Professional Documents
Culture Documents
Financial statements are written records that convey the business activities and the
financial performance of a company. Financial statements are often audited by government
agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing
purposes.
- Evaluate the company's past performance. By assessing revenues and expenses we can
measure the company's performance and compare it with competitors
- Predict future performance. Information about past performance helps determine important
trends which, if continuing, provide information about future performance
- assess the risk or uncertainty of future competitive cash flows. Information about the
various components of earnings
– revenues, expenses, gains, and losses are relationships among these components and can be
used to assess the company's failure at a certain level in the future
- Gross profit
- Analysis can more easily understand and assess revenue trends from continuing operations -
Operating profit
- Determined by deducting selling and administrative expenses as well as income and
expenses from gross profit
- Used to predict the amount, timing, and uncertainty of future cash flows
- Net profit
- Income after all revenues and expenses during the period are considered
- Seen by many as the most important measure of a company's success or failure over some
time
- Allocations to Non-controlling Interests IFRS requires that the net income of subsidiaries be
allocated to controlling and non-controlling interests. This allocation is reported at the bottom
of the income statement after net income
Quality of Earnings
The company tries to match or outperform the market demand, so that The market price of its
shares increases, and the value of management's compensation increases. Result firms have
incentives to manage earnings to meet profit targets or to make profits look less risky
STATEMENT)
a. Income (Income)
Includes:
Revenue – arises from the normal activities of the company (sales, fees, interest, dividends,
and rent)
Profits – may or may not arise from normal activities company (profits from the sale of long-
term assets, gains has not been realized from the sale of securities)
b. Expenses
Includes:
Expenses – arising from the normal activities of the company (Cost of Goods Sold,
depreciation, rent, salaries and wages, and taxes)
Losses – may or may not arise from normal activities company (loss of restructuring costs,
losses on sale of assets long-term, unrealized losses from the sale of securities valuable)
- Minimum Disclosure
Under IFRS, at a minimum, the following items will be presented on the income statement:
Income, tax expense, interest expense, profit/loss sharing, net profit/ net loss
- Intermediate components
It is common for companies to present some or all of the parts and totals in the income
statement
- Illustration
Includes all major items in the list above, except for discontinued operations.
In some cases, the income statement may not present all the costs involved desired details, to
solve this problem, the company only covers the total components in the income statement
- Gross profit
- Analysts can more easily understand and assess revenue trends from operating next
- Operating profit
- Determined by deducting selling and administrative expenses and income and expenses
from gross profit
- Used to predict the amount, timing, and uncertainty of future cash flows front
- Net profit
- Represents income after all revenues and expenses during the period are considered
- Seen by many as the most important measure of success company or failure for a certain
period
controller and non-controller. This allocation is reported at the bottom of the income
statement
- Operation in discontinuation
Estimated change:
Comprehensive profit
companies generally included in the income are all revenues, expenses, gains, and losses
recognized during the period. Those items are classified in the income statement so that
readers of financial statements can be more understand the importance of the various
components of net income
- equity generally consists of ordinary share capital, ordinary premium shares, retained
earnings, and accumulated balance in other comprehensive income
Limitations
Classification
1. Assets (Assets)
Non-Current Assets
1. Long-Term Investments
factory expansion)
renewable (minerals).
Except for land, most of these assets are depreciable (such as buildings) or
3. Intangible Assets
- The amortization of an intangible asset is limited to live over its useful life.
in practice.
restricted.
Are cash and other assets that are expected to be converted into cash, sold, or consumed in
one year or an operating cycle, depending on which one is the longest.
1. Inventories
To properly present inventory, companies disclose basic valuation (lower than cost or net
realizable value)
2. Receivables (Receivables)
A company should identify any anticipated losses due to bad debts, the amount and nature of
each non-trade receivable, and any receivables used as collateral.
3. Prepaid expenses
A company includes prepaid expenses in current assets if it will receive benefits. Other
general prepaid expenses include rent paid in advance, advertising, tax, and operating
inventory
4. Short-term Investment
5. Cash
2. Equity
Equity or also called shareholder equity is one of the most difficult parts to create and
understood. This is because of the complexity of ordinary agreements and preference shares
and various restrictions imposed by corporate equity laws, treaties debt, and board of
directors, companies typically divide equity into six sections:
1. Share capital
The par value or set of shares issued. Consists of common stock and preferred stock
2. Agio shares
3. Retained earnings
5. Shares outstanding
6. Minority interests
The part of the equity of the subsidiary that is not owned by the reporting company
3. Liabilities
a. Non-Current Liabilities
Liabilities that are reasonably expected will not be liquidated in the normal operating cycle.
