Financial statements

(a)   . Financial statements (or financial report) are a formal record of the financial activities and position of a business, person or other entity.

Or

Financial statements are a structured representation of the financial position and financial performance of an entity.

Trading account; this is the account which is prepared to determine the gross profit or gross loss of a business concern.

Profit and loss account; this is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a fiscal quarter or year.

Balance sheet; this is a statement showing the financial position of a firm in terms of assets and liabilities. Balance sheet is not an account as it has no debit and credit sides.

(b). Financial statements(or financial report) are a formal record of the financial activities and position of a business, person or other entity.

Or

Financial statements are a structured representation of the financial position and financial performance of an entity. The objectives of financial statements are to provide information about the financial performance and cash flows of an entity that useful to a wide range of users in making economic decisions. Financial statements also show the results of the managements hardship of the resources entrusted to it. The financial statements provide information about and entity, assets, liabilities, equity, income, expenses, including gains and losses. Contributions by distribution to owners in their capacity as owners, and cash flows. This information along with other information in the notes, assists users of financial statements in predicting the entity are cash flows and in particular their timing and certainly. The financial statements prepared for this purpose that meets the common needs of most users are known as general purpose of financial statements. Financial statements usually do not provide all the information that users may need to make economic. This is because they largely portray the financial effects of the past events and not the future, and also they do not provide financial information. Financial statements also show the results of the stewardship of management or the accountability of management for resources entrusted to it.

Their types of financial statements which are-;

Income statement; this report reveals the financial performance of an organization for the entire reporting period. It begins with sales and then subtracts out all expenses incurred during the period to arrive at a net profit or loss. Earnings per share figure may also be added if the financial statements are being issued by a publicly- held company. This usually considered the most important financial statement, since it describes performance.

Balance sheet; this report shows the financial position of a business as of the date (so it covers a specific point in time). The information is aggregated into the general classification of assets, liabilities, and equity. Line items within the asset and liability classification are presented in their order of liquidity, so that the most liquid items are stated first. This is a key document, and so is included in most issuances of the financial statements.

Statements of cash flows; this report reveals the cash inflows and outflows experienced by an organization during the reporting period. This cash flow is broken down into three classifications, which are operating activities, investing activities and financing activities. This document can be difficult to assemble and so is more commonly issued only to outside parties.

Statement of changes in equity; this reports documents all changes in equity during the reporting period. These changes include the issuance or purchase of shares, dividends issued and profits or losses. This document is not usually included when the financial statements are issued internally, as the information in it is not overly useful to the parties.

Types of financial information and their needs

Users of financial statements include present and potential investors, employees, lenders, suppliers and other trade creditors, governments and their agencies and the public. They use financial statements in order to satisfy some different needs for information. Account helps users to make better financial decisions.

Internal (primary) user of accounting information they include; management, employees and shareholders (owners). Accounts, budgets, forecasts and financial statements.

External (secondary) user of accounting information include; the creditors, tax authorities, investors, customers, regulatory authorities and public in general. External users are communicated accounting information usually in form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making sound financial decisions.

The followings are users of financial statements and some of their needs’-

Investors

the providers for capital and they are concerned with the risk inherent in and return provided by their investments. They need information to help them determine whether they should buy, hold or sell their investments. Shareholders are also interested information which enables them to assess the ability of the enterprise to pay dividends.

Employees

Employees and their respective groups are interested in information about the stability and sustainability of their employer they are also interested in information which enables them to assess the ability of the enterprise to provide remuneration retirement benefits and employment opportunities.

Lenders

Lenders are interested in information that enables them to determine whether their loans and the interest attaching to them will be paid when they become due.

Suppliers and other trade creditors

Suppliers and other trade creditors are interested in information that enables them to determine whether amounts owing to them will be paid when due. Trader’s creditors are likely to be interested in an enterprise over a shorter period than lenders unless they are dependent upon the continuation of the enterprise as a major customer

Customers

Customers have an interest in information about the continuation of an enterprise, especially when they have a long term involvement with or are dependent on, the enterprise.

Government and their agencies

Government and their agencies are interested in the allocation of resources and therefore, the activities of enterprises. They also require information in order to regulate the activities of enterprises. Determine taxation policies and as the basis for national income and similar statistics.

Management

Management use financial information for analyzing the organization’s performance and position and taking appropriate measures to improve the company results.

Trading account;this is the account which is prepared to determine the gross profit or gross loss of a business concern.it should be noted that the result of the business determined through trading account not true result. The true result is the net profit or net loss which is determined through profit and loss account. Trading account can be any investment account containing securities, cash or other holdings. Most commonly, trading account refers to a day trader’s primary account. These investors tend to buy and sell assets frequently, often within the same trading session, and their accounts are subject to special regulation as a result. The assets held in a trading account are separated from others that may be part of a long- term buy and hold strategy.

