financial reports &financial statements a dac 501: financial accounting presentation. by herick...

FINANCIAL REPORTS &FINANCIAL STATEMENTS

A DAC 501: FINANCIAL ACCOUNTING

PRESENTATION.BY

HERICK ONDIGO

SCHOOL OF BUSINESS, UoN

OBJECTIVE OF PRESENTATION

The Purpose of this presentation is to help you understand the data included in Financial Reports & specifically Financial Statements.

COMPONENTS OF AN FINANCIAL REPORT

The Letter to Shareholders: This gives a broad overview of the company’s business and financial performance.

The Business Review: This summarizes a company’s recent developments, trends and objectives.

The Financial Review: This presents a company’s business performance in Monetary Terms.

COMPONENTS OF AN ANNUAL REPORT … Management Report: The purpose of this report is to reinforce the

managements responsibilities for the companies financial and internal control systems and the shared role of management and directors in the preparation of the financial statements

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COMPONENTS OF AN ANNUAL REPORT …

• Management’s Discussion and Analysis• One of ways management communicates

the reasons for changes in financial and operating data

• The content of the section includes coverage of any favorable or unfavorable trends and significant events or Uncertainties in the areas of liquidity, capital resources, and results of operations

Management’s Discussion and Analysis…. Must also disclose prospective information

involving material events and uncertainties known to cause reported information to be less indicative of future operating activities or financial condition

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COMPONENTS OF AN ANNUAL REPORT

Audited Financial Statements: Consists of the Statement of Financial Position, Statement of Income, Statement Changes in Shareholders Equity, and Statement of Cash flow.

These statements are the main focus of today's presentation

COMPONENTS OF AN ANNUAL REPORT … Auditors Report An external auditor is an independent

certified Public Accountant hired by shareholders to provide an opinion on whether or not the company’s financial statements are prepared in conformity with the generally accepted accounting principles, International Financial Reporting Standards & other relevant legistations.

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Auditors Report cont…

The report from the independent auditors is often referred to as the auditor’s opinion, and is printed in the annual report.

It should state :

The audit steps taken to verify the financial statements meet the auditing profession’s approved standard of practice.

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The Financial Statements prepared by management are management’s responsibility and follow generally accepted accounting principles, Financial Reporting Standards and any relevant legislation.

10


As a result, when the annual report contains financial statements accompanied by an unqualified (often referred to as “clean”) opinion from independent auditors, there is added assurance that the figures can be relied upon as being fairly presented

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However, if the independent auditor’s report contains the qualifying words “except for”, the reader should be on the alert, cautions and questioning.

The reader should investigate the reason(s) behind such qualification(s), which should be summarily explained in that report and referenced to the footnotes.

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In addition, while the auditor(s) may not qualify the opinion, a separate paragraph may be inserted to emphasize an important item.

Financial statement analyst should carefully consider any matter so emphasized.

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Financial Statement Analyst should review the audit report to ascertain whether the company received unqualified (clean) opinion.

Anything less than unqualified opinion increases the risk of Financial Statement analysis

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Board of Directors XYZ CorporationWe have audited the accompanying statement of financial Position of XYZ Corporation as of 31 December 2011 and 2010, and the related statements of income, shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with International Auditing Sttandards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Corporation at 31 December 2010 and 2009, and the results of its operations and its cash flows for the years then ended, in accordance with International Financial Reporting Standards as published by the International Accounting Standards Board.

Signature of the Independent AuditorDate and Place

of the Report

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Study questions and problems Read the auditors’ report for Royal Appliance Co. What type of

opinion was issued by the auditors? To the shareholders and Board of Directors of Royal Appliance Co. We have audited the Consolidated Financial Statements of Royal

Appliance Co. From pages 5 to 10. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion and these financial statements based on our audits.

We conducted our audits in accordance with generally accepted standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining……

We believe that our audits provide a reasonable basis for our opinion. Continue to next slide

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Study questions and problems

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Royal Appliance Co. as of Dec. 31,2010 and 2011, and the consolidated results of their operations and their cash flow for each of the three years in the period ended Dec. 31,2011, in conformity with the International Financial Reporting Standard and the Conceptual Framework.

