Financial statements

prepared at the end of a period (typically a year) to show the performance and position of the business to meet the needs of various external user groups.
Financial accounts are geared towards external users of accounting information to answer their needs, as a whole in order for users to answer questions such as: - "Should I invest my money in this company?"
- "Should I lend money to this business?" -"What are the profits on which this company
- must pay tax?"

Company Law Requirements for Financial Accounts Every company registered under the Companies Act is required to prepare a set of accounts that give a true and fair view of its profit or loss for the year and of its state of affairs at the year end. Annual accounts for Companies Act purposes include: - A directors report - An audit report - A profit and loss account - A balance sheet - A statement of total recognised gains and losses - A cash flow statement - Notes to the accounts
Generally this is the practice in most countries. You should research for circumstances in your own countries for exception of omission or additions

The purposes of each report are: : Profit and Loss Account Describing the trading performance of the business over the accounting period. Balance Sheet Statement of assets and liabilities at the end of the accounting period (a "snapshot") of the business. Cash Flow Statement Describing the cash inflows and outflows during the accounting period. Notes to the Accounts Additional details that have to be disclosed to comply with Accounting Standards and the Companies Act. Directors' Report Description by the Directors of the performance of the business + various additional disclosures, particularly in relation to directors' shareholdings, remuneration etc.

Comparative figures should be given for most items and analysis given with financial statements

Exceptions are given individually. For example, there is no requirement to give comparative figures for the notes detailing the movements in the year on fixed asset or reserves balances.

Company Law Requirements for Financial Accounts

If the company is a "parent company", (i.e it other companies or subsidiaries) then "consolidated accounts" must be prepared

Relationships among the Financial Statements

Profit and Loss Statement Statement of owners equity Balance Sheet Cash Flow Statement

Ms Jones Profit and Loss Statement Month Ended 30 June, 2001

Revenues Fees Earned Expenses Wages Expense $ 600

$1,800

Utilities And Telephone Expense

Equipment Rental Expense Office Maintenance Expense

300
200 100 -1,200

Net Profit

$ 600

Ms Jones Statement Of Owners Equity Month Ended 30 June, 2001

J. Jones, Capital, 1 June, 2001 Contribution Of Capital $ 0

95,000

Net Income
Cash Distributions J. Jones, Capital, 30 June, 2001

600
- 500 $95,100

Ms Jones Balance Sheet as at 30 June, 2001

Assets Cash Accounts Receivable $34,500 200 Liabilities Accounts Payable Owners Equity J. Jones, Capital Total Liabilities and Owners Equity 95,100 $95,300 $ 200

Supplies
Land Total Assets

600
60,000 $95,300

Note: The cash balance on the balance sheet = ending cash balance in the cash flow statement.

Ms Jones Balance Sheet as at 30 June, 2001

Liabilities Assets Cash Accounts Receivable Supplies Land Total Assets $34,500 200 600 60,000 $95,300
Accounts Payable $ 200

Owners Equity
Contribution Of Capital Net Income Cash Distributions 95,000 600 - 500

J. Jones, Capital

95,100 $95,300

Total Liabilities and Owners Equity

Note: The cash balance on the balance sheet = ending cash balance in the cash flow statement.

Why Managers Analyze Financial Statements

1. To control operations. 2. To asses the financial stability of vendors, customers and partners. 3. To assess how their companies appear to investors and creditors.

Assess and Control Earnings

1. Has that plan been effective? No! Gross margins are still about 30%. Gross margins should not be lower from one period to the next if goods were obtained at a lower price.

2 Pressed for discounts from suppliers. 3. ?????

Assess Vendors, Customers and Business Partners

1. Management applies the same analyses to vendor, customer and other strategic partner financial statements as they do to their own. 2. Financial statement analysis used to find, qualify and monitor potential partners.

Stability of Vendors, Customers, and Business Partners

1. Example : A consideration to outsourcing the IT function to Cosmos Solutions, Inc. What steps should the company take to investigate this potential partner? Financial analysis of Cosmos, Media financial report, etc

Assess Appearance to Investors and Creditors

1. Accrual income vs. cash flow. 2. Notes to financial statements. 3. What additional information can the company give to investors, creditors, analysts? 4. What questions should be anticipated by the company given the current financial analysis?
Days sales in inventory is more than 120 days. The company should prepare to give answers.

Financial Analyses
Financial analyses help managers determine whether or not plans and decisions have been successful. a) Comparative figures
Horizontal analysis. Vertical analysis.

b)Ratio analysis The numbers help tell the story examples

Profitability ratios. Turnover ratios. Debt related ratios

Comparative figures between financial periods improve control and review of corporate decision

Horizontal and Vertical Analysis

1. Horizontal Analysis: a. Analysis of dollar value and percentage changes. b. Over time (left to right). c. Sometimes called trend analysis. 2. Vertical Analysis: a. Analysis of dollar value amounts relative to a common base. b. Top to bottom. c. Sometimes called Common Size Statement Analysis.

The Balance Sheet

1. Snapshot at a given point in time. 2. Three categories:
a. Assets b. Liabilities c. Equity

3. Basic equation:
Assets = Liabilities + Shareholder Equity

4. Differentiate between current and noncurrent: 1-year threshold

Analysis of The Balance Sheet

1. Horizontal Analysis: how have assets, liabilities and equities changed over time? 2. Vertical Analysis: express all other accounts relative to total assets.

The Income Statement

1. Statement of operations or a statement of (accrual) performance over a given period of time. 2. Revenues, expenses, gains and losses. 3. Basic relationship:
Sales COGS Operating Expenses Non-operating Income (Expense) Income Tax = Net Earnings

Analyzing the Income Statement

1. Horizontal Analysis: how have sales, expenses, COGS changed over time? 2. Vertical Analysis: express all other accounts relative to sales.

The Statement of Cash Flows

1. Explanation of the change in cash from the beginning to the end of an accounting time period. 2. Categories include:
a. Operating (activities) b. Investing (activities) c. Financing (activities) The Need to Compare Earnings and Cash-Flow Information