Overview of financial statements

• the cash flow statement shows :

  • the cash movements that took place over a period of time (changes in cash)
• income statement shows:

  how much wealth was generated over a period (changes in retained earnings)

  • P&L statement
• SOFP & balance sheet:

  answers the question: what is the accumulated wealth at the end of a period?

  snapshot of the beginning and end
• the setup of the income statements:

  Sales - revenue

  expenses

  total expenses

  profit/net income
• the setup of the SOFP:

  assets $. liabilities $
• the purposes of the SOFP:

  • it sets out the financial position of an entity at a given date
  • it is a status report rather than a flow reports
  • it is always dates
• the basic accounting equation:

  Assets = Owner’s equity + liabilities
• the 2 counterbalancing sections of the SOFP:

  Assets: the resources of the entity

  liabilities & equity: claims against the resources
• characteristics of assets:

  • a probable future benefit
  • the business has an exclusive right to control the benefit
  • the benefit arises from some past transaction or event
  • the asset must be capable of measurement in monetary terms
• example of assets:

  • buildings
  • plant, property & equipment / plant & machinery
  • fixtures and fittings
  • pre paid rent
  • patents and trademarks
  • trade and other receivable : accounts receivable
  • inventories
  • investements
  • cash at bank/in hand
• liabilities:

  present obligation of the business entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
• Liabilities:

  • accounts payable / trade payable
  • notes payables (loan)
  • salaries payable
  • capital
  • retained earnings
• equity:

  the claims of the owners in respect of the money that they have invested in the entity and fro all profits earned that have been reinvested in the entity
• the sole proprietorship equity equation = capital + retained earnings (at the end)
• sole proprietorship retained earnings at the end = retained earnings at the beginning - drawings
• the balance sheet always balances
• Whatever changes occur to the assets of the entity or the claims against the entity, there will be compensating changes elsewhere that will ensure that the statement of financial position always ‘balances’.
• Assets that are held in short term :

  are expected to be sold within the next year and are cash or near cash, such as marketable short term investments
• examples of current assets:

  • inventory
  • trade receivables
  • cash
• non current assets:

  assets that are held for long term operations

  may be either tangible or non tangible
• examples of non current assets:

  PPE

  buildings

  computers

  motor vehicles
• short term liabilities:

  amounts due for settlement in the short term

  they are due to be settled within a year after the date of the SOFP.
• current liabilities:

  trades payable

  bank loans that are due within the next year
• non current liabilities:

  amounts due for settlement in the long term

  they represent amounts due that don’t meet the definition of current liabilities

  • long term borrowings
• standard format of SOFP:

  SOFP of XYZ enterprise as at year end date

  assets:

  non current assets:

  premises, fixtures and fittings

  current assets:

  inventory: stock, trade receivables, cash at bank

  total assets

  liabiloties & equity:

  current liabilities :

  trade payables

  non current liabilities:

  borrowings

  equity:

  capital

  retained earnings

  total liabilities & equity