University Ibn Zohr

ENSA- Agadir
Dr. Mohamed Nouhi

Types of Financial Statements

 Understanding the Concept
• Financial statements denote specific reports about an entity's accounting
system. They are structured financial presentation about the transactions
undertaken in an organization including five major components:
Liabilities - Equity – Income - expenditures - and Cash Flow
• They are written records describing details and providing specific information
about the economic conditions and the company’s performance.
• They are diagnostic tool for evaluating financing, investment, and operational
activities.
• They allow managers, shareholders, investors to evaluate and analyse the
entity’s financial strengths and weaknesses, its profitability for better decision-
making strategies.
• To comply with accounting regulations, companies must prepare a number
of financial statements
• The main financial statements are International Accounting Standards
(IAS):
• • Income and expenditure statements,
• • Balance Sheet,
• • Cash Flow Statement,
• • Statement of Equity Changes,
• • Statement of Explanatory Note.
 1- Income and Expenditure Statements
It is also known as Profit and Loss (P&L) Statement.
 It presents the financial result of a firm, its revenues and expenses, and the
resulting net income or net loss over a period of time (monthly, quarterly or
annual). This is achieved by deducting all expenses from all income.
A typical income statement starts with a heading which consists of three lines.
The first line presents the name of the company; the second describes the title of
the report; and the third states the period covered in the report worded "For the
Year Ended...“
It can be partial income statement (for a specific period) or classified income
statement(for more complex operations)
 Income accounts (Revenues/ Total sales) are presented before expenses. If
income exceeds expenses, there is a net income. If expenses exceed income,
there is a net loss.
 Example of an income and expenditure
statement for year ended in December 31, 2019
 2. Balance Sheet
A balance sheet is a financial statement that reports a company's assets
(what it owns), liabilities (what it owes) and shareholders' equity (What
is left over for the owners) at a specific point in time, and provides a
basis for calculating financial ratios and computing rates of return and
evaluating its capital structure.
 It is also known as the statement of financial position. Companies
usually prepare one at the end of a reporting period, such as a month,
quarter, or year.
All balance sheets are organized into three categories: assets, liabilities,
and owner’s equity.
 2.1. Assets
2.1.1. Current assets include:
• Money in a checking account
• Money in transit (money being transferred from another account)
• Accounts receivable (money owed to you by customers)

• Short-term investments . Inventory . Prepaid expenses

• Cash equivalents (currency, stocks, and bonds)
• 2.1.2.Long-term assets include tangible items like:
• Buildings and land . Machinery and equipment
• Intangible assets (patents, trademarks, intellectual property, and goodwill)
• Long-term investments
• Assets = Liabilities + Owner’s Equity
 2.2. Liabilities
 Refer to the company's legal financial debts or obligations towards the others that
arise during the course of business operations.
 They are used to finance operations and pay for large expansions include loans,
accounts payable, mortgages, deferred revenues, earned premiums, unearned
premiums, and accrued expenses.
 Businesses sort their liabilities into two categories: current and long-term.
 Current liabilities are debts payable within one year, while long-term liabilities are
debts payable over a longer period.
 Current/short-term liabilities should be separated from long-term/non-current
liabilities on the balance sheet.
 Major Current Liabilities include:
* Wages Payable * Interest Payable * Dividends Payable * Bank indebtedness
*Rent, tax, utilities * Customer prepayents * Earned and unearned premiums
• Long-term liabilities are also known as long-term debts or Noncurrent
liabilities. They can include:
• Long-term debt: interest and principal on bonds issued due beyond twelve
months
• capital leases: a contract entitling a renter to the temporary use of an
asset
• Pension fund liability: the money a company is required to pay into its
employees' retirement accounts
• Deferred tax liability: taxes that have been accrued but will not be paid for
another year
• Bonds your company has issued
• Deferred compensation: a portion of an employee's compensation that is
set aside to be paid at a later date.
 2.3 Shareholders' Equity
is the money attributable to a business' owners if all of the assets were liquidated
and all of the company's debt was paid off.. In other words, it is money currently
held by your company. It shows what belongs to the business owners after
subtracting all debts associated with that asset.
 It is also known as "net assets," since it is equivalent to the total assets of a
company minus its liabilities
 Equity is represented on a company's balance sheet and is one of the most
common financial metrics employed by analysts to assess the financial
Sometimes it can be offered as Payment-in-kind (PIK): the financial instrument
of using a good or service as payment or compensation instead of cash.
Shareholder equity can be either negative or positive. If positive, the company
has enough assets to cover its liabilities. If negative, the company's liabilities
exceed its assets (risky or unsafe investments); if prolonged, this is considered
balance sheet insolvency.
 Owners’ equity includes:
•Capital (money invested into the business by the owners)
•Private or public stock
•Retained earnings (all your revenue minus all your expenses)
The Calculation of Shareholder Equity
Shareholders’ Equity=Total Assets−Total Liabilities

Owner's equity is one of the three main sections of a sole proprietorship's

balance sheet and one of the components of the accounting equation: Assets =
Liabilities + Owner's Equity.

