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THE FINANCIAL STATEMENTS OF THE LIMITED COMPANIES AND CASH FLOW STATEMENT
Profit&Loss Statement, Balance Sheet,
Cash Flow Statements
BALANCE SHEET AND PROFIT OR LOSS STATEMENTS The Financial Statements of a company are normally filed\annually at a public bureau, in a form prescribed by companylaw and International Financial Reporting Standards (IFRS).Financial Statements comprises:1. Profit&Loss Statement2. Balance Sheet3. A Statement of Changes in Equity4. A Cash Flow Statements
In previous chapters we considered A Statement of Changes inEquity, now we present the other Financial Statements of acompany.
The Balance of ABC ltd at 01 January 2008 is set out below:
Non-current Assets USD in thousand Plant and Equipment at cost 260 Vehicle 42 Accumulated depreciation (P&E) (84) Accumulated depreciation (vehicle) (16.80)
Current Assets Inventories 22 Trade receivables 56 Bank 7 Bank deposit account 10
Total 296. 20
Current liabilities USD in thousand
Trade payable 23 Wage payable 48 Income tax payable 10 Advertising 5 Heat, light and fuel 3Non-current liabilities 10 % Debenture 50
Equity Ordinary shares at 1 USD each 100 Share premium 0.30 USD each 30 Retained earnings 27.20
Total 296,20
The following transactions happened in 2008.1. Depreciation to be calculated on non-current assets during
year 2008: Plant and equipment 20 % per annum reducing balance Vehicle 20 % per annum str/line balance2. Bought furniture valued 5 $ on credit3. Received 54 $ into bank account trade receivables4. Paid wages 45 $ and 10 $ taxes from the bank account5. Bought goods 50 $ on credit, and sold goods costing 60 $ for105 $ among which 70 $ was in cash and 35 $ on credit 6. Paid trade payables- 5 $ for furniture and 62 $ for goods7. Paid for advertising, heat and light payables8. Sold a vehicle for 20 $ in cash in December9. Received into the current bank account 1.6$ interest pmt 10. Salary charged 30 $ and income tax charged 4.2$11. Other administrative expenses were charged 7 $ 12. Received in cash for assisted services 42 $ to motor
vehicles and machineries13. 20 % profit (income) tax charged
Plant&E Depreciation Payable Wage pay 260 84 6)62 23 4)45 48 1) 35.2 5)50
10)30
Vehicle Depreciation In tax pay Advert Pay 42 8)42 8)25.2 16.8 4)10 10 7)5 5 1) 8.4 10)4.2 13) 1,40 Goods Receivables Bank Heat&light Furniture/P 22 5) 60 56 3)54 7 7)3 3 6)5 2) 55)50 5)35 3)54 4)55 5)70 6)67 8)20 7)8 Admin payable Debentur Bank deposit 9)1.6 11) 7 50 10 12) 42
Furniture Ordinary shares Share premium
2) 5 100 30
Disposal on vehicle8) 42 8) 25.2 Retained earnings 8) 20 27.208)3.2
Depreciation expense COGS Revenue/Op 1) 35.2 5)60
5)105 1) 8.4 12)
42
Salary Expense Admin exp Revenue/Invest
10)34.2 11) 7 8)3.2
Revenue/Finan
9)1.6
Profit&Loss StatementRevenue from operational activities
(105+42)
COGS (60)
Gross Profit 87
Depreciation charges (43.6)
Admin expenses (7)
Salary expense (34,2)
Operational profit 2.2
Interest received 1.6
Revenue from investment activity
3.2
Profit before tax 7
Profit tax 1,40
Net profit 5,6
Balance Sheet
Non-Current assets Current Liabilities
Plant 260 Trade Payable 11
Depreciation of Plant (119,20)
Wage payable 33
Furniture 5 Income tax payable/profit 5,60
Current Assets Admin payable 7
Goods 12 Non-current Liabilities
Receivable 37 Debenture 50
Bank 64,6 Equity
Bank deposit account 10 Ordinary shares 100
Share premium 30
Retained earnings 27,20+5,6
Total 269,4 Total 269,40
CASH FLOW STATEMENT
A Cash Flow Statement recognizes the importance of liquidityto a business by reporting the effect of the transactions of thebusiness during the period on the bank, cash and similar liquidassets. It is a summary of receipts and payments during theperiod. But learners often ask: “Why does the profit made during theperiod not equate to an increase in cash and bank balance?”Therefore is the statement that shows the profit madeduring the period considers how that profit and othertransactions during the period, have affected the flow of cashinto and out of the company.
