COMPONENTS OF FINANCIAL STATEMENTS
The main financial statements produced by business organizations are as follows:
1. INCOME STATEMENT
2. BALANCE SHEET
3. CASH FLOW STATEMENT
INCOME STATEMENT
(STATEMENT OF COMPREHENSIVE INCOME)
• The Income Statement is one of the most frequently used financial statements.
• It shows the profit or loss earned by the business in a particular accounting period, usually one
year.
• A company makes a profit or loss as a result of making and selling items, producing a service or
trading. That is, buying items and then selling them at a higher price.
The Trading Account
• The income statement is divided into Three Sections. The Trading account, The profit and Loss
account and The appropriation account.
• Each section gives a different total profit figure.
• The trading account shows the calculation of GROSS PROFIT.
• Gross Profit = sales – cost of sales
• Cost of Sales = opening stock + purchases – closing stock
• Sales turnover/revenue is the total value of sales made during the trading period.
• Cost of sales or cost of goods sold is the direct cost of purchasing the goods that were sold during
the financial year.
• Opening stock/inventory is the cost of inventory at the beginning to the accounting period.
• Closing stock/inventory is the cost of inventory at the end of the accounting period.
The profit and loss Account
• This shows the calculation of NET PROFIT.
• This is done by adding any additional income such as, rent received or commission received, to
the gross profit then subtracting all the expenses, such as light, wages and rent.
• Net profit = Gross Profit – Expenses
The Appropriation Account
• This is the last section of the income statement.
• It shows how profits after tax are distributed in the form of dividends and retained profits.
BALANCE SHEET
(Statement of Financial Position)
• The Balance Sheet shows the state of a business’s finances at a given time, such as, at the end of
each month or the end of the year.
• The Balance Sheet gives a summary of the business’s Assets, Capital and Liabilities.
ASSETS
• Assets includes anything of measurable value owned by the business.
• Fixed Assets (non-current) are items owned by the business that are likely to be kept and used for
more than one year.
• Current Assets are assets that can easily be converted into cash, sold or consumed within a
one-year period.
LIABILITIES
• Current Liabilities are debts that are likely to have to be repaid with a year. Such as trade creditors
and bank overdraft.
• Fixed /Long-Term Liabilities are long-term loans owed by the business. They are due to be paid
over a period of time greater than one year. Examples are loans and commercial mortgages.
CAPITAL
Shareholders capital/owner’s equity
This is the total of fixed and current assets minus the current and long term liabilities.
CASH FLOW STATEMENT
• This is the movement of cash into and out of the business.
• It describes and measures the various types and values of cash flows into and out of a business
over a particular period of time.
• Cash inflows includes, loans to firms, profits, sale of fixed assets, increase in creditors.
• Cash outflows includes, purchase of fixed asset, loan repayments, payment of expenses, decrease
in creditors
• Cash Flow Statements shows three main types of cash movement.
• Cash flows from operation eg. Sales of goods and services.
• Cash flows from investing activities eg. Refurbishing a building.
• Cash flows from financing activities eg. Cash borrowed.
