Financial Statements Theory

Financial Statements

• Annual reports are financial documents detailing a company's activities over the past year
• They provide information for shareholders, banks, and suppliers regarding company activities and financial performance
• Most jurisdictions require annual reports, often filed at a company registry
• Report content varies by jurisdiction's regulations.

Annual Report Specifications

• Financial Result Highlight: Key summary of company financial performance
• Governance and Ownership Structure: Information on company leadership and ownership
• Recent Economic Discussions: Analysis of recent economic events' impact
• Financial Statements: Consolidated and separate entity parent company statements, with footnotes
• Independent Auditor's Report: Statement on the accuracy and fairness of the financial data
• Management Responsibility Statement: Assurance for the financial statements' preparation

External Users of Financial Information

• Lenders: Individuals or entities providing loans
• Suppliers: Providing goods or services
• Shareholders: Investors in the company
• Government Agencies: Regulatory bodies
• SEC (Securities and Exchange Commission): Regulatory body for publicly held companies
• Customers: Buyers of company products or services
• Employees (current and potential): Present or future workforce

Internal Users of Financial Information

• Board of Directors: Governing body of the company
• Managers: Leaders within various departments
• Purchasing Department: Responsible for purchasing goods
• Finance Department: Handles financial issues
• Production Department: Involved in the manufacturing process
• Shipping and Receiving Department: Handles product distribution
• Marketing Department: Promotes company goods
• Human Resources Department: Oversees employee matters

The Balance Sheet

• Assets: Resources a company owns (e.g., cash, equipment)
• Liabilities: Obligations a company owes to others
• Equity: Owners' residual interest in the company
• Equation: Assets = Liabilities + Equity

The Income Statement

• Revenues: Increase in company's resources following activities
• Expenses: Decreases in company resources resulting from activities
• Net Income: Difference between revenues and expenses (profit or loss)

The Statement of Cash Flows

• Categorizes cash inflows and outflows based on activity types (operating, investing, and financing)
• Explains cash inflows and outflows used for generating new investments and business operations and repaying debts

Investor Relations (IR)

• Responsibility: Integrates finance, communication, marketing, and legal compliance for effective communication between a company and its constituents.
• Investor Relator (Officer): Responsible for investor relations activities
• Annual report content: Set by Regulatory bodies and Varies by country.
• Financial Statements: Prepared based on Generally Accepted Accounting Principles (GAAP) – but GAAP differs from country to country.

International Financial Reporting Standards (IFRS)

• Purpose: Harmonize accounting rules across the world.
• Process: Developed and approved by the International Accounting Standards Board (IASB) – replaced the International Accounting Standards Committee.

Auditors

• Role: Inspect and verify financial records
• Public Companies: Typically require an audit from a public accounting firm.
• Reports: Issues are opinions on the quality of reported financial data after audit process.

Chief Financial Officer (CFO)

• Responsibility: Oversees financial control and planning for a company. and accounting functions
• Key accounting functions include: credit control, budget preparation, financial statements, financing and fund raising, investment, tax issues and reporting financial performance to the board

Inventory

• Recorded at cost, generally cost of manufacture or acquisition
• If cost > selling price, recorded at the lower of cost or net realizable value

Allowance for Bad Debts

• Used to estimate uncollectible receivables.

Consolidation

• Used when an investor controls over 50% of an investee company
• Financial data from the parent and subsidiary companies combined for consolidated financial statements