Understanding the Financial Statements for Beginners

The structure and content of financial statements are defined by local law.  International Accounting Standards (IAS) 1 is designed to work in any jurisdiction and require their own set of requirements for financial statements presentation.

Financial statement comprise of:

      -          Statement of Financial Position   

-          Statement of Comprehensive Income OR  Income Statement with Other Comprehensive Income (OCI)

-          Statement of  Changes  in Equity   

-          Statement of Cash Flow (this will be in another blog)

-          Accounting policies and explanatory notes

Below is a simplified format of a Statement of Financial Position:

EDG Statement of Financial Position as at 31 December 2012

	Assets
Current assets:
Cash		$x
Receivables		x
Inventory		x
Prepaid Insurance		x
Non-current assets:
Property and Equipment		x
Total Assets		$x
Liabilities and Equity
Current liabilities:
Payables		$x
Other Liabilities		x
Short-term loans		x
Non-current liabilities:
Long-term loans		x
Total Liabilities		$x
Equity:
Share Capital		x
Retained Earnings		x
Total Equity		$x
Total Liabilities and Equity		$x

An asset or liability to be classified as current if:

      -          It will be settled within 12 months of  December 31, 2012; OR

-          It is part of the entity’s normal operating cycle

Statement of Changes in Equity

       -          Provides a summary of all changes in equity arising from transactions with owners of the business.  This will include the effect of Dividends and Issuance of shares; and

-          Profit for the period

Below is a simplified format of a Statement of Changes Equity:

EDG Statement of Changes in Equity for the year ended 31 December 2012

				Share		Retained		Total
				Capital		Earnings		Equity
Balance at 31 December 2012				$x		$x		$x
Dividends						(x)		(x)
Issue of Share Capital				x				x
Profit for the period						x		x
Balance at 31 December 2012				$x		$x		$x

 

Statement of Comprehensive Income

-          Total Comprehensive Income is the profit or loss for the period PLUS Other Comprehensive Income

-          Other Comprehensive Income is income and expenses that are not part of normal profit and loss.  Example is Gain or loss on revaluation of property and equipment - some businesses hire an expert for independent valuation of their property and equipment.

Below is a simplified format of a Statement of Comprehensive Income:

EDG Statement of Comprehensive Income for the year ended 31 December 2012

Revenue			$x
Cost of Sales			(x)
Gross Profit			x
General and			x
Administrative Expense			x
Profit from Operations			x
Finance Cost			(x)
Profit before tax			x
Income tax expense			(x)
Profit for the period			x
Other comprehensive income
Gain/loss on revaluation			x
Total comprehensive income for the year			$x