profit.

The percentage of revenue that remains after deducting the cost of goods sold. It is calculated as (Revenue – Cost of Goods Sold) ÷ Revenue × 100.

The percentage of revenue that remains as net profit after all costs have been deducted.

Revenue minus cost of goods sold, expressed as a percentage of revenue.

Exam practice

• Which financial statement is most useful for judging a business’s profitability?
• A small manufacturer is planning to increase its production capacity. Using its financial statements, evaluate whether this expansion is likely to improve the company’s profitability.
• Which of the following items is a main component of the income statement?
• List the main components of the statement of financial position and explain the purpose of each component.
• Which statement best distinguishes an asset from a liability for a business?
• Define an asset and a liability, and give one example of each for an online service business.
• Which of the following best describes the statement of financial position?
• Explain why the statement of financial position is considered a snapshot in time.
• Which of the following best describes the relationship between revenue, cost of goods sold, and gross profit on an income statement?
• Analyse the following income statement excerpt for an online service business and explain what the changes in gross profit margin and net profit margin indicate about its performance.
• Which of the following best explains a 10% drop in net profit margin from 2019 to 2020 for a small manufacturer?
• Analyse how a 5% decline in market share for an online service business over the last year could affect its stakeholder relationships.
• Which of the following is the correct formula for calculating the gross profit margin of a business?
• A small online retailer reports £120,000 in revenue and £70,000 in cost of goods sold for the year. Calculate the gross profit margin and state what this figure indicates about the retailer’s profitability.
• What is the net profit margin of a business that has a net profit of £12,000 and revenue of £60,000?
• A small manufacturer reports revenue of £250,000 and total costs of £200,000. Calculate the net profit margin.
• Which profitability ratio measures the percentage of revenue that remains after deducting all operating expenses?
• A small manufacturer reports revenue of £500,000 and a net profit of £50,000 for the year. Calculate the net profit margin and interpret what it indicates about the company's profitability.