06 - Financial Statement

Question 1

What are high level components of a financial statement?

Answer 1

Balance sheet (aka Statement of Financial Position)

Income statement

Cash flow statement

Statement of changes in equity

Integrated sustainability reporting (King Code)

• Societal reports
• • Health (including HIV/AIDS strategy plan) 
• • BEE
• • Code of ethics
• • Human capital development
• Environmental reports
• Value added statements

Question 2

What is a value added statement?

Answer 2

Value Added Statement is a financial statement that depicts wealth created by an organization and how is that wealth distributed among various stakeholders.

The various stakeholders comprise of the employees, shareholders, government, creditors and the wealth that is retained in the business.

Question 3

What is a Statement of Changes in Equity?

Answer 3

The statement explains the changes in a company’s Share Capital, accumulated reserves and retained earnings over the reporting period.

It break down changes in the owners’ interest in the organization, and in the application of retained profit or surplus from one accounting period to the next.

Question 4

What is included in the Balance Sheet?

Answer 4

Two main sections:

• Assets
• Equity and liabilities

Assets include:

• Current assets
• Non-current assets

Equity and liabilities include:

• Shares and reserves
• Non-current liabilities
• Current liabilities

Question 5

How is liquidity defined for a company?

Answer 5

The current ratio:

• Current assets ÷ current liabilities
• Should ideally be 2:1

The quick ratio:

• (Current assets – inventories) ÷ current liabilities
• Should be at least 1:1

What does this mean?

• A ratio that is too low indicates a business in trouble
• A ratio that is too high indicates a business that is not employing its liquidity efficiently

Question 6

What is included in the Income Statement?

Answer 6

Where the balance sheet is like a snapshot of the race as the winner passes the winning post, the income statement is like a video recording of the whole race.

The income statement consists of:

• Revenue
• Cost of sales or services
• Gross profit
• Costs
• Net profit
• Tax
• Net profit after tax
• Dividends, retained income and reserves

Question 7

How does one measure profitability of a company?

Answer 7

Return on capital employed

• ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed.
• Return on capital employed (ROCE) is a financial ratio that measures a company’s profitability and the efficiency with which its capital is employed.

Return on equity
- Net income / Shareholders equity
Return on equity measures how efficiently a firm can use the money from shareholders to generate profits and grow the company. Unlike other return on investment ratios, ROE is a profitability ratio from the investor’s point of view—not the company

Return on investment (Quite popular with smaller businesses)
- Net profit (sales – cost of sales – all other expenses) ÷ total assets (current and non-current assets)

Each industry will have its benchmark for what a good number would be.