The only difference between owner’s equity and shareholder’s equity is

whether the business is tightly held (Owner’s) or widely held (Shareholder’s).
 3.Cash Flow Statement
 In financial accounting, CFS is a financial statement that summarizes
the amount of cash and cash equivalents entering and leaving a
company.
 The cash flow statement complements the balance and income
statement and is a mandatory part of a company’s financial reports
The Structure of Cash Flow Statement :
 The main categories found and organized respectively in CFS are:
(1) Cash from operating activities: reflecting how much cash is
generated from a company's products or services. It comprises
*Net Earnings/Income showing the profitability of a company over
a period of time * ***
(2) Cash from investing activities
 It reports changes in capital expenditures (CapEx) and long-term
investments. CapEx can refer to the purchase of property, plant, or
equipment assets. Long-term investments may include debt and equity
instruments of other companies.
 Investments in Property and Equipment
 Acquisitions of other businesses
(3) Cash from financing activities
 It represents the sources of cash from investors or banks
 Issuance of stocks and bonds of the company
 Cash paid to shareholders.
 Payment of dividends
 Payments for stock repurchases and the repayment of loans
 4.Statement of Equity Changes
 It shows the movements of equity in addition to accumulated earnings and losses so as to
enable the readers to depict on the sources (where it came from) and outlets of equity (where
did it go).
 As it is prepared annually, it indicates the reconciliation of Opening and Closing equity
balances
 The formula of Statement of Changes in Equity is:
Opening Equity balance + Net profit during the period – Dividends (+/-)
Other Changes= Closing balance of Equity.
• I. profit or loss for the specific period
• II. every item of income and expenditure for the period which is specified directly in the equity,
and the sum of those items
• III. total income and expense for the period specified (evaluated as the sum of (I) & (II)),
representing individually the total amounts attributable to equity holders of minority interest
besides the parent holder
• IV. for every component of equity, the effects of changes occurring in the accounting
policies and rectification of errors in accord with IAS
The components of Statement of Changes in Equity are as follows:
• Opening Balance of shareholders’ equity reserves
• Effect of changes in accounting policies
• Effects of correction of prior year error
• Restated balance
• Changes in Share Capital during the period
• Dividends payments during the period
• Income/loss during the period
• Changes in revaluation reserve
• Other Gains /losses made during the year
 5.Statement of Explanatory Notes
 They are comprehensive additional information and explanatory notes
in order to provide a deep understanding of the information contained in
other financial statements and to disclose additional material
information excluded from such other statements including names,
codes, registration dates, head offices...
They are an integral part of the financial statements, The explanatory
statement should “help the reader grasp what the bill does, how it does
it, and to provide helpful background”,1 in order that they may (1)
participate in the process of law-making,2 and, (2) when referring to
any Act that results from the bill, to gain some understanding of its
purpose and provisions
 They are required by the Securities and Exchange Commission of any
publicly held company when they issue their annual financial
statements
• Note 1 The Basis of Accounting or Accounting policies: explain the principles, the
standards, and conventions used in preparing the financial statements.
• Note 2 Change in Accounting policies: explain how items are measured, recognised and
disclosed in financial statements. It represents a change of accounting principles,
accounting methods and rules applied by an entity in keeping its accounting records
and preparing financial statements.
• Note 3 Investments. Note the fair value and unrealized gains and unrealized losses on
investments.
• Note 4 Key management personnel: the head of the entity’s administration, members
of the board of directors and supervisory board, and other persons having authority for
planning, controlling and directing the operations of the entity and (or) responsibility
for ultimate decisions.
• Note 5 Parent: an entity exerting direct or indirect control over one or more
subsidiaries.
• Note 6 Related parties: The nature of the relationship with a related party, and the
amounts due to or from the other party.
• Note 7 Contingencies and commitments. Describe the nature of any reasonably
possible losses, and any guarantees, including maximum liabilities.
• Risks and uncertainties. Note the use of significant estimates in accounting
transactions, as well as various business vulnerabilities.