As discussed in footnote 1 to the Consolidated Financial Statements, effective September 2011, the Company changed its method of accounting for domestic inventories from the last-in , first-out(LIFO) method to the first-in, first-out(FIFO) method.

Coopers & Lybrand LLP

March 27, 2012

Explanatory notes

The annual reports of many companies contain this or a similar statement:

“See the Accompanying Notes to the Financial Statements.” or “The Accompanying Notes are an Integral Part of the Financial Statements.”

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Explanatory notes cont…

The Notes to the financial statements are aimed at assisting users in understanding the financial statements and comparing the financial statements of the entity with those of other entities.

The information provided in the notes should be cross-referenced to items on the face of the financial statements.

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The reason is that the financial statements themselves simply report the balances in the various accounts.

Because there is no room on the face of the statements for a complete and adequate discussion relating to those balances, additional required disclosures are provided in the notes.

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They play an integral part in financial statement analysis.

They are a means of communicating additional information regarding items included or excluded from the financial statement.

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They May include information on:– accounting policies, – commitments and contingencies, – business combinations, – transaction with related parties, – stock options, – legal proceedings,– significant customers and – detailed disclosures regarding individual

financial statement items22

COMPONENTS OF AN ANNUAL REPORT … Supplementary information These are schedules on business data

segments, export sales, marketable securities, short term borrowing and other quarterly financial data notes

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COMPONENTS OF AN ANNUAL REPORT … A proxy statement contains information

necessary for shareholder voting on a matter for which the proxy is solicited

A proxy is a means whereby a shareholder authorizes another person to act for him or her at the AGM .

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FINANCIAL STATEMENTS

The end product of the accounting process is financial statements and reports. The purpose of financial statements and reports is to communicate to users of accounting information the effect of activities on an accounting entity during a specified period of time and the financial position of the entity at the end of a given period of time

FINANCIAL STATEMENTS cont..

A complete set of financial statements comprises:

a statement of financial position a statement of comprehensive income a statement of changes in equity a statement of cash flows notes to the financial statements; comprising

a summary of significant accounting policies and other explanatory notes.

The Statement of Comprehensive Income

The statement of comprehensive income should provide information about the performance of the entity. The statement of comprehensive income should include all items of income and expenses recognized in a period.

The Statement of Income cont..This can be thought of more

like a motion picture, since it reports on how a company performed during the period(s) presented and shows whether that company’s operations have resulted in a profit or loss.

The Statement of Income cont..

IAS 1 requires enterprises to present all items of income and expenses recognized in a period either

(a) in a single statement of comprehensive income; or

(b) in two statements; a separate income statement and a statement of other comprehensive income

The Statement of Income cont

A statement of income is a statement that shows the results of operations of a business entity during an accounting period. This is reflected by the revenues earned matched with the expenses incurred to generate the revenue.


Revenue refers to increases in owners’ equity resulting from sale of goods or performance of services in the ordinary course of business.

It consists of cash, claims to cash or a promise to receive cash in the future (accounts receivable).


Revenue represents compensation for the sale of goods or performance of services. Other types of revenue may include:

Sales or Turnover Interest earned Dividend earned Rent earned Royalty earned


Expenses refer to decreases in owners’ equity resulting from the costs incurred in order to earn revenue.

They are measured by the amount of asset consumed or the amount of liability incurred.

They may involve immediate cash payment or promises to pay in the future.

The Statement of Income cont Comprehensive incomes include all

changes in equity during the period except those resulting from investment by owners and distribution to owners.

They include all revenues and gains, expenses and loses reported in net income ,and all gains and losses that bypass net income but affect equity.

They are changes in owners’ equity that by pass the income statement

The Statement of Income cont Examples of other comprehensive income

include: changes in revaluation surplus actuarial gains and loses on defined benefit

plans exchange gains/losses arising from

translating financial statements of foreign operations

gains and losses on re-measuring available for sale financial assets


An entity has the alternative of presenting an analysis of expenses in the statement of income using a classification based on either the nature or their function within the entity.

The guiding criteria in selecting the basis of the classification should be relevancy and

reliability.


Classification of expenses by function involves grouping expenses based on the purpose for which the cost was incurred.

For example, advertising costs, depreciation of motor vehicles used for the purpose of distributing products and uncollectible debts would be classified as selling and distribution costs.


