25/04/2009

The Financial Manager,

Factors a company should take in to consideration when deciding

how to arrange information in financial statements.

Financial reports are the formal written record of all the financial activities
concerning a business. These are normally published annually presenting the
financial performance and position of the business. The main
financial statements a company prepares are the P&L, balance sheet, the CFS
or the cash flow statement and the Statement of total recognised gains and
losses.

The main users of a company’s annual accounts are its shareholders. Apart
from them creditors, employees, government and the general public may have
an interest in a company’s annual accounts. There for it is important to
prepare accounts in a way that is easily accessible and understandable by all
of its intended users.

There are a few factors a company should take in to consideration when

deciding how to arrange information in financial statements.

Since ownership and management is separated in plcs’ annual reports must

be presented in a way that all shareholders get an overview of their
company’s performance over the financial year. Annual accounts also need to
be prepared to meet statutory and professional requirements.

Legal Requirement
The current law in enforcement is the company’s act of 1985. All annual
accounts should supplement its requirements and accommodate one of the
formats it recommends. A company can prepare its financial statements either
horizontally or vertically. The financial statements should provide its
shareholders with ‘minimum amount’ of information that gives a ‘true and fair
view’ of the financial performance and position of the company. The minimum
amount of information in the P&L may include operating profit, wages and
salaries, social security and pension charges director’s remuneration etc…

If directors do not work according to the company’s act they may be ‘guilty of
an offence and liable to a fine’. The company’s act gives directors a great deal
of flexibility when preparing and presenting financial information, within the
limits defined in the act.

Professional Requirements
As far as professional requirements are concerned a company’s accounts
should be prepared in line with regulations and standards set by sources of
regulation such as Financial Reporting Council (FRC), the Accounting
Standards Board (ASB) and the International Accounting Standards Board
(IASB). If a company decides to present any information against any standards
or regulations it has to justify the reason for not following the recommended
procedure. For example, if a particular activity of a company will not give a
true and fair view of the financial performance and position of the company if
presented in the recommended way, then directors may wish to use
alternative methods.

Apart from the above mandatory requirements there are few other factors and
influences that a company needs to take in to account when preparing annual
accounts.

The recent growth in pressure groups such as environmental groups, have

forced company’s to include any measures it has taken to assist the causes
they support in the annual financial statements. Also the belief that companies
should shift away from solely financial reports to reports that disclose
information on activities addressing environmental and poverty issues have
forced companies to report these information on its annual reports. This
system of reporting accounts is called ‘social accounting’ or ‘social reporting’.
All though these are not compulsory we can use this as a way to inform the
general public that we are aware and concerned of social and ethical issues as
there are benefits of doing so.

Accounting concepts are globally recognised accounting practices which are

used when preparing financial statements. Though they are not a set of strict
rules, if not followed it tends to give a picture which doesn’t necessarily give a
true and fair view. It emphasizes the importance of consistency, materiality,
continuity and prudence when preparing and presenting financial statements.
There for it makes great sense to follow these concepts.

As all companies don’t operate in the same field/sector presenting all financial
statements in the same way will not give a clear picture as to how a company
has faired over the financial year. A service company’s accounts will not make
sense if it is presented in the same way as a manufacturing company’s
accounts. The accounts of a company operating in the leisure industry will be
different from the annual accounts of an insurance company. A service
company does not typically feature a trading account. A manufacturing
company shall always prepare a manufacturing account. High street retailers
may want to emphasize their brand value on the annual accounts. A financial
report of a commercial bank will be different from all of these formats. There
for accounts for such companies should be prepared in appropriate ways that
reflects the company’s financial performance and position.

Irrespective of the type of the company and the format used, the FRS 3
requires all company’s to disclose exceptional items. These are items that
arise out of the normal operating activities. These include
• Profit or loss made on a sale or a termination of a particular operation
• Cost incurred of a basic restructuring which can have a material impact
on the focus and the nature of the concerning entity’s operation.
• Profit or loss made on the disposal of fixed assets.
These items have to be categorised in to continuing and discontinued
operations.

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The information in the annual accounts should be arranged in a sensible order.
The order information should be presented is giving in the formats
recommended in the company’s act. Following this order will make the
information presented easily understandable and also will serve a legal
requirement.

I hope I provