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.