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  The Main Financial Statements

Introduction to the Main Financial Statements

Financial statements create part of the process of financial reporting. An entire set of financial statements generally involves a balance sheet, a statement of profit and loss (also termed as 'income statement'), a cash flow statement and those notes and other statements and explanatory material which are an integral part of the financial statements. They might also involve supplementary schedules and information relies on or derived from, and supposed to be read with, such type of statements. Such types of schedules and supplementary information might deal, for instance, with financial information about business and geographical segments, and disclosures about the influences of changing prices. Though, financial statements do not involve such types of items as reports through directors, statements through the chairman, discussion and analysis through management and identical items that may be involved in a financial or annual report.

As we may suppose, the financial statements of a limited company are, basically, the same like those of a sole proprietor or partnership. Though there are some variations of detail. We shall now refer these.

The income statement

The major points for consideration in the income statement are as follows:

Ø  Profit

We can observe that, following the computation of operating profit, two additional measures of profit are described as follows:

  • The 1st of these is the profit before taxation. Interest charges are subtracted from the operating profit to derive this figure. In the case of a sole proprietor or partnership business, the income statement would end here.
  • The 2nd measure of profit is the profit for the year. Because the company is a separate legal entity, it is liable to pay tax (termed as corporation tax) on the profits produced. (This contrasts with the sole-proprietor business in which it is the owner than the business that is liable for the tax on profits, as we saw before in the chapter.) This measure of profit presents the amount which is available for the shareholders.

Ø  Audit fee

Companies across a specific size are needed to have their financial statements audited through an independent firm of accountants, for which a fee is charged. The aim of the audit is to lend credibility to the financial statements.

Even though it is also open to sole proprietorships and partnerships to comprise their financial statements audited, comparatively few do, that is why this is an expense which is most frequently seen in the income statement of a company.

The statement of financial position

The major points for consideration in the statement of financial position are as follows:

Ø  Taxation

The amount that comes into existence as part of the current liabilities presents 50% of the tax on the profit for 2010. So, it is 50% (£12 million) of the charge which appears in the income statement (£24 million); the other 50 % (£12 million) will already have been paid. The unpaid 50 % will be paid shortly after the statement of financial position date. These payment dates are set down through law.

Ø  Other reserves

This will involve any reserves that are not separately recognized on the face of the statement of financial position. It might involve a general reserve that generally contains trading profits which have been transferred to this separate reserve for reinvestment ('ploughing back') into the operations of the company. It is not at all essential to set up a separate reserve for this aim. The trading profits could stay unallocated and still swell the retained earnings of the company. It is not completely clear that why directors decide to make transfers to general reserves, because the profits concerned stay a part of the revenue reserves, and like such they still stay available for dividend. The most plausible description seems to be that directors feel that placing profits in a separate reserve points out an intention to invest the funds, presented through the reserve, permanently in the company and so not to make use of them to pay a dividend. Certainly, the retained earnings that are appearing on the statement of financial position are also a reserve.

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