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