If the assets are more than the outside liabilities, the business is considered to be in sound financial position.
Format
Statement of Financial position as at……..(date)…..
$m $m
Assets
Non-Current assets
Property, plant and equipment xx
Goodwill xx
Investments xx
xx
Current Assets
Inventories xx
Trade and other receivable xx
Prepayments xx
Cash/Bank xx
xx
Total assets xx
Equity and Liabilities
Capital and reserves
Share capital xx
Share premium xx
Reserves xx
Retained earnings xx
xx
Non-current liabilities
Loans xx
Debentures xx
xx
Current liabilities
Trade and other payables xx
Overdrafts xx
Tax xx
xx
Total equity and liabilities xx
- Statement of cash flow
IAS 7 [International Accounting Standard 7] requires the business to present a cash flow statement as part of financial statements
A cash flow statement can be presented in a number of ways. It is simply a summary of the cash inflows (cash receipts) and cash outflows (cash payments).
IAS 7 requires the cash flow statement to be presented using standard headings. The objective of the standard headings is to ensure that the cash flows are reported in a form that highlights the significant components of cash flow and facilitates comparison of cash flow performance of different businesses.
The standard headings shown in the cash flow statements are :
- Operating activities
- Investing activities
- Financing activities
There are two methods of finding the cash flow from operating activities.
- Direct method
- Indirect method
Format – Direct Method – Net cash flow from operating activities
$’000
Cash received from customers xx
Cash paid to suppliers xx
Cash paid to and on behalf of employees xx
Other cash payments xx
Net cash flow from operating activities xx
Format – Indirect Method – Net cash flow from operating activities
$’000
Net profit before taxation xx
Depreciation xx
Profit on sale of plant (xx)
Profit on sale of investment (xx)
Interest expense xx
Operating profit before working capital charges xx
Increase in inventory (xx)
Increase in receivables (xx)
Increase in payables xx
Cash generated from operations xx
Interest paid xx
Net cash flow from operating activities xx
Format – Cash Flow Statement – Indirect Method
Cash flow statement for the year ended….(Date)….
$’000 $’000
Cash flow from operating activities
Net profit before taxation xx
Depreciation xx
Profit on sale of plant (xx)
Profit on sale of investment (xx)
Interest expense xx
Operating profit before working capital charges xx
Increase in inventory (xx)
Increase in receivables (xx)
Increase in payables xx
Cash generated from operations xx
Interest paid xx
Net cash flow from operating activities xx
Cash flow from investing activities
Purchases of :
Plant and machinery xx
Property xx
Proceeds from sale of investment xx
Proceeds from sale of plant xx
Net cash flow from investing activities (xx)
Cash flow from financing activities
Proceeds of issue of shares xx
Repayment of loan xx
Net cash flow from financing activities xx
Net increase/(Decrease) in cash and cash equivalents xx
Cash and cash equivalents b/f from last year xx
Cash and cash equivalents c/f to next year xx
- Statement of change in equity
This statement represents all the changes which have affected the various headings such as:
- Share capital
- Share premium
- Reserves
- Accumulated profits
Format – Statement of change in equity
Statement of changes in equity for the year ended ….(Date)….
Share Share Revaluation Accumulated Total
Capital Premium reserves Profit
$’000 $’000 $’000 $’000 $’000
Balance b/f xx xx xx xx xx
Correction of errors -- -- -- (xx) (xx)
xx xx xx xx xx
Surplus on revaluation
of properties xx xx
Deficit on revaluation
of investments (xx) (xx)
Net gains and losses not
recognized in the income
statement xx xx
Net profit for the period xx xx
Dividends (xx) (xx)
Issue of share capital xx xx -- -- xx
Balance c/f xx xx xx xx xx
- Notes to the financial statement
Notes are attached to the financial statement for items which need analysis and details.
Example
Notes
- Sales/Turnover
The break up of sales into different products could shown or different area sales could be shown
- Cost of sales ; details could be highlighted
- Administrative Expenses :
-Directors Remuneration – Details could be given
-major expenses could highlighted
4. Distribution Cost
- Major expenses could be highlighted
5. Company Taxation – basis of calculation or % etc
6. Further issue of share capital could be highlighted
7. Loan notes and bonds - details
8. property, plant and Equipment schedule
9. Other Disclosures required by International Accounting Standards
Kinds of information needs for each statement
- Statement of comprehensive income
Turnover/sales from the main activities of the business, other receipts such as rents, proceeds entertainment concerts shows/lectures, discount received, commission received and interest on investments.
All expenses which are incurred for day to day performance of activities or operations and are of recurring nature. Examples are: Wages, salaries, rent, printing and stationery, insurance, advertisement etc. Also includes expenses incurred on maintenance of fixed assets (non-current assets) such as repairs, depreciation etc.
- Statement of financial position
Kinds of information needs
- Non-current assets [Fixed assets]
Need to identify all the non-current assets such Land and buildings, machinery, motor vehicles, furniture and fittings, computer equipments etc at their original purchase price which will be shown as COST in the statement of financial position.
Futher each non-current asst except land is subject to depreciation due to wear and tear, passage of time, obsolescence etc. Accumulated of depreciation of each category of non-current asset is also shown in the statement of financial position. Futer the Net Book Value [ Cost less accumulated depreciation) is also show in the statement of financial position.
These assets value will change frequently with the routine transactions. Current assets includes Closing Inventory/Stock, trade receivables (debtors), prepaid expenses, accrued income, cash at bank (favourable) and cash in hand.