Instead, they expect to pay on a date outside the specified time. The most common example is
debt bonds, notes payable, partially deferred income tax, liabilities leases, and pension
obligations.
1. liabilities stemming from special financing situations, such as issuing bonds, long-term
lease obligations, and long-term notes
2. liabilities that arise from the normal operations of the company, such as liabilities pension
and deferred income tax liability
3. obligations that depend on the occurrence or non-occurrence of one or more future events
to confirm the amount to be paid, or payee, or date of payment, such as a service guarantee
b. Current Liabilities
Obligations that a company generally expects to stay in the normal operating cycle or one
year, whichever is longer.
This concept includes:
1. Payables arising from the acquisition of goods and services: trade payables, salaries
payable, tax debt, etc.
2. Invoices received in advance before goods or services are delivered provided such as
unearned rental income or income ungenerated subscriptions.
3. Other liabilities whose liquidation will be carried out in the operating cycle such as a
portion of long-term bonds payable in the current period, short-term obligations arising from
the purchase of equipment, or liability estimates such as liability guarantees.
To present a detailed summary of all cash inflows and outflows, or sources and uses of cash
during a period.
Is to provide relevant information regarding receipts and payments cash flow of a company
during a period.
The cash flow statement provides answers to the following simple but important questions:
1. Operating activities, including the effects of cash from transactions used to determine net
income.
2. Investment activities, including the granting and collection of loans as well as the
acquisition and disposal of investments (both debt and activities) and property, plant, and
equipment.
3. Financing activities, involving liability and owner's equity items. This activity includes (a)
the acquisition of resources from owners and their composition to them with returns on and
from their investments, and (b) borrowing money from creditors and the payment
source:
Generating cash flow statements from these sources involves four steps as follows:
financing.
3. Determine the change (increase or decrease) in cash during the current period.
4. Reconciliation of changes in cash with the beginning cash balance and ending cash
balance.
Not all significant activities of the company involve cash. Examples of non-cash activities
High amount – the company can generate sufficient cash internally from operations to pay its
obligations without having to borrow from outside.
Low amount – the company may have to borrow or issue securities equity to pay its
obligations.
The main purpose of a cash flow statement is to provide information about a company's cash
receipts and cash payments during the period. Another objective is to provide a cash basis of
information about the company's operations, investments, and financing. Statements of cash
flows due to statements of cash receipts, cash payments, and net changes in cash resulting
from the company's operations, investments, and financing during a period. The usefulness of
Cash Flow Provides information to help assess:
1. the entity's ability to generate future cash flows. The main objective of financial reporting
is to provide information that allows for predicting the amount of time, and uncertainty of
future cash flows.
2. The entity's ability to pay dividends and meet its obligations. Simply put, cash is very
important. If the company does not have sufficient cash, employees cannot be paid, debts
cannot be settled, dividends cannot be paid, and equipment cannot be obtained.
3. Reasons for the difference between net income and net cash flows from operating
activities. The amount of net income is important because it provides information about the
success or failure of a business company from one period to another.
4. Cash and non-cash investment and financing transactions during the period. By examining
an investment company's activities (buying and selling of assets other than its products) along
with the financing of transactions (loans and payments of debt, investments by owners, and
distributions to owners), readers of financial statements can better understand why assets and
liabilities increased or decreased during the period.
1. Operating activities involve the cash effects of transactions that enter into net income, such
as cash receipts from the sale of goods and services and cash payments to suppliers and
employees for the acquisition of inventories and expenses.
2. Investing activities generally involve long-term assets and include (a) making and
collecting loans, and (b) obtaining and disposing of investments and earning long-term assets.
3. Financing activities involve liabilities and items of equity and include (a) obtaining cash
from creditors and paying borrowed amounts, and (b) obtaining capital from owners and
providing them with a return on, and return of, their investment. Generally, the layout of the
cash flow statement is similar to the following layout:
The basis of a recommendation by the IASB for the statement of cash flows is actually “cash
and cash equivalents”. Equivalent short-term, highly liquid investments that are both:
Generally, only investments with maturities within three months or less qualify for this
definition. Examples of cash equivalents are treasury bills, marketable securities, and money
market funds purchased with cash more than immediate needs. Equity investments are
excluded from cash equivalents unless they are, in substance, cash equivalents. although we
use the term "cash" in this discussion, it means cash and cash equivalents when reporting
cash flows and the net increase or decrease in cash. Cash Flow Statement Format A company
reports inflows and outflows from individual investing and financing activities separately.
That is, companies report them dirty, not netted against one another. Thus, cash outflows
from property purchases are reported separately from cash inflows from property sales.
Similarly, cash inflows from issuing debt are reported separately from cash outflows from
pensions.
2. Current income statement data help determine the amount of cash provided by or used by
operations during the period.
