Accounts Interpreting Accounts

Key Accounting Documents Public Limited Companies in the UK are required to publish their accounts This will usually consist of three key accounting documents:  The Income Statement (Sometimes referred to as “Profit and Loss”)  The Balance Sheet (Sometimes referred to as “Statement of Financial Position”)  The Cash Flow Statement

The Income Statement The income statement will summarise the trading that has taken place during a specific period It will calculate whether the business has made a net profit or a net loss during the period It is based upon the profit formula: Profit = Total revenue – Total Costs

An Example Money received from selling goods and services Money spent providing the goods and services sold (direct costs) Profit or loss made before indirect costs are taken off The indirect costs, or expenses that the business has had to pay Profit or loss available to the business after tax The corporation tax the business must pay Profit or loss made before tax is taken off The profit or loss from trading Costs or revenue from financial dealings

The Balance Sheet May be referred to as “Statement of Financial Position” The balance sheet is a snapshot of the assets and liabilities of a business It shows the value of the resources within the business, and how they were financed A balance sheet must “balance” since the resources that have been obtained must have been financed in some way

An Example Fixed assets that the business has obtained for long-term use, e.g. premises Items that the business has, but does not intend to keep longer than 12 months. E.g. stock The total value of things the business owns Debts that the business intends to pay within the next 12 months The funds contributed into the business by the owners The difference between total assets and total liabilities Long-term borrowing, e.g. a bank loan The total value of what a business owes

The Cash Flow Statement Unlike a cash flow forecast, the cash flow statement is a factual document It shows the flow of cash both into and out of the business Most businesses will only publish this document in a summary form

An Example The net amount of cash flowing into or out of a business from its trading activity The net amount of cash flowing into or out of a business from its investment activity (i.e. buying or selling fixed assets) Figures in brackets show cash outflows The total increase or decrease in cash within the business The net amount of cash flowing into or out of a business from its activity with banks or shareholders