Every financial year end the closing stock should valued at lower of cost or net realizable value as per International Accounting Standard 2 [IAS 2].
According to prudence concept foreseeable future losses could be considered as loss in the current accounting period. Accordingly we calculate the Provision for doubtful debts at the end of the financial year and deduct the same from the Trade reivals in the statement of financial position.
According to matching concept, we deduct the prepaid revenue expenses and shown as current asset in the statement of financial position.
We prepare the Bank Reconciliation statement at end of each month. We compare the bank balance as per bank statement with the bank balnce as per corrected cash book. At the year end, we take the bank balance as per corrected cash book [final ledger balance for cash at bank] to the balance sheet. If bank balance as per corrected cash book is a debit balance and will be shown as a current asset in the statement of financial position. Whereas bank balance as per corrected cash book is a credit balance, it show the amount payable to the bank (bank overdraft) and will be shown as a current liability in the statement of financial position.
The amount payable by the business to other parties within one year from the date of the statement of financial position.
Examples of current assets are : Trade payables, Accrued expenses, tax payable, dividend payable, other payables and bank overdraft.
The amount payable by the business to other parties after more than one year from the date of the statement of financial position.
Exampls of non-current liabilities are : Bank Loan, mortgage loan, debentures etc
A company’s statement of financial position includes the following under the heading of Capital and Reserves.
- Ordinary share capital
- Preference share capital
- Share premium
- Reserves
- Retained profit c/f to next year
A sole trader’s statement of financial position includes the following under the heading of Capital Employed.
- Opening capital
- Net pofit/(Net Loss)
- Drawings
- Closing capital
- Statement of cash flow
Kinds of information needs
- Net cash flow from operating activities
There are two methods of calculating as explained earlier [Refer the format – Direct method and Indirect method]
- Net cash flow from investing activities
It includes purchases of non-current assets, proceeds from sale of non-current assets, proceeds of sale of investments etc
- Net cash flow from financing activities
It includes proceeds of issue of shares, repayment of loan etc.
- Cash and Cash Equivalents
It includes cash at bank, cash in hand and short term investments.
- Statement of change in equity
Kinds of information required
- Surplus/(deficit) on revaluation of Non-Current Assets/properties/investments
- Net gains and losses not recognised in the income statement
- Net profit/(Net Loss) during the year
- Dividends
- Notes to the financial statement
Kinds of information needs
- Analysis of sales
- Components of cost of sales
- Administrative expenses – Major expenses could be highlighted
- Distribution cost – Major expenses could be highlighted
- Loan notes and debentures – nature and the payment plan
- Property, plant and equipment schedule showing the Cost, additions, disposal, depreciation and net book value
- Events after the statement of financial position requires disclosure
- Other disclosures
The information needs of various users of financial statements
Internal users
Owners contribute capital in the business and thus are exposed to maximum risk. Naturally, they are interested in knowing the profit earned or loss incurred by the business, besides the safety of their capital.
The management makes extensive use of accounting information to arrive at informed decision on routine work as well as long term decisions.
Employees and workers are entitled to monthly salaries and bonus at the year end, which is linked to the profit earned by the enterprise. Therefore, the employees and workers are interested in financial statements.
External users
- Banks and financial institutions
Banks and financial institutions are an essential part of any business as they provide loans to the business. Naturally, they watch the performance of the business to know, whether is making progress as projected to ensure the safety and recovery of the loan advanced. They assess it by analyzing the accounting information.
- Investors and potential investors
Investment involves risk and also the investors do not have direct control over the business affairs. Therefore, they rely on the accounting information available to them and seek answers to the questions, such as ‘What is the earning capacity of the enterprise and how safe is their investment.
Creditors are those parties who supply goods or services on credit. Before granting credit, creditors satisfy themselves about the credit worthiness of the business. The financial statement helps them immensely in making such an assessment.
Decision made by users based on such information and conclusions
Internal users
Based on the Statement of comprehensive income, net profit or net loss could be indentified.
If there is a considerable profit continuously the owners could decide to invest further capital and if it is a company, issue of further shares. It leads to expansion of the enterprise.
On the other hand, if there is loss continuously, the owners could try different strategies to make profits in the future or alternatively diversion of business possible.
The management makes various decisions on a daily basis as well as long term decisions.
For example, target could bet set for sales volume for each area marketing managers who work as a team with their respective subordinates. By calculating accounting ratios, improvement could be made on receivables collection, better management of working capital etc possible.
If the business earns more profits, the Employees could be motivated with better salaries, bonus etc. As a result, the employees make a decision to work hard and efficiently.
External users
- Banks and financial institutions
They watch the performance of the business, and if their loan and loan interest are paid on time, they could make decision to give more loans and other facilities to expand the business without hesitation.
- Investors and potential investors
Financial statements provide better information to the investors to make decision to invest larger amount in the enterprise or not.
By analyzing the financial statement of the enterprise, It is easier to the creditors to decide whether the credit facilities are to be given to the enterprise or not.
References
- Kaplan Publishing – ACCA Paper 1.1 International – ISBN 1-84390-842-5
- Double Entry Book Keeping – T.S. Grewal’s – ISBN 978-81-8350-337-2
Suggestions:
- Please provide citations wherever it is needed by following Harvard referencing style. Minimum 10 references are required.
- The red colored text is not needed, since it is about the format of the financial statements.
- Introduction and brief contents of the topic should be enlarged.
- Please make the report in a structural format, means conveying the constant meaning throughout the report.
by
chinthasam (student)
