Summary Introduction to and objectives of Financial statements

FINANCIAL STATEMENT ANALYSIS



LESSON 1
INTRODUCTION TO FINANCIAL STATEMENT ANALYSIS

Learning objectives

At the end of the lesson participants should be able to;

 Identify the components and contents of financial statements
 Explain the users of financial statements and their information needs
 Explain the need for financial statements analysis

Lecture outline

1. Introduction to and objectives of financial statements
2. Statement of comprehensive income
3. Statement of financial position
4. Statement of cash flows
5. Uses of financial statement analysis and information needs

1.1 Introduction

Understanding the financial statements of a firm is critical since it is often the only source of
information with which we must make investment decisions; i.e., whether or not to loan the
company money or invest some equity. There is a rationale behind the construction of the
financial statements that helps us to interpret the information that is contained within them.
The following are the components of financial statements:
 Balance sheet which provides information on the financial position of the business
 Income statement which lists out income and expenses for the financial period (operating
results) of the business
 Statement of cash flow which presents cash flows from operating activities , investing
activities and financing activities during the financial year

Objectives of Financial Statements

i. To provide information about financial position of an enterprise as at the end of the
financial period. This is contained in the balance sheet.
ii. To provide information about financial performance of an enterprise during the financial
period. This information is contained in an income statement or profit and loss account.
iii. To provide information about changes in financial position of an enterprise during the
financial period. This information is contained in statement of changes in equity.
iv. Financial statements also show the success or otherwise of the management, or the
accountability of management for the resources entrusted to it.


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, FINANCIAL STATEMENT ANALYSIS



v. The financial statements also contain notes and supplementary schedules and other
information.




1.2 Income Statements or statement of comprehensive income

The statement of comprehensive income (SOCI) provides information about financial
performance of an enterprise during the financial period. This information is contained in an
income statement or profit and loss account which can be outlined as follows;

Revenues
Less: Cost of Goods Sold Manufacturing
Gross Profit

Less: Salaries
Advertising
Rent Selling & Administrative
Depreciation
Utilities
Operating Income
Less: Interest Expense Finance
Taxable Income
Less: Taxes Government (Tax accounting)
Net Income
Other comprehensive income
Example revaluation of property plant and equipment
Total comprehensive income

The income statement is broken down by functional area. This allows us to more accurately
determine where our strengths or weaknesses lie.


1.3 Balance Sheets or statement of financial position

The statement of financial position provides information about resources controlled by the
enterprise as at the end of the financial period and any claim on the resources. This is contained
in the balance sheet. As with the income statement the balance sheet is constructed in a very
methodical manner. On the Asset side, the assets are listed in order from the most liquid to the
least liquid. Similarly, on the Liability & Equity side, the accounts are listed in order from the
most immediately due to the least.


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