3. Transaction data selected from the general ledger provides the additional detailed
information needed to determine how the company-provided cash or used it during the
period.
Preparing a cash flow statement from the above data sources involves three main steps:
Step 3. Determine net cash flow from financial investing and financing activities Sources
of Information for a Cash Flow Statement Important points to remember in preparing a cash
flow statement are:
2. An analysis of the Retained Earnings account is required. The net increase or decrease in
Retained Earnings without any explanation is the significant amount in the statement.
Unexplained, it may be the effect of net income, dividend distribution, or prior period
adjustments. The statement includes all changes that have passed through cash or have
resulted in an increase or decrease in cash. Write-downs, amortization costs, and similar
"book" entries, such as the depreciation of plant assets, are cash inflows or not cash flows
because they do not affect cash. To the extent that they have entered into net income
determination, however, the company must add them back or subtract them from net income,
to arrive at net cash (used) from operating activities.
As we discussed earlier, two different methods available for adjusting operating income on
an accrual basis to net cash flows from operating activities are the indirect method
(reconciliation) and the direct method (income statement). The indirect method is the most
widely used in practice. . The main advantage of the indirect method is that it focuses on the
difference between net income and net cash flow from operating activities. That is, it
provides a useful link between the cash flow statement and the income statement and balance
sheet.
Direct Method Under the direct method the cash flow statement reports net cash flows from
operating activities as a major group of operating cash receipts (for example, cash collected
from customers and cash received from interest and dividends) and cash disbursements (for
example, payments to suppliers for goods, to employees for services, to creditors for
interests, and government authorities for taxes). The main advantage of the direct method is
that it shows cash operating receipts and payments. That is, it is more consistent with the
objective of the cash flow statement to provide information about cash receipts and cash
payments than the direct method, which does not report operating cash receipts and
payments.
net that allows the company to arrive at net cash flows from operating activities. But there
are many non-cash expenses or income items. Examples of cost items that a company must
add back to net income are the amortization of limited-life intangible assets such as patents,
and the amortization of deferred costs such as the cost of issuing bonds. This expense to
expense involves expenses made in prior periods that a company amortizes currently. Post-
retirement Cost Benefits
If a company has postretirement costs such as an employee pension plan, the pension costs
recorded during the period will likely either be higher or lower than the cash funded.
Changes in Deferred Income Tax Changes in deferred income tax affect net income but do
not affect cash. Equity Accounting Method Net increase in accounts investment does not
affect cash flow.
A company must subtract the net increase from net income to arrive at net cash flow from
operating activities. Losses and Gains Losses are added to net income to calculate net cash
flow from operating activities because losses are non-cash costs in the income statement.
Companies report gains in the cash flow statement as part of cash receipts from sales of
equipment under investing activities, thereby deducting gains from net income to avoid
double-counting as part of net income and again as part of cash receipts from sales.
Receivables Indirect method Due to an increase in Allowance for Accounts Receivable
Uncollectibles results from costs for bad debt expense, the company must add back the
increase in Allowance for Doubtful Accounts to net income to arrive at net cash flow from
operating activities Direct Method If using the direct method, the company should not set
aside bad debts against accounts receivable. Other Working Capital Changes.
Some changes in working capital, although they affect cash, do not affect net income.
Generally, this is an investment or funding of a current nature. Another change in a working
capital item that does not affect operating profit or cash is the cash dividend paid. Although
the company will report cash dividends paid when as a financing activity, it does not report
declarations but has not yet paid dividends on the cash flow statement.
Net Loss If the company reports net losses instead of net income, it must adjust net losses for
items that do not generate cash inflows or outflows. A net loss, after adjusting for costs or
credits that do not affect cash, can result in negative or positive cash flows from operating
activities. Disclosure of Significant Non-Cash Transactions Because the cash flow statement
reports only the effects of operating, investing, and financing in terms of cash flows, it
eliminates some non-cash transactions. - Significant cash and other events that are investing
or financing.
Among the more common non-cash transactions that companies must report or disclose in
some way are the following.
When multiple adjustments are required or other complicating factors are present, companies
often use worksheets to collect and classify data to be displayed on a cash flow statement. A
worksheet (spreadsheet when using computer software) is simply a tool that assists in the
preparation of statements. Its use is optional. Preparation of the Worksheet The preparation
of the worksheet involves the following steps.
Step 1. Enter the balance sheet accounts and their opening and ending balances in the
transactions section of the administrative account.
Step 2. Enter the data describing changes in the balance sheet accounts (other than cash) and
their effects against the cash flow statement in the reconciliation column of the worksheet.
Step 3. Enter the increase or decrease in cash on the cash row and at the bottom of the
worksheet. This record must allow totals from the reconciliation column according to the
agreement