WHY DOES THE PROFIT EARNED NOT EQUAL THE CHANGE OF IN BANK AND CASH BALANCES?There are three main reasons:1. Profit is calculated on accrual basis, means that the revenue
is taken back when is earned. Expenses are calculated on the
same basis to match with the revenue. Bank and cash balances
change when monies are received and paid.
2. The calculation of profit includes include some items that do
not affect cash at all or affect if differently. For example, profit
after deducting depreciation, which involves no movement in
cash. The profit or Loss on disposal of a non-current asset will
be taken into the profit calculation, but it is the proceeds of
sale that affect cash. In addition there will be other accrued
items, like taxes and etc.
3. Bank and cash balances are affected by some items that do not
affect profit, such as the purchase of NCA, the raising of additional
capital or repayment of loans.
The cash Flow Statement has three sections:1.Cash flows from operating activities. Cash fromoperating activities is calculated after deducting: interest paidand income tax paid
2. Cash flows from investment activities: this has fourmain sections:Purchase of non-current fixed assets, proceeds on sale noncurrent fixed assets, interest received (bonds), dividend received
3. Cash flows from financial activities: this has four mainSections:Proceeds from issuing shares, proceeds from loans, repaymentof loans, payment of dividends
Cash flows from operating activities is cash generated fromoperations. Operations are the normal, everyday activity of thecompany, that earn it profit. Cash Flows from investment activities shows the purchase ofnon-current fixed assets and the proceeds of on their disposal.In addition interest and dividends received occurs cash inflows. Cash flows from financial activities is the proceeds fromissuing shares, loan proceeds or debentures. For preparation Cash Flow Statements there are two methods:1. Direct method2. Indirect methodDirect method shows direct cash inflows and outflows during the certain accounting period.When we consider Indirect method, opening and endingbalances of assets items, payables and capital structure is
noted. .
The result will be as follows:Profit for the period Add: Depreciation charge for the period Loss on disposal of NCA Decrease in inventories levels Decreases in receivables Increase in payablesLess: Profit on disposal of NCA Increases in inventories level Increase in receivables Decrease in payables
Example: From the following information construct the Cash Flow Statement:
Operating Profit for the year, after charging depreciation of 22 300
215 500
Purchase of NCA 80 000
Repayment of Non current loan 45 000
Issues of shares at par 100 000
Changing in working capital during the year
Increase in inventories 22 500
Decrease in receivables 18 000
Decrease in payables 14 500
Taxation paid 25 000
Dividends paid 5 000
SolutionCash flows from operating activities
Cash flows from Investment activities
Operating profit 215 500 Purchase of NCA (80 000)
Add: Depreciation 22 300 Cash flows from financing activities
Add:Decrease in Receivables 18 000 Issue of shares 100 000
Less: Increase in inventories (22 500)
Loan repaid (45 000)
Decrease in payables (14 500)
Dividends paid (5 000)
Cash generated from operations 218 800
Increase in net cash
163 800
Taxation paid (25 000)
193 800
Example of ABC ltd
Assets 01 January 2008, USD
31 December 2008, USD
Non-current assets 302 265
Accumulated depreciation (100,80) (119,20)
Current AssetsInventories 22 12
Receivable 56 37
Bank 7 64,60
Bank deposit 10 10
Total 296,20 269,40
Current Liabilities 01 January 2008
31 December 2008
Trade payable 23 11
Wage payable 48 33
Income tax payable/Profit 10 5,60
Advertising payable 5 -
H&light, fuel payable 3 -
Admin payable - 7
Non-current liabilitiesDebenture 50 50
EquityOrdinary shares at 1 USD per share 100 100
Share premium o,30 USD per share 30 30
Retained earnings 27,20 32,8
Total 296,20 269,40
Cash flow from operating activity
Increase in retained earnings 32,80-27,20
5,60
Add Depreciation charge for the year 43 ,60
Deduct profit on sale of NCA (3,20)
46
Add Decrease in Inventories 10
Add Decrease in Receivables 19
Less Decease in payables (32,40)
42,60
Cash flow from investing activities
Purchase of NCA (5)
Proceeds on sale of NCA 20
Increase in bank balance 57,60 +
Beginning bank balance +17= 74,60 ending bank balance