Basic Financial Statements PDF

BASIC FINANCIAL STATEMENTS CHAPTER 4  IMPORTANCE OF FINANCIAL STATEMENT Financial conditions of a company Reporting on operating results Show cash flow movement Company’s net worth  FOUR KEY FINANCIAL STATEMENT STATEMENT OF...

BASIC FINANCIAL STATEMENTS CHAPTER 4  IMPORTANCE OF FINANCIAL STATEMENT Financial conditions of a company Reporting on operating results Show cash flow movement Company’s net worth  FOUR KEY FINANCIAL STATEMENT STATEMENT OF STATEMENT OF PROFIT OR LOSS FINANCIAL POSITION STATEMENT OF CASH FLOWS STATEMENT OF CHANGES IN EQUITY  STATEMENT OF COMPREHENSIVE INCOME The statement of profit or loss and other comprehensive income measures the amount of profit (or loss) earned by a firm over a period of time, usually one year. Profit (or loss) is the difference between total revenue and total expenses. (Sales + other revenue) – (Cost of sales + other expenses) = Profit / Loss Simply, the higher the sales or revenue or the lower the expenses, the higher the profits of the company.  STATEMENT OF FINANCIAL POSITION The statement of financial position shows the assets of company and the claims against these assets, represented by the liabilities and the shareholders’ funds or capital at a specific point in time. Total assets must always equal the total liabilities plus equity. Assets = Liabilities + Equity  CASH FLOW STATEMENT It shows the cash flows of a firm for a given period, again usually one year. It explains to us the sources of the firm’s cash flows, that is, the cash inflows representing where the firm obtains its cash and the cash outflows representing how the cash is used.  STATEMENT OF CHANGES IN EQUITY A statement of changes in equity details out the changes in owners’ equity over period. Equity increases when capital is added or when profit is earned. On the other hand, equity reduces when the owner makes withdrawal or when a business incurs trading losses. Item shown in this statement include: - net profit or loss during the accounting period - effect of changes in accounting policies - increase or decrease in share capital - dividend payments to shareholders.  USERS OF FINANCIAL STATEMENT Shareholders/ 01 owners Government 07 Customers 06 02 Managers Prospective 05 investors 04 Creditors/ 03 Current and lenders future employees  USERS OF FINANCIAL STATEMENT SHAREHOLDERS/ OWNERS CREDITORS/ LENDERS There are the main recipients of financial Creditors and lenders consist of those who supply goods statements of companies. These parties may range and services on credit basis as well as banks or financial from individuals with relatively limited resources institutions providing loans to companies. Suppliers want and a small percentage of ownership, to to ensure that they are able to get timely payment corporations and institution such as mutual funds on the accounts due. Banks are interested not only the and insurance companies. firm’s profitability but also its ability to repay loans. These users are interested in the profits earned, financial health performance and potential growth of the company. They want CURRENT AND FUTURE EMPLOYEES to ensure that they get good returns from their investment. They want to know whether there is an Employees are part of the company and feel that their increase in value of their shares. They need to get efforts contribute to the firm’s profitability. They have a these statements to identify the firm’s strengths and vested interest in the firm’s continuity and profitable weaknesses for remedial action and future operation. They are interested to know the firm’s ability planning. Shareholders may also need to decide to expand and grow to ensure steady employment. They whether they want to retain or sell their investment need the financial statements to determine the monetary in the firm. benefits that they can obtain from the firm.  USERS OF FINANCIAL STATEMENT MANAGERS PROSPECTIVE INVESTORS They have to ensure that they manage the business They need to analyze the firm’s financial statement effectively and efficiently, so that owners’ wealth is to assess profitability, stability, growth maximized. They need financial statements to potential and financial health. They also want evaluate the firm’s performance for to assess the efficiency of management before planning, organizing and controlling the deciding on whether to invest in the firm. firm’s resources. CUSTOMERS GOVERNMENT Before they buy or place orders, customers would Various government ministries and department want to ensure that the company can deliver not require financial statements to ascertain a firm’s only the goods ordered but also the legal obligations declaration and payment of taxes, fi price of associated with guarantees, warranties or deferred essential goods and utilities, and make expansion benefits. They want to ensure the company’s ability plans for the economy. to provide after-sales customer service.