Jul
11
2019

Accountants Cash Flow Statements & Balance Sheets

A balance sheet is a quick depiction of the financial condition of a business organisation at a particular period in time. The actions of a commercial enterprise drop into two separate areas that are reported by an accountant.They are profit-making actions, which takes sales and expenditure. This can likewise be referred to as operative activity. There are likewise actions that demand generating finance from equity and debt sources, net profit distribution to stockholders and owners, asset investment and disposing and varying one-time investment and fiscal projects.

Profit giving actions are described in the income statement; financing and investment activity are observed in the statement of cashflows. Put differently, two different finance statements are processed for the two opposite cases of transactions. The one-year growth or reduction in cash from operating actions for the year is likewise qualified in the cashflow statement, while the income statement accounts the sum of occurrent profit.

The balance sheet is different from the income and cashflow statements that describe, as it states, income of hard cash and outward cash. The balance sheet shows the totals, or amounts, or a businesses assets, indebtednesses and directors equity at an moment in time. The word balance has several meanings at different times. As it’s utilised in the phrase balance sheet, it refers to the balance of the two opposite sides of a company, total assets on one face and total financial obligations on the other. A balance sheet can be reckoned at any established instance, but, in actual fact are by and large done at regular calender points such as every month, quarterly and invariably yearly, up to and including all transactions on the final day of the account period.

It would probably be idealistic if commercial enterprise and life were as painless as developing trade goods, trading them and registering the net profit. But, In actual fact there are often considerations that interrupt the cycle, and it is part of the accountants occupation to report these too. Modifications in the business situation, or price of commodities or whatever number of matters can lead to singular or extraordinary profits and losses in a business. Singular matters that can affect the income statement can take in curtailment or restructuring the company. This used to be a rare thing in the commercial enterprise environment, but is nowadays fairly common. Commonly it is instigated to cancel losses in different areas and to decrease the price of employees remunerations and advantages. Yet, there are costs attached with this also, such as severance remuneration, outsourcing functions, and early retirement costs.

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Jul
03
2019

How To Read A Financial Statement

This article introduces the key concepts of accounting for investors. Its intention is to better enable investors to understand and interpret the financial statements of businesses they might invest in.

Accounts provide a (hopefully) objective analysis of the state and performance of a business. Accounts of listed companies must be prepared according to both the law and Generally Accepted Accounting Principles (GAAP).

Listed companies must have their accounts audited by qualified, independent, auditors to verify the accounts conform to the law and GAAP. Look closely at the auditor’s statement. Any hint of concern here should be cause for alarm.

The four basic accounting principles are accruals, prudence, consistency, and viability.

* Accruals – Items are recorded when their income (or expenditure) arises, not when it is actually received or paid.

* Prudence – Figures must be shown in a conservative (pessimistic) way.

* Consistency – Accounting methods can vary from company to company, however, for a given company the methods used must remain consistent from year to year. If a company changes its accounting methods, this change must be reported.

* Viability – Accounts are prepared on the assumption that the company will remain in business.

Because companies can legitimately adopt different accounting methods it is not always possible to directly compare the accounts of one company with another. However, because of the consistency principle, it is possible to monitor a particular company’s performance over time from its financial statements.

Financial statements usually include letters from the chairman and board of directors. These will usually serve to tell you what a great job the management team have done, but can sometimes provide useful hints as to likely future initiatives.

The three key financial statements are the Profit and Loss Account, the Balance Sheet, and the Cash Flow Statement.

Profit and Loss Account

The Profit and Loss Account summarizes a business’s performance over a period (usually a year).

Sales (turnover) = total sales revenues.

Cost of Sales = production overheads, raw materials, employees, product development, changes in stock levels, depreciation.

Gross Profit = Sales – Cost of Sales.

Operating Costs = costs of administration, distribution, marketing.

Operating Profit = Gross Profit – Operating Costs. (Also referred to as profit before interest and tax, PBIT).

Profit Before Tax = Operating Profit – Profit (+ Loss) on Sales of Fixed Assets – Net Interest Payable.

Balance Sheet

The Balance Sheet is a snapshot of a business’s financial position (what it owes and owns) at a particular moment in time.

The Balance Sheet is based on the accounting equation:

Assets = Liabilities + Owners’ Equity

Fixed assets are assets that a business does not buy/sell as part of its business.

Tangible assets are physical things, eg buildings, machinery etc.

Intangible assets include brand names, patents, licenses, goodwill (the amount by which the price of a business exceeds its assets) etc.

Current assets are assets that can be converted to cash within a year, eg inventory (stocks of goods for sale or raw material), debtors (money not yet received for sales), investments, cash etc.

Current Liabilities are debts due in the next 12 months, eg creditors (money owed to suppliers), accrued expenses (phone, rent… incurred but not yet paid), outstanding dividends, tax due within next year.

Long Term Liabilities money owed but not due within next year, eg bank loans.

Net Current Assets (working capital) = Current Assets – Current Liabilities.

Total Assets less Current Liabilities = Fixed Assets + Current Assets – Current Liabilities.

Net Assets = Total Assets – Total Liabilities.

Shareholder’s funds (owners’ equity) must equal net assets.

Share Capital is the money put into the business by shareholders.

Retained Profit is the cumulative retained profit from the Profit and Loss Account since the business started.

Revaluation Reserve results from a business revaluing assets (eg buildings) at current rather than original costs.

Cash Flow

The last (but certainly not least important) financial statement is the cash flow statement. This statement shows the movements of cash into or out of the business. No matter how healthy the profit & loss account and balance sheet may appear, without sufficient cash a business will fail.

The Operating Profit (from the Profit and Loss Account) is adjusted for non-cash items.

* Depreciation is added back in.

* Any increase (decrease) in inventory is subtracted (added).

* Any increase (decrease) in debtors is subtracted (added).

* Any increase (decrease) in creditors is added (subtracted).

These adjustments give the Operating Cash Flow.

From the Operating Cash Flow the following are subtracted to give Cash Flow before Financing:

* Interest paid.

* Dividends.

* Taxation (actually paid in year).

* Capital expenditure (eg on fixed assets).

* Any other exceptional costs (eg settling a legal action).

* Financing shows cash generated from or lost to external financing, eg changes in loans, issues of share capital etc.

Movement in Cash is the sum of Cash Flow before Financing and Total Financing, and must agree with the change in cash figures on the current and previous year’s balance sheets.

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