• Illustrative example of a statement of comprehensive income, where expenses are classified by their function


XYZ Limited Statement of Comprehensive Income

For the year ended 31st December


2010 2009 Sh.million Sh.million Turnover 1660 1400 Cost of sales (840) (720) Gross profit 820 680 Other operating income 60 880 680 Administration expenses (240) (200) Selling and distribution costs (220) (180) Finance costs (40) (40) Investment income 20 15 Profit before taxation 400 275 Income tax expense (180) (105) Profit for the period 220 170 Other comprehensive income Exchange differences on translating foreign operations

X X

Gains on property revaluation X X Share of other comprehensive income of associates

X X

Income tax relating to components of other comprehensive income

X

X

Other comprehensive income for the year, net of tax

X

X

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

X

X


Classification of expenses by nature involves identifying expenses by their titles

The following is an Illustrative example of a statement of income, where expenses are classified by their nature’

XYZ Limited Statement of Comprehensive Income

For the year ended 31st December


2010 2009 Sh.million Sh.million Turnover 1660 1400 Other operating income 60 Changes in inventories 20 (20) Purchases (860) (700) Staff costs (220) (181) Rent and rates (50) (45) Depreciation and amortization (70) (55) Directors emoluments (10) (8) Advertisement and promotion (35) (30) Audit fees (5) (5) Light and power (30) (24) Uncollectible debts (7) (5) Insurance expense (5) (5) Telephone and postage (3) (4) Printing and stationery (5) (3) Vehicle running expenses (20) (15) Finance costs (40) (40) Investment income 20 15 Profit before taxation 400 275 Income tax expense (180) (105) Profit for the period 220 170 Other comprehensive income Exchange differences on translating foreign operations

X X

Gains on property revaluation X X Share of other comprehensive income of associates

X X

Income tax relating to components of other comprehensive income

X

X

Other comprehensive income for the year, net of tax

X

X

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

X

X

The Statement of Changes in Owners’ Equity

• This statement serves as a connection between the Statement of Financial Position and the statement of income by explaining the changes that have taken place in owners’ equity during the period covered.

• The statement of changes in equity provides information about the increase or decrease in the net assets or owners’ equity of an entity between the end of two reporting dates.

The Statement of Changes in Owners’ Equity illustrative format

Share capital Sh.’000’

Share premium Sh.’000’

Revaluation surplus ‘Sh.000’

Accumulated Profit Sh.’000’

Translation of foreign operations Sh’ 000’

Total Sh.’000’

Balance at 1 January 2009 X X X X X X Changes in accounting policy X X Restated balance X X X X X X Changes in equity for 2009 Dividends (X) (X) Issue of share capital X X X Total comprehensive income for the year

X X X X

Balance at 31 December 2009

X X X X X X

Changes in equity for 2010

Dividends (X) (X) Total comprehensive income for the year

X X X X

Transfer to retained earnings (X) X Balance at 31 December 2010

X X X X X X

STATEMENT OF FINANCIAL POSITION This portrays the financial position of

the business by showing what the company owns (controls) and what it owes to outsiders and owners at the report date.

It is a snapshot, since it reports the company’s financial position at a specific point in time.

The Statement of Financial Position cont…The Statement divided into two halves:

Assets, always presented first Liabilities and Shareholders’ Equity In the standard accounting model, the

formula of Assets=Liabilities + Shareholders’ Equity applies.

Both halves are always in balance.

The Statement of Financial Position cont…

The two sides balance because, from an economic viewpoint, each dollar/shilling of assets must be “funded” by a dollar/shilling of either liabilities or equity.

Reported assets, liabilities, and shareholders’ equity are subdivided into line items or groups of similar “accounts” having a dollar/shilling amount or “balance.”

The Statement of Financial Position cont… The Assets section includes all economic

resources: the goods and property owned or controlled by the company, and uncollected amounts due (receivables) to the company from others.

The Liabilities section includes all debts (Obligations) and amounts owed (payables) to outside parties.

The Statement of Financial Position cont… The Shareholders’ Equity section

represents the shareholders’ ownership interest in the company--what the company’s assets would be worth (at book value) after all claims upon those assets were paid.

