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FINANCIAL STATEMENTS
Chapter outline
Introduction
The objectives of financial statements
Who are the users of financial statements?
Requirements for financial statements
The standardisation of financial statements
Statement of financial position
Statement of comprehensive income
Statement of cash flows
Conclusion
Learning outcomes
By the end of this chapter, you should be able to:
Discuss the objectives and requirements of financial
statements
Identify the users of financial statements
Identify the components included in the main types of
financial statements
Distinguish between the three main types of financial
statements
Describe the formats of a statement of financial
position, statement of comprehensive income and
statement of cash flows.
Introduction
Companies provide annual report at end of
financial year
Annual report provides analysts with
information
Includes a set of financial statements:
Statement of financial position
Statement of comprehensive income
Statement of cash flows
Financial position
Influenced by economic resources and the capital
structure used to finance these resources
Evaluated by focusing on assets, liabilities and
shareholders equity included in the statement of
financial position
Solution
Standardise published financial statements
Facilitates comparison between companies & over
time
Simplifies the calculation of financial ratios
Non-current
assets
Ordinary
shares
Reserves
Preference
shares
Non-controlling
interest
Current liabilities
Non-current
liabilities
Assets
Capital investment - apply assets to generate
revenue
Two types of assets:
Non-current
Current
Non-current assets
PPE at cost price
Usually indicated at original purchase price of items
Accumulated depreciation
Accumulate depreciation provided on PPE in the
statement of comprehensive income
Non-current assets
Intangible assets
Goodwill
Other intangible assets (software, licences)
Investment in associate
Owns 20% - 50% of shares in another company
Current assets
Inventories
Required for operations of a company
Total equity
Breakdown of different forms of equity capital
to finance companys assets
Includes all capital provided by different
shareholders
Important to distinguish between contributions
of different types of shareholders
Reserves
Share-based payments
Share repurchases
Retained earnings
Accumulation of retained profits reinvested
Non-controlling interest
Financial statements of subsidiary companies
included
Liabilities
Breakdown of the different forms of debt capital
Two types of liabilities:
Non-current liabilities
Current liabilities
Non-current liabilities
Long-term debt capital
Interest-bearing borrowings
Long-term loans
Mortgages
Debentures
Post-retirement obligations
Deferred tax liabilities
Current liabilities
Short-term debt capital
Trade and other payables
Outstanding amount on credit purchases
Other short-term obligations
Short-term debt
Loans redeemed in the next financial year
Current liabilities
Statement of comprehensive
income
Summary of financial performance for the
financial year matching income and expenses
Income:
Turnover
Operating income
Investment income
Non-recurring income
Other
Statement of comprehensive
income (cont.)
Expenses:
Cost of sales
Operating expenses
Non-recurring expenses
Finance cost
Taxation
Non-controlling interest
Preference dividends
Ordinary dividends
Statement of comprehensive
income (cont.)
EXPENSES
INCOME
RETAINED
PROFIT
2009
2008
(R million)
(R million)
Turnover
137 836
129 943
(88 508)
(74 634)
49 328
55 309
1 021
635
(25 681)
(22 128)
24 666
33 816
2 060
989
Finance cost
(1 917)
(1 145)
24 809
33 660
(10 480)
(10 129)
14 329
23 531
(67)
(1 111)
(614)
(3)
Attributable earnings
13 648
22 417
Ordinary dividends
(7 193)
(5 766)
6455
16651
Gross profit
Tax
Profit after tax
Non-controlling interest
Preference share dividends
Statement of comprehensive
income components
Turnover
Income received for products or services rendered
by the company during the financial year
Gross profit
Turnover minus cost of sales
Profit generated by sales activities of company
Statement of comprehensive
income components
Other operating income
Income items not part of the sales activities of the
company, but which are generated as part of the
operating activities
Operating expenses
Expenses incurred to support primary activities
Includes depreciation, employee costs, research
and development, operating lease charges, etc
Operating profit
Profit resulting from primary activities of business
Excludes income items not part of the businesss
normal activities
Statement of comprehensive
income components
Investment income
Income generated by financial investments
Dividends & interest received
Finance cost
Interest paid on debt financing
Statement of comprehensive
income components
Non-controlling interest
Portion of profit that belongs to non-controlling
interest shareholders
Attributable earnings
Portion of profit left after all expenses have been
allocated
Important to the ordinary shareholders: amount
available for ordinary dividend payments
Statement of comprehensive
income components
Ordinary share dividends
Total amount paid to ordinary shareholders in the
form of dividends
Retained earnings
Portion of profit not paid out as dividends to
shareholders but reinvested
Transferred to reserves of business and used to
finance businesss activities
Earnings still belongs to shareholders included as
part of shareholders equity
CASH FROM
OPERATING
ACTIVITIES
+/-
MOVEMENT IN
CASH DURING
THE YEAR
CASH FROM
INVESTING
ACTIVITIES
+/-
CASH AT END
OF YEAR
CASH FROM
FINANCING
ACTIVITIES
2008
(R million)
(R million)
144 963
123 452
(96 776)
(88 712)
48 187
34 740
2 264
957
(2 168)
(2 405)
(10 252)
(9 572)
38 031
23 720
Dividends paid
(7 193)
(5 766)
30 838
17 954
2009
(R million)
(13 047)
(126)
697
(30)
3 486
(89)
7
(917)
(12 518)
2008
(R million)
(8 671)
(17)
184
(431)
693
(42)
0
(393)
(10 844)
2009
2008
(R million) (R million)
1 189
475
(1 114)
(7 300)
5 575
3 806
(4 820)
(4 588)
280
1 942
(2 091)
(2 292)
(212)
(458)
(1 193)
(870)
16 257
4 335
20 592
(8 415)
(448)
(981)
6 088
4 335
Conclusion
The main objectives of financial statements are to
provide information about the financial position,
financial performance and changes in the financial
performance of a company.
Conclusion (cont.)
It is sometimes necessary to standardise the published
financial statements of a company to ensure that they
are comparable with other companies, and over time.
The statement of financial position provides a summary
of a companys financial position on a specific date.
The statement consists of two parts: the asset side,
and the equity and liabilities side. The asset part
provides an indication of the specific assets that the
company owns. The equity and liability part contains
the different sources of capital used to finance these
assets.
Conclusion (cont.)
The statement of comprehensive income provides a
summary of a companys financial performance over a
period of time. Within a statement of comprehensive
income the turnover generated during the financial year
is allocated to the different stakeholders up to a point
where only retained earnings are left.
The statement of cash flows provides a summary of a
businesss ability to generate cash and the application
of cash (i.e. how the cash is used). A distinction is
made between the cash results of operating, investing
and financing activities.