Format of Trading account

TRADING A/C FOR THE YEAR ENDED…………………

Dr.	Cr.
Opening stockxxxxx Add: purchasexxxxx Less: purchase returnxxxxx Net purchasexxxxx Add: freight dutyxxxxx Good available for salesxxxxx Less: closing stockxxxxx Cost of goods soldxxxxx Gross profit c/dxxxxx	Salesxxxxx Less: sales returnxxxxx Net salesxxxxx

Profit and loss account; this is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a fiscal quarter or year. The profit and loss statement is synonymous with the income statement. These records provide information about a company’s ability or inability to generate profit by increasing revenue reducing costs or both some refer to the profit and loss statement as a statement of profit and loss, income statement, statement of operations, statement of financial results or income, earnings statement or expense statement. We prepare trading account to ascertain the Gross profit/ Gross loss. While we prepare profit and loss account to ascertain the Net profit / Net loss.

Hence; the formula for the profit and loss statement is: -

Revenue- expenses = net profit

P&L statements generally follow this format;

Revenues

-Operating (variable) expenses

= Gross profit (operating) margin

-overhead (fixed expenses)

=operating income

+/-other income or expenses (non- operating)

=pre- tax income

-income taxes

=net income (after taxes)

Revenue is the money you receive in payment for your products or services.

Operating, or variable, expenses are the expenses that rise or fall based on your sales volume.

Gross profit margin or operating margin is the amount left when you subtract operating expenses from revenues.

Overhead, or fixed, expenses are costs that don’t vary much month to mouth and don’t rise of fall with the number of sales you make. Examples might include salaries of office staff, rent, or insurance.

Operating income is the income after deducting operating and overhead expense.

Other income or expenses (non- operating) generally don’t relate to the operating side of the business, rather to how the management finances the business. Other income might include interest or dividends from company investments, for example other expenses might include interest paid on loans.

Pre- tax income is the income before federal and state governments take their share.

Income taxes how income tax is shown on the profit and loss varies based on the type of legal entity. For example, a C corporation almost always shows income tax expense, but S corporations, partnerships, LLCs, and sole proprietorships rarely show income tax expense on the profit and loss.

Net income (after taxes) is the final amount on most profit and loss statements. It represents the net total profit earning by the business during the period, above and beyond all related costs and expenses.

The format of profit and loss account

PROFIT AND LOSS A/C FOR THE YEAR ENDED…………….

All expenses

Income

Machinery repair                         xxxx Salaries                                        xxxx Income tax                                  xxxx Interest xxxx Rentxxxx Carriage                                       xxxx Bad debts                                    xxxx Wages and salaries                    xxxx General expenses                        xxxx Discount                                      xxxx Rates                                           xxxx Net profit                                    xxxx

Gross profit b/d                 xxxxx Commission received        xxxxx

Balance sheet; this is a statement showing the financial position of a firm in terms of assets and liabilities. Balance sheet is not an account as it has no debit and credit sides. Balance sheet it contains; -

Assets; these are properties or possession of a firm. There two kinds of assets which is fixed assets and current assets.

Fixed assets are properties which can stay for a long time in the firm; more than one trading period. That is, they are not easily converted in cash. For example, furniture, motorcars.

Current assets are properties which do not stay for a long period of time not more than the trading period. That is, they easily converted into cash. For example, stock debtors, cash at bank, cash in hand.

Liabilities; these are debts owed by the business or firm. There are two kinds of liabilities, long term liabilities and short term liabilities.

Long term liabilities are debts to be repaid after a long period of time. That is more than a trading period. For example, loans.

Short term liabilities are debts to be repaid within a short period of time. This should not more than one trading period. For example, example, creditors, bank overdraft.

The format of the Balance sheet

BALANCE SHEET AS AT FOR THE YEAR ENDED………….

Fixed assets Land & building                       xxxxx Plant & machinery                     xxxxx Furniture                                     xxxxx Current assets Stock                                      xxxxx Debtors                                  xxxxx Bank balance                           xxxxx

Capital Cash introducedxxxxx Add: Net profit                            xxxxx Less: Drawings                            xxxxx Current liabilities Creditors                                 xxxxxx Loans                                      xxxxxx

(c). The followings are uses of Trading accounts which as; -

It used to know the gross profit or gross loss; trading account shows the relationship between gross profit and gross loss. This helps to measure profitability position. It prepares gross profit and gross loss by comparing between merchandise income and merchandise expense. Business compares gross profit and gross loss with those of previous years through trading account.

To provide information about stock; the trading account provides the information regarding stocks and cost of goods sold. It helps business to make plans and policies by providing information about opening stock and closing stock.

To provide information about net purchases and net sales; it provides the information relating to total purchases as well as a net purchase by deducting purchase return from the total purchase. Similarly, it provides the information of total sales as well as net sales by deducting sales return from total sales.

To provide information about factory expenses; the trading account provides the information about the factory expenses like factory manager salary, heating and lighting and coke and coal. This information helps to control the expenses in the process of manufacturing the product.

To make comparison; the trading account helps to evaluate the progress of the business by comparing the amount of sales and gross profit of the current year with those of previous years.

To measure efficiency; the trading account compares between the amount of sales and merchandise expenses. Such comparison helps in measuring the working efficiency of the business.

The followings are uses of profit and loss accounts which as; -

Profit and loss accounts is the base of analyzing the performance of company.

