Chapter 8 Summary

The statement of financial position

The statement of financial position (balance sheet) is a snapshot of a companys financial position at a moment in time. It shows what the company owns (its assets), what it owes (its liabilities) and the shareholders equity. Equity + Liabilities = Assets. The assets are made up of non-current assets, both tangible eg machinery and intangible eg trademarks, and current assets (cash and items that can be quickly converted into cash eg inventories (stocks), trade receivables (debtors)). The liabilities are made up of non-current liabilities (amounts falling due after one year) and current liabilities (amounts falling due within one year).
Equity consists of share capital, other reserves and retained earnings.

The statement of comprehensive income

The income statement component of this shows the profit or loss generated by the company over a period of time, usually a year. The income statement is prepared according to the realisation and accruals concepts. The gross profit is found by deducting the cost of sales from the turnover. The operating profit is found by deducting expenses (excluding interest) from the gross profit. The net profit before tax and interest is found by adding finance income. The net profit before tax is found by deducting finance costs. The net profit after tax is found by deducting tax.
The earnings of the ordinary shareholders, ie the profit attributable to equity holders, is the net profit after tax less preference dividends (if any). Total comprehensive income is found by adding other comprehensive income, eg gains on revaluation.

The cashflow statement

Cashflow statements show where the money has come from and where it has gone. The accruals concept is ignored.

There are three sections to the cashflow statement: cashflows from operating activities cashflows from investing activities cashflows from financing activities.

Statement of changes in equity

The statement of changes in equity shows how the composition of equity (share capital, other reserves and retained earnings) has changed over the year.