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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
4
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
6
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.
8
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.
9
Auditors Report cont…
 The Financial Statements prepared by
management are management’s
responsibility and follow generally
accepted accounting principles, Financial
Reporting Standards and any relevant
legislation.
10
Auditors Report cont…
 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
11
Auditors Report cont…
 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.
12
Auditors Report cont…
 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.
13
Auditors Report cont…
 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
14
Board of Directors
XYZ Corporation
We 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 Auditor
Date and Place
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
16
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 , firstout(LIFO) method to the first-in, first-out(FIFO) method.
Coopers & Lybrand LLP
March 27, 2012
17
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.”
18
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.
19
Explanatory notes cont…
 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.
20
Explanatory notes cont…
 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.
21
Explanatory notes cont…
 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 items
22
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
23
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 .
24
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.
The Statement of Income cont
 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).
The Statement of Income cont
 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
The Statement of Income cont
 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
The Statement of Income cont
 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.
The Statement of Income cont
 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.
The Statement of Income cont
• Illustrative example of a statement of
comprehensive income, where expenses are
classified by their function
The Statement of Income cont
 XYZ Limited
 Statement of Comprehensive Income
 For the year ended 31st December
The Statement of Income cont
Turnover
Cost of sales
Gross profit
Other operating income
Administration expenses
Selling and distribution costs
Finance costs
Investment income
Profit before taxation
Income tax expense
Profit for the period
Other comprehensive income
Exchange differences on translating foreign
operations
Gains on property revaluation
Share of other comprehensive income of
associates
Income tax relating to components of other
comprehensive income
Other comprehensive income for the year,
net of tax
TOTAL COMPREHENSIVE INCOME FOR
THE YEAR
2010
Sh.million
1660
(840)
820
60
880
(240)
(220)
(40)
20
400
(180)
220
2009
Sh.million
1400
(720)
680
680
(200)
(180)
(40)
15
275
(105)
170
X
X
X
X
X
X
X
X
X
X
X
X
The Statement of Income cont
 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
The Statement of Income cont
Turnover
Other operating income
Changes in inventories
Purchases
Staff costs
Rent and rates
Depreciation and amortization
Directors emoluments
Advertisement and promotion
Audit fees
Light and power
Uncollectible debts
Insurance expense
Telephone and postage
Printing and stationery
Vehicle running expenses
Finance costs
Investment income
Profit before taxation
Income tax expense
Profit for the period
Other comprehensive income
Exchange differences on translating
foreign operations
Gains on property revaluation
Share of other comprehensive income of
associates
Income tax relating to components of
other comprehensive income
Other comprehensive income for the
year, net of tax
TOTAL COMPREHENSIVE INCOME
FOR THE YEAR
2010
Sh.million
1660
60
20
(860)
(220)
(50)
(70)
(10)
(35)
(5)
(30)
(7)
(5)
(3)
(5)
(20)
(40)
20
400
(180)
220
2009
Sh.million
1400
(20)
(700)
(181)
(45)
(55)
(8)
(30)
(5)
(24)
(5)
(5)
(4)
(3)
(15)
(40)
15
275
(105)
170
X
X
X
X
X
X
X
X
X
X
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
Balance at 1 January 2009
Changes in accounting policy
Restated balance
Changes in equity for 2009
Dividends
Issue of share capital
Total comprehensive income
for the year
Balance at 31 December
2009
Changes in equity for
2010
Dividends
Total comprehensive income
for the year
Transfer to retained earnings
Balance at 31 December
2010
Share
capital
Share
premium
Revaluation Accumulated
surplus
Profit
Sh.’000
’
X
Sh.’000’
‘Sh.000’
X
X
X
X
X
Sh.’000’
X
X
X
Translation of Total
foreign
operations
Sh’ 000’
Sh.’000
’
X
X
X
X
X
(X)
X
X
X
X
X
X
(X)
X
X
X
X
X
X
X
X
(X)
X
(X)
X
(X)
X
X
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
The Statement of Financial
Position cont…
 XYZ Limited
 Statement of financial position
 As at 31st December
The Statement of Financial Position cont…
Assets
Non –current assets
Freehold property
Plant and machinery
Furniture and fittings
Motor vehicles
Goodwill
Investments
Current assets
Inventories
Accounts receivable
Prepayments
Cash and cash equivalents
Total assets
Equity and Liabilities
Capital and reserves:
Share capital
Share Premium
Revaluation reserve
Accumulated Profit
Shareholders’ funds
Non-current liabilities
16% loan stock
Current liabilities
Accounts Payable
Taxation Payable
Total equity and liabilities
2010
Sh.million
164
450
32
20
10
351
1027
46
164
10
76
296
1323
2009
Sh.million
60
360
40
23
10
334
827
34
203
15
33
285
1112
350
30
66
590
1036
273
27
66
480
846
164
132
98
25
123
1323
112
22
134
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.
Statement of cash flows cont…
 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
Statement of cash flows cont…
 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.
Statement of Cash Flows cont…
 Cash flows are Classified by business
activity:
 Operating activities.
 Investing activities and
 Financing activities,
Statement of Cash Flows cont…
• 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.
Statement of Cash Flows cont…
• 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
Statement of cash flows cont..
 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
Statement of cash flows cont..
XYZ Limited.
Statement of cash flows
For the period ended
December 2010.
st
31
Statement of cash flows cont..
Sh.
Cash flows from operating activities:
Cash receipts from customers
Cash paid to suppliers and employees
Cash generated from operations
Income taxes paid
Net cash from operating activities
Cash flows from investing activities
Dividends received
Proceeds from sale of marketable securities
Purchase of marketable securities
Purchase of plant and equipment
Proceeds from sale of equipment
Net cash from investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Proceeds from long term borrowing
Interest paid
Dividends paid
Net cash from financing activities
Change in cash and cash equivalents
Add: Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
XX
(XX)
XX
(XX)
Sh.
XX
XX
XX
(XX)
(XX)
XX
XX
XX
XX
(XX)
(XX)
XX
XX
XX
XX
END OF PRESENTATION
THANK YOU