1. T HE F INANCIAL S TATEMENTS OF THE LIMITED C OMPANIES AND C ASH F LOW S TATEMENT Profit&Loss Statement, Balance Sheet, Cash Flow Statements

2. B ALANCE SHEET AND P ROFIT OR L OSS S TATEMENTS The Financial Statements of a company are normally filed\ annually at a public bureau, in a form prescribed by company law and International Financial Reporting Standards (IFRS). Financial Statements comprises: 1. Profit&Loss Statement 2. Balance Sheet 3. A Statement of Changes in Equity 4. A Cash Flow Statements In previous chapters we considered A Statement of Changes in Equity, now we present the other Financial Statements of a company.

3. The Balance of ABC ltd at 01 January 2008 is set out below: Non-current Assets USD in thousand Plant and Equipment at cost 260 Vehicle 42 Accumulated depreciation (P&E) (84) Accumulated depreciation (vehicle) (16.80) Current Assets Inventories 22 Trade receivables 56 Bank 7 Bank deposit account 10 Total 296. 20

4. Current liabilities USD in thousand Trade payable 23 Wage payable 48 Income tax payable 10 Advertising 5 Heat, light and fuel 3 Non-current liabilities 10 % Debenture 50 Equity Ordinary shares at 1 USD each 100 Share premium 0.30 USD each 30 Retained earnings 27.20 Total 296,20

5. The following transactions happened in 2008. 1. Depreciation to be calculated on non-current assets during year 2008: Plant and equipment 20 % per annum reducing balance Vehicle 20 % per annum str/line balance 2. Bought furniture valued 5 $ on credit 3. Received 54 $ into bank account trade receivables 4. Paid wages 45 $ and 10 $ taxes from the bank account 5. Bought goods 50 $ on credit, and sold goods costing 60 $ for 105 $ among which 70 $ was in cash and 35 $ on credit 6. Paid trade payables- 5 $ for furniture and 62 $ for goods 7. Paid for advertising, heat and light payables 8. Sold a vehicle for 20 $ in cash in December 9. Received into the current bank account 1.6$ interest pmt 10. Salary charged 30 $ and income tax charged 4.2$ 11. Other administrative expenses were charged 7 $ 12. Received in cash for assisted services 42 $ to motor vehicles and machineries 13. 20 % profit (income) tax charged

6. Plant&E Depreciation Payable Wage pay 260 84 6)62 23 4)45 48 1) 35.2 5)50 10)30 Vehicle Depreciation In tax pay Advert Pay 42 8)42 8)25.2 16.8 4)10 10 7)5 5 1) 8.4 10)4.2 13) 1,40 Goods Receivables Bank Heat&light Furniture/P 22 5) 60 56 3)54 7 7)3 3 6)5 2) 5 5)50 5)35 3)54 4)55 5)70 6)67 8)20 7)8 Admin payable Debentur Bank deposit 9)1.6 11) 7 50 10 12) 42

7. Furniture Ordinary shares Share premium 2) 5 100 30 Disposal on vehicle 8) 42 8) 25.2 Retained earnings 8) 20 27.20 8)3.2

8. Depreciation expense COGS Revenue/Op 1) 35.2 5)60 5)105 1) 8.4 12) 42 Salary Expense Admin exp Revenue/Invest 10)34.2 11) 7 8)3.2 Revenue/Finan 9)1.6

9. Profit&Loss Statement Revenue from operational activities (105+42) COGS(60) Gross Profit87 Depreciation charges(43.6) Admin expenses(7) Salary expense(34,2) Operational profit2.2 Interest received1.6 Revenue from investment activity 3.2 Profit before tax7 Profit tax1,40 Net profit5,6

10. Balance Sheet Non-Current assetsCurrent Liabilities Plant260Trade Payable11 Depreciation of Plant(119,20)Wage payable33 Furniture5Income tax payable/profit5,60 Current Assets Admin payable7 Goods12 Non-current Liabilities Receivable37Debenture50 Bank64,6Equity Bank deposit account10Ordinary shares100 Share premium 30 Retained earnings27,20+5,6 Total269,4Total269,40

11. C ASH F LOW S TATEMENT A Cash Flow Statement recognizes the importance of liquidity to a business by reporting the effect of the transactions of the business during the period on the bank, cash and similar liquid assets. It is a summary of receipts and payments during the period. But learners often ask: “Why does the profit made during the period not equate to an increase in cash and bank balance?” Therefore is the statement that shows the profit made during the period considers how that profit and other transactions during the period, have affected the flow of cash into and out of the company.

