Module 3-Financial Statements

8/9/2019 Module 3-Financial Statements

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Financial Statements


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Course Contents

Regulatory Framework

Users ofFinancial Statements

Purposes ofFinancial Statements Qualitative Characteristics ofFinancial

Statements

Components ofFinancial Statements Balance Sheet


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Regulatory Framework

The International Accounting standard Board (IASB) issues financial reporting standards onhow Financial Statements need be prepared (

IFRS) Priortoharmonization offinancial reporting

standards each country accounting Boardsissued guidelines and standards on how

financial statements were to be prepared. The move toharmonize accounting standardshave caused changes in the classifications ofitems to be included in the Financial Statements.


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USERS OF FINANCIAL

STATEMENTS

There are different groups ofusers offinancialstatements whouse financial statements inorder to satisfy some oftheirdifferent needs

for information.The Users Include

1. Investors These are providerofrisk capital

They concerned with the return provided by theirinvestments.

They need information that will help them determinewhetherthey should buy,hold orsell.


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Users ofFinancial Statements and their

Information Need

2. Shareholders- Concerned whether they the

company is able topay dividends.

3. Employees. They are interested about the stability and profitabilityof

theiremployers

Abilityofthe entity topay salaries,retirement benefits.

4. Lenders

Lenders are interested in information that enables them todetermine whethertheir loans and interest attaching to them

will be paid when due.


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Information Need

5.Governments and theiragency

Interested in the allocation ofresources and

on the activities of the firm.

Regulation ofthe firm

Determine taxation.


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Information Need

6. Suppliers and othertrade Creditors

They are interested in information that

enables them to determine whetheramounts

owing to them will be paid when due.

7. Customers

Are interested in information about the

continuance ofan entity, especially when theyhave long term involvement with,orare

dependent on, the entity.


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Purposes ofFinancial Statements

Financial Position

Assets = Liabilities + Equity

Performance Measurement Profit= Income- Expenses

Measure ofFinancial Change The changes are derived from the change in the Financial position

as well as on the performance side.


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Provide information about the financial

position,financial performance and cash

flows ofan entity that is useful to a wide

range ofusers in making economic

decisions.

Financial Statements show the results of

managements stewardshipof theresources entrusted to it.


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Financial Statements provide information

about an entitys ;Assets

Liabilities

Equity ( Capital)

Income and Expenditure including gains and Losses

OtherChanges in Equity

Cashflows


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Qualitative characteristics of

Financial Statements Attributes that make the information

provided in the financial statements useful

tousers.

These attributes include Understandability

Relevance

Materiality

Reliability

Comparability


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Components ofFinancial

Statements Balance Sheet

Income Statement

Cashflow Statement Statement ofChanges ofEquity

Notes, comprising a summaryof

significant accounting policies and otherexplanatory Notes


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Balance Sheet

The Financial Report which shows the

Financial position of the Business entity at

a given time.

Balance sheet Equation

ASSETS= CAPITAL + LIABILITIES

Where the funds are invested= Where thefunds came from


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Balance Sheet

A balance sheet is a statement ofthe totalassets and liabilities ofan organization at aparticular date - usually the last date ofanaccounting period.

The balance sheet is split into twoparts:(1) A statement offixed assets,current assetsand the liabilities (sometimes referred to as"Net Assets")

(2) A statement showing how the Net Assetshave been financed,forexample through sharecapital and retained profits.


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More definitions

A balance sheet is a summaryof the financial position ata specific point in time. It presents the economicresources ofan organization and the claims againstthose resources.

Assets-Are items in which an organization has investedits funds for the purpose of generating revenue.

Liabilities-Represent what is owedby the organizationtoothers. Represent what is ownedby the organizationorowedto it byothers

Equity-Represents the capitalorworthof theorganization. Includes capital contributions ofmembers,investors ordonors,retained earnings, and the currentyearsurplus.

Assets = Liabilities + Equity


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ASSETS AND LIABILITIES

Definition of Assets

An asset is anyright orthing that is owned by abusiness. Assets include land, buildings,equipment and anything else a business ownsthat can be given a value in money terms forthepurpose offinancial reporting.

Definition of Liabilities

To acquire its assets, a business mayhave to

obtain moneyfrom various sources in addition toits owners (shareholders) orfrom retainedprofits. The various amounts ofmoneyowed bya business are called its liabilities.


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Long-term and Current Liabilities

Toprovide additional information to the

user, assets and liabilities are usually

classified in the balance sheet as:Current Liabilities: those due to be repaid or

converted into cash within 12 months of the

balance sheet date.

Long-term Liabilities: those due to be repaid or

converted into cash more than 12 months after thebalance sheet date.


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Fixed Assets

1. Fixed asset is an asset which is intended to beofa permanent nature and which is used bythe business toprovide the capability toconduct its trade.

Examples of"tangible fixed assets" include plant &machinery, land & buildings and motorvehicles.

2. Intangible fixed assets may include goodwill,patents, trademarks and brands - althoughthey mayonly be included if theyhave been

"acquired.3. Investments in othercompanies which are

intended to be held for the long-term can alsobe shown under the fixed asset heading.


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Definition ofCapital

As well as borrowing from banks and othersources, all companiesreceive finance from theirowners. This money is generally availableforthe life of the business and is normallyonlyrepaid when thecompany is "wound up".

To distinguish between the liabilities owed to third parties and to thebusiness owners, the latter is referred to as the "capital"or"equitycapital" ofthe company.

In addition,undistributed profits are re-invested in company assets(such as stocks, equipment and the bank balance). Although these

"retained profits" may be available fordistribution to shareholders -and may be paid out as dividends as a future date - they are addedto the equity capital of the business in arriving at the total "equityshareholders' funds".


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INCOME STATEMENT

Reports on Results ofoperation ofan entire accounting period in Questionwithrespect to selected accounting entity.

Income statement shows all revenues and expenditure overthe period andthe profitability

Specific information in the income statement include, Revenue,Cost ofSales, Gross Profit, Operating Expenditures,finance costs, Depreciation.

An income statement reports the organizations financial performance overa specified period oftime. It summarizes all revenue earned and expensesincurred during a specified accounting period.

An institution prepares an income statement so that it can determine its netprofit or loss (the difference between revenue and expenses).


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CASH FLOW STATEMENT

A cash flow statement shows where aninstitutions cash is coming from and how it isbeing used overa period oftime.

A cashflow statement Classifies the cashflowsintooperating, investing and financing activities.

Operating activities: services provided (income-earningactivities).

Investing activities: expenditures that have been made for

resources intended to generate future income and cashflows.

Financing activities: resources obtained from and resourcesreturned to the owners,resources obtained throughborrowings (short-term or long-term) as well as donorfunds.


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Methods ofCashflow Calculation

The direct method, by which majorclasses ofgross cashreceipts and gross cashpaymentsare shown to arrive at net cashflow(recommended by IAS)

The indirect method, works backfrom net profitor loss, adding ordeducting non cashtransactions, deferrals oraccruals ofpast or

future operating cashreceipts orpayments, anditems of income orexpense associated withinvesting orfinancing cashflows to arrive at netcashflow.


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Statement ofChanges in Equity

The statement shows what has happened

to capital

What has happened toprofit Distributed to shareholders in the form ofdividends How much was retained in the Business.

Module 3-Financial Statements

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