Unit 3 assignment 2

Task 2

Statement of comprehensive income

a statement of comprehensive income provides the details of a company’s income,

Advantages and disadvantages of a sole trader using a statement of

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Stakeholders in IWYL are required to know how a company is generating revenue and where
it comes from, as well as the costs that are obtained along the way. The net income doesn’t
provide the full picture by itself, the statement of comprehensive income however can help
highlight the smaller details for the business.

Similarly investors in IWYL tend to ask for the financial reports before investing or making
any decisions. The financial statements show earnings per share, net profit and so on. This
gives an indication on how approximately how much an investor might take. Using net profit
alone might deflate the earnings per share, therefore including all income in the calculation
is crucial.

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Although the statement of comprehensive income is very helpful in showing the unrealized
gains and losses when it comes to income, it wont list them if they’re related to assets and
liabilities.

One useful quality that this statement lacks is that it has no indication of timing. It doesn’t
indicate when revenue and expense items will be realized in the future. It also tends to be
rather complex and add a sense of complexity to the financial reporting package that might
be irritating for the accounting department producing the statement
What is a statement of financial position

A statement of financial position, also known as a balance sheet considers the key
information that allows a business to keep track of where the money is coming from and
where it has been spent. As well as the overall value of the business. The statement can only
consider business performance and value at a particular point in time. The overall aim of the
balance sheet is to get the assets and capital employed to correspond, thus balancing the
sheet.

This is an example of a statement of financial position. There are many elements to the
statement. including assets, liabilities, working capital (net current assets), and capital
employed. There are two different types of assets, current and non-current. Current assets
are short term meaning they last for less than a year. This can include things like cash, raw
materials and stock. Non- current assets are long term, they last and can be owned for more
than a year. This includes things like buildings, equipment and vehicles.

Similarly with liabilities, they come in two different categories. Current and non- current.
Current liabilities are short -term debts. These are debts that a business owes that will need
to be paid back within a year. This can be an overdraft, trade credit or a short- term business
loan. Non – current liabilities are long term. These are the debts that can be paid back in
more than year. Examples includes mortgages or a long-term bank loan.
Advantages and disadvantages of a sole trader using a statement of financial
position

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a balance sheet or a statement of financial position efficiently lists a business’s assets an
liabilities in one place. Short term and long term assets reflect the ability for your business
to generate cash and sustain operations. A balance sheet can also show when a business’s
debt levels are unsustainable. If IWYL has too much debt on their balance sheet it can
eventually lead to bankruptcy. By using the balance sheet, they can avoid long -term
financial problems that may put a strain on a sole trader’s operations considering they’re
responsible for running the business individually

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These statements can often give an incorrect view of the financial results or cash flows of a
business, since it only covers a specific period of time. One period can differ from the
normal operating results of a business. This can be due to a sudden spike in sales or
seasonal effects. Therefore it is more useful to view a large number of financial statements
so that the sole trader can gain a better view of the ongoing results.

Depreciation and how it impacts a business

Depreciation refers to the method used to allocate the cost of a physical asset over its
useful life expectancy. It represents how much of a an assets value has been used. Instead
of recognizing the asset’s entire cost in year one, depreciation can used to spread out the
cost and generate revenue from it. Depreciation helps businesses earn revenue from an
asset while expensing a portion of its cost each year the asset is useful for. Not considering
and implementing depreciation can greatly affect a business’s profits. Businesses can also
depreciate long- term assets for both tax and accounting purposes

Accruals, prepayments and changes in capital

The accrual method is an accounting method whereby revenue or expenses are recorded
when a transaction is made instead of when a payment is received or made. This method
follows the principle of revenues and expenses should be recognized in the same period. An
advantage of this method is that it gives the business a clear indication of how the business
is doing. Since income and expenses are being recorded as they first occur, you will know
how a business it doing in terms of how its revenues compare with its expenses. This way a
sole trader can make better informed decisions about the direction of the business.

Prepayments are certain amounts that are paid for by a business in advance of the goods or
services that’ll be received later on. Insurance is a good example of an expense that requires
prepayment due to the nature of the service. Prepayments offer the benefit of tax
deductions. A business or sole trader may want to prepay some of their future expenses if
they need additional business deductions.

Changes in capital refers to the changing of a company’s capital structure. Like the
percentage of debt and equity that are used to finance operations and growth. The change
in working capital is generally the difference between the working capital for two given
working periods. Companies usually increase and decrease their current liabilities and assets
in order to fund their current operations. When a company increases its current liabilities or
cash inflow, the added liabilities like short-term debt, provide them with money.