10.1 Financial statements

The statement of profit or loss summarises revenue and expenses over a period to show gross profit, operating profit and profit after relevant items. It is a period measure, not a cash account.

Interpretation requires consistent definitions, accruals and comparison with context. Profit can differ from cash because sales and costs may be recorded before money moves.

A sale on credit can increase revenue and profit while receivables rise; the business may still need cash to pay suppliers.

A positive profit figure does not guarantee liquidity, value creation or future performance.

The statement of financial position reports assets, liabilities and equity at a point in time. It shows what the business controls or is owed and how those resources are financed.

Current and non-current categories help assess liquidity, solvency and capital structure. The statement is a snapshot, so timing and valuation matter.

A business may own equipment financed by a loan; assets and liabilities rise together, while retained profit changes equity.

The statement does not show future cash flow or the market value of every resource, and “net assets” is not the same as cash.

Inventory is valued so that the statement reflects the cost of goods still held rather than goods already sold. The method and assumptions affect cost of sales, profit and current assets.

Obsolete, damaged or slow-moving stock may need a lower valuation. Consistency supports comparison, but the chosen method should reflect the information required.

If purchase prices rise, the cost assigned to units sold changes the reported gross profit and closing inventory even when physical stock is unchanged.

Inventory value is an accounting estimate, not automatically its selling price or cash value.

Depreciation spreads the depreciable cost of a non-current asset over the periods that benefit from its use. It reflects consumption of service potential; it is not a cash payment in the period recorded.

Method and useful-life estimates affect reported profit and asset value. A review is needed when usage, technology or residual value changes.

A machine bought for £10,000 with a four-year useful life may create an annual expense under straight-line assumptions, while cash was paid at purchase.

Depreciation does not set the market price of an asset and does not create a cash fund automatically.