Main Financial Statements Flashcards
The Main Financial statements
- Statement of financial position (balance sheet)
- Statement of profit and loss and other comprehensive income
- Statement of Cash Flows
- Statement of changes in equity
- Notes to the accounts
Principles of the financial statements
Comprehensive income
- profit or loss for the period
- other comprehensive income
- non-owner changes in equity
Changes in equity
- retrospective adjustments
- owner changes in equity:
- dividends
- share issues
- non-owner changes in equity
Financial postion
- Assets (current & non-current)
- Liabilities (current & non-current)
- Equity (share capital; retained earnings; other components of equity)
Cash Flows
-notes
define total comprehensive income
the change in equity resulting from all transactions other than those with owners
What can total comprehensive income arise from
profit and losses
other comprehensive income
define other comprehensive income
includes items of income and expense which are not recognised in profit or loss
- unrealised gains or losses in asset (not cash)
what items does OCI include?
- revaluation gains and losses
- actuarial gains and losses on defined benefit plans
- gains and losses on the translation of financial statements into the presentation currency
What is disclosed on the Income Statement?
- Operating expenditure split into:
a) cost of sales/ administration/ selling and distribution OR
b) raw materials, employee costs and other operating expenses including depreciation - Finance costs (sometimes net of finance income)
- Company taxation (income tax or corporation tax)
What is disclosed in notes or in the annual report?
- directors salaries/ fees/ remuneration/ emoluments (AR/notes)
- auditors fees and expenses (notes)
- interest on debentures and loan stock (notes)
What does the SOFP disclose?
- non-current assets
- current assets
- non-current liabilities
- current liabilities
- equity
i. share capital
ii. retained earnings
iii. other components of equity
Long-term capital structure of a company
(Owner’s equity 1-3):
- Issued Share
- ordinary
- variable dividends
- appropriations of profit after tax - reserves
- Revenue
i. from profits
ii. can be distributed as dividends
- Capital
i. from capital events
ii. legally not distributable as dividends - Preference Shares
- fixed dividend/interest
- finance costs = a deduction from profit before tax - Loan capital (debentures)
- same as 3
Equity for a Sole Trader
Capital at end = Capital account capital introduced + profit - Drawings
Equity for Company
Equity at end = Share capital + profit - dividends
(Reserves =)
(Retained earnings=)
what are Equity share dividends
- an appropriation of profit
- deducted when paid from retained earnings in SOCE
What are interim dividends
paid halfway through the accounting year when the profit for the first six months is known
what are final dividends
addition to the interim dividends, paid first after the end of the accounting year when the profit for the year is known
What are Equity reserves?
Revenue reserves (distributable as dividends)
1. retained profits:
i. Retained earnings
ii, profit and loss account
2. General reserves
-transfers from the income statement,
- created to deal with general, unspecified contingencies i.e. inflation
Capital Reserves (not distributable as dividends):
- Share Premium
- Revaluation expense
- Capital redemption reserve
what are retained earnings?
accumulated profit of a listed company
what is the profit and loss account
accumulated profit of a non-listed company
what is the share premium
the amount by which the issue price of a share exceeds their nominal value
what is the revaluation expense?
the amount by which any revaluation of non-current assets shown on the statement of financial position exceeds their historical cost
what is the Capital redemption reserve
arises when a company redeems or purchases back its own shares from existing shareholders
What is the statement of changes in equity?
- opening equity
- in terms of share capital and reserves - increases or decreases in the elements of equity in the year
e. g. profits, dividends paid, issue of new shares, revaluation surpluses) - closing equity
- in terms of share capital and reserves
What is the Annual report of a plc?
contains audited financial statements provides information on: - development, performance and position - future prospects -strategy for achieving its objectives - business model -governance -directors remuneration
what is the purpose of the annual report?
provide shareholders with relevant information that is useful for asking resource allocation decisions and assessing the director’s stewardship
what is strategic management?
how the entity intends to generate and enhance the value
- strategy and objectives
- business model
what is the business environment?
the internal and external environment in which the entity operates
- trends and factors
- principal risks and uncertainties
- environmental, employee, social, community, and human rights matters
what is business performance
how the entity has developed and performed and its position at the year end
Limitations of financial statements
- General-purpose versus specific-purpose financial statements
- “general”= the main information needs of users other than capital providers are the same as the investors. - Economic and business context
- focus on the financial effects of transactions and other events which need to be put into context to be understood. - Historical nature of financial information
- provide information that is largely historical = does not reflect future events or transactions that affect an entity’s operations or anticipate changes in the economy.
The objective of financial statements
• Financial reporting
- is the reporting of financial information usually to external users. This is normally done in the form of financial statements such as the income statement, statement of financial position and statement of cash flows.
• Reporting Entity
- is the business or other enterprises in the case of the IASB this is usually listed companies.
• Providing resources to the entity
- This varies, for example, the shareholders provide funds by way of cash, loan holders funds by way of loans.