Shareholders = Assets- Liabilities Equity

The Statement of Financial Position cont… The following is an illustrative example

of a Statement of Financial Position


XYZ Limited Statement of financial position

As at 31st December


2010 2009 Sh.million Sh.million Assets Non –current assets

Freehold property 164 60 Plant and machinery 450 360 Furniture and fittings 32 40 Motor vehicles 20 23 Goodwill 10 10 Investments 351 334 1027 827

Current assets Inventories 46 34 Accounts receivable 164 203 Prepayments 10 15 Cash and cash equivalents 76 33 296 285 Total assets 1323 1112 Equity and Liabilities Capital and reserves: Share capital 350 273 Share Premium 30 27 Revaluation reserve 66 66 Accumulated Profit 590 480 Shareholders’ funds 1036 846 Non-current liabilities 16% loan stock 164 132

Current liabilities Accounts Payable 98 112 Taxation Payable 25 22

123 134 Total equity and liabilities 1323 1112

The Statement of Cash Flows

The statement of cash flows reports on the company’s cash movements during the period(s) classifying them according to three business activities:

Operating, Investing and Financing

Statement of cash flows cont…

The basic purpose of a statement of cash flows is to provide information about the sources and application of cash and cash equivalents of an entity.

It communicates information about the financial adaptability of an enterprise for a given period of time.


Cash comprises of cash on hand, and demand deposits (including those in foreign currencies) net of bank overdrafts.

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are not subject to any significant risk of changes in value.

Statement of cash flows cont..

They include short-term securities; investments that have a short maturity of three months or less from the specified redemption date (e.g. 91 day Treasury Bills)

Cash flows are inflows and outflows of cash and cash equivalents


Unlike the statement of financial position and the statement of comprehensive income, which are required by the Companies Act (Cap 486), the statement of cash flows is a requirement of the International Financial Reporting Standards, International Accounting Standard No.7 in particular (IAS 7).

Statement of Cash Flows cont…

The statement of cash flows presents the changes in cash resulting from business activities.

Cash flow analysis is necessary to make proper Investing and Financing decisions and also to maintain operations.


Cash flows are Classified by business activity:

Operating activities. Investing activities and Financing activities,


• Operating activities basically include all activities not classified as either financing or investing activities.

• They involve the company’s primary business activities, for example the production/sale and delivery of goods and/or services.

• They reflect the cash effects of transactions, which are included in the determination of net income.


• Since many items enter into the determination of net income, the indirect method can be used to adjust the net income for the period to determine the cash provided by or used for operating activities.

• This method requires adjusting net income to reconcile it to cash flows from operating activities.

Statement of Cash Flows, cont…

Common examples of cash flows from operating activities are:

Cash Collected from customers Payments to suppliers of Goods Payment for insurance Payment for Salary and Wages Payment of rent and rates Tax payments

Statement of Cash Flows cont...

Investing activities include those activities relating to acquisition or disposal of non current assets, long term investments or short term investments not classified as cash equivalent

Statement of Cash Flows cont… Financing activities include those

activities relating to the receipt and repayment of funds provided by creditors and investors.

These activities include the issuance of debt or equity securities, the repayment of debt, and distribution/payment of dividends/interest

Statement of Cash Flows, cont…

• The last part of the cash flow statement reflect the effect of exchange rate changes on cash as well as a reconciliation between the opening and ending cash and cash equivalents


The statement of cash flows or statement of sources and application of funds or statement of changes in financial position is not a legal requirement,

The following is an illustrative Format of a statement of cash flows


XYZ Limited.Statement of cash flows For the period ended 31st

December 2010.


Sh. Sh. Cash flows from operating activities: Cash receipts from customers XX Cash paid to suppliers and employees (XX) Cash generated from operations XX Income taxes paid (XX) Net cash from operating activities XX Cash flows from investing activities Dividends received XX Proceeds from sale of marketable securities XX Purchase of marketable securities (XX) Purchase of plant and equipment (XX) Proceeds from sale of equipment XX Net cash from investing activities XX Cash flows from financing activities Proceeds from issue of share capital XX Proceeds from long term borrowing XX Interest paid (XX) Dividends paid (XX) Net cash from financing activities XX Change in cash and cash equivalents XX Add: Cash and cash equivalents at beginning of period XX Cash and cash equivalents at end of period XX

END OF PRESENTATION

THANK YOU

financial reports &financial statements a dac 501: financial accounting presentation. by herick...

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