We can find net profit or net loss from profit and loss account. This will be useful for taking the decision of payment of dividend.

Bank can take decision for providing more loan to company, if bank sees good net profit in profit and loss account.

Employees may demand reward on the basis good performance in profit and loss account.

The followings are uses of balance sheet which as; -

To determine if working capital is enough; the balance sheet is used to determine if the business has enough working capital to sustain its operation. Working capital is the difference of current assets less current liabilities. It measures if the company still has enough current resources after deducting its due loan or obligations.

To know the business net worth; net worth is defined as the true value of an entity it shows how rich or poor it is. It is computed by the difference of total assets less total liabilities.

To see if the company can sustain future operation; by looking at the balance sheet, you can determine if the company can sustain future operation. To do this look at the value of its non- current assets such as property, plant and equipment. If the total is higher than the current assets, it means the company has plans to sustain future operations.

To identify if there’s possible of dividend; most business owners/ investors are interested to know if when will they receive return from their investment. Such returns can be in the form of dividends. Dividends are issued if the company is profiting and has high amount of retained earnings.

(d). Give the trial balance below prepare a trading and profit and loss account for the year ended 31^st December 2019 and a balance sheet as date.

TRIAL BALANCE AS AT 31^st OCTOBER 2019.

S/N	NATURE OF ACCOUNT	FOLIO	DR	CR
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.	Free hold and building Plant and machinery Stock 1st January 2019 Purchases and sales Carriages Wages and salaries Bad debts Commission received Debtor sand creditors Discounts Furniture Returns Capitals General expenses Rates Bank balance Drawings Closing stock Total		275,000 133,000 417,300 1,273,400 47,200 122,700 22,500 544,000 82,300 19,200 8,400 133,800 18,800 187,400 185,800 442,000 3,470,800	2,078,400 67,500 245,000 81,700 998,200 3,470,800

TRADING, PROFIT AND LOSS A/C AS AT 31^ST DECEMBER, 2019

DR

CR

Opening stock                                  417,300 Add: purchases                              1,273,400 Less: return out                                   81,700 Goods available for sales              1,609,000 Less: closing stock                            442,000 Cost of goods sold                         1,167,000 Gross profit c/d                                 903,000                                                        2,070,000 All expenses Carriages                                          47,000 Wages and salaries122,700 Bad debts                                          22,500 Discount                                            82,300 General expenses                            133,800 Rates                                                188,800 Net profit                                          543,200  970,500

Sales                                           2,078,400 Less: return inward                           8,400 Net sales                                      2,070,000                                                     2,070,000 Gross profit b/d                            903,000 Add: commission received             67,500 970,500

BALANCE SHEET AS AT 31^ST DECEMBER 2019

Fixed assets Land & building                           275,000 Plant & machinery                       133,000 Furniture                                         19,200 Current assets Stock                                                442,000 Debtors                                             544,000 Bank balance                                187,400 1,600,600

Capital Cash introduced,   998,200 Add: net profit                      543,200 1,541,400 Drawings                              185,800 Current liabilities Creditors                                245,000 1,600,600

(e). The followings are the importance of financial statements which as; -

Financial transparency; even the small numbers in a balance sheet can have a huge impact on the business. Assets never have the same value that they did when they were first purchased. A percentage has to be deducted from their value for depreciation. A company might report a certain number as revenue earned. But how much of it is actual cash and how much of it accounts receivable has to be accurately stated. Numbers like profit before tax, after tax, and profit after interest depreciation and tax are all important number that tell shareholders and management a lot.

Evaluate tax liability; corporate tax rates are quite high. When companies make a lot of profit the taxes they have to pay are equally high. The owners often get astonished at how little they have left once they have paid taxes to the government. Can they reduce their tax burden? If yesthen they will need the most accurate financial numbers possible. Otherwise, all their resources could be depleted in a very short time. Conversely, for the government, accurate financial statements are essential because many firms fudge their reports only to avoid paying tax.

Mitigate errors; accurate financial statements are also essential to catch costly mistakes or internal wrongdoing early on in the process. If any illegal activity is taking place, there is no better way to catch it than through discrepancies in the numbers. If an error has made, reconciliation activities can find them. That is why companies spend a lot of time on reconciling there with any part of the business or an accounting error has been made. Investment banking especially has been prone to many accounting misdeeds over the years to cover huge trading losses. The inefficiency of the financial reporting systems allowed those losses to be hidden. That is why regulators have started asking banks and other trading firms to pay more attention to their internal accounting methods.

Better decision making planning and forecasting; analyzing financial statements is crucial when decisions are to be made. A finance manager would look at the value of the assets that he currently holds and decide if he can afford to purchase more when the value of assets is severely depreciated, questions would arise if they need to be sold off. A company needs more funds to expand its business the account would look at the debts on the balance sheet the shareholder’s capital and other loans they have taken and decide which type of financing they can afford. When the time comes for the company to pay dividend, the CFO would look at the profits that have, the debts that need to be paid off, the provisions made for various reserves and decide what the quantum of dividend can be.