Learning aim C: Understand how financial statements for a sole trader are prepared and used to analyse and evaluate business performance.

C1 Statement of comprehensive income

Methods and processes used to prepare, complete, revise and analyse a statement of comprehensive income for a sole trader.

• Purpose and use of a statement of comprehensive income.
• Completion, calculation and amendment to include gross profit (revenue, opening inventories, purchases, closing inventories, cost of goods sold), calculation of profit/loss for the year (expenses, other income).
• Adjustments in a statement of comprehensive income for depreciation using both the straight line and reducing balance methods.

C2 Statement of financial position

Methods and processes used to prepare, complete, revise and analyse a statement of comprehensive income for a sole trader.

• The purpose and use of a statement of financial position.
• Completion, calculation and amendment of a statement of financial position of a sole trader to include: non-current assets (tangible and intangible, cost, depreciation and amortisation, net book value), current assets (inventories, trade receivables, prepayments, bank, cash), current liabilities (bank overdraft, accruals, trade payables).
• Non-current liabilities (bank loan and mortgage).
• Adjustments in a statement of financial position for depreciation, prepayments and accruals.
• Accounting for changes in capital, including opening capital, transfer of profit or loss and drawings.
• Extracting financial data from a statement of financial position to determine net current assets/liabilities, capital employed.

C3 Measuring performance using financial ratios

Methods and processes used to analyse financial statements against financial targets.

• Measuring profitability: calculation, interpretation, analysis and evaluation of:

1. gross profit margin – (gross profit/revenue) × 100
2. mark-up – (gross profit/cost of sales) × 100
3. net profit margin – (net profit/revenue) × 100 
4. return on capital employed (ROCE) – (profit/capital employed) × 100.

• Measuring liquidity: calculation, interpretation, analysis and evaluation of:

1. current ratio – current assets/current liabilities
2. liquid capital ratio – (current assets – inventory)/current liabilities.

• Measuring efficiency: calculation, interpretation, analysis and evaluation of:

1. trade receivable days – (trade receivable/credit sales) × 365
2. trade payable days – (trade payables/credit purchases) × 365
3. inventory turnover – (average inventory/cost of sales) × 365
4. comparative analysis of business performance against own performance, competitors and industry benchmarks
5. actions taken by a business to improve its profitability, liquidity and efficiency and the benefits and limitations of such actions.

• Limitations of ratios when assessing business performance.

C4 Preparation of financial performance reports

Importance of using a business report format for the presentation of financial performance review outcomes.

• Format, layout:

1. title and details of the report
2. introduction
3. set of calculations based on the financial data provided for the business
4. risks faced by the business based on financial data provided by the business and the previous decisions it has taken
5. analysis of the performance of the business
6. conclusions
7. recommendations.