12. W HY DOES THE PROFIT EARNED NOT EQUAL THE CHANGE OF IN BANK AND CASH BALANCES ? There are three main reasons: 1. Profit is calculated on accrual basis, means that the revenue is taken back when is earned. Expenses are calculated on the same basis to match with the revenue. Bank and cash balances change when monies are received and paid. 2. The calculation of profit includes include some items that do not affect cash at all or affect if differently. For example, profit after deducting depreciation, which involves no movement in cash. The profit or Loss on disposal of a non-current asset will be taken into the profit calculation, but it is the proceeds of sale that affect cash. In addition there will be other accrued items, like taxes and etc. 3. Bank and cash balances are affected by some items that do not affect profit, such as the purchase of NCA, the raising of additional capital or repayment of loans.

13. The cash Flow Statement has three sections: 1. Cash flows from operating activities. Cash from operating activities is calculated after deducting: interest paid and income tax paid 2. Cash flows from investment activities : this has four main sections: Purchase of non-current fixed assets, proceeds on sale non current fixed assets, interest received (bonds), dividend received 3. Cash flows from financial activities: this has four main Sections: Proceeds from issuing shares, proceeds from loans, repayment of loans, payment of dividends

14. Cash flows from operating activities is cash generated from operations. Operations are the normal, everyday activity of the company, that earn it profit. Cash Flows from investment activities shows the purchase of non-current fixed assets and the proceeds of on their disposal. In addition interest and dividends received occurs cash inflows. Cash flows from financial activities is the proceeds from issuing shares, loan proceeds or debentures. For preparation Cash Flow Statements there are two methods: 1. Direct method 2. Indirect method Direct method shows direct cash inflows and outflows during the certain accounting period. When we consider Indirect method, opening and ending balances of assets items, payables and capital structure is noted..

15. The result will be as follows: Profit for the period Add: Depreciation charge for the period Loss on disposal of NCA Decrease in inventories levels Decreases in receivables Increase in payables Less: Profit on disposal of NCA Increases in inventories level Increase in receivables Decrease in payables

16. Example: From the following information construct the Cash Flow Statement: Operating Profit for the year, after charging depreciation of 22 300 215 500 Purchase of NCA80 000 Repayment of Non current loan45 000 Issues of shares at par100 000 Changing in working capital during the year Increase in inventories22 500 Decrease in receivables18 000 Decrease in payables14 500 Taxation paid25 000 Dividends paid5 000

17. Solution Cash flows from operating activities Cash flows from Investment activities Operating profit215 500Purchase of NCA(80 000) Add: Depreciation22 300 Cash flows from financing activities Add:Decrease in Receivables18 000Issue of shares100 000 Less: Increase in inventories(22 500)Loan repaid(45 000) Decrease in payables(14 500)Dividends paid(5 000) Cash generated from operations 218 800 Increase in net cash 163 800 Taxation paid(25 000) 193 800

18. Example of ABC ltd Assets 01 January 2008, USD 31 December 2008, USD Non-current assets 302265 Accumulated depreciation(100,80)(119,20) Current Assets Inventories2212 Receivable5637 Bank764,60 Bank deposit10 Total296,20269,40

19. Current Liabilities 01 January 200831 December 2008 Trade payable2311 Wage payable4833 Income tax payable/Profit105,60 Advertising payable5- H&light, fuel payable3- Admin payable-7 Non-current liabilities Debenture50 Equity Ordinary shares at 1 USD per share100 Share premium o,30 USD per share30 Retained earnings27,2032,8 Total296,20269,40

20. Cash flow from operating activity Increase in retained earnings 32,80- 27,20 5,60 Add Depreciation charge for the year43,60 Deduct profit on sale of NCA(3,20) 46 Add Decrease in Inventories10 Add Decrease in Receivables19 Less Decease in payables(32,40) 42,60 Cash flow from investing activities Purchase of NCA(5) Proceeds on sale of NCA20 Increase in bank balance57,60 + Beginning bank balance+17= 74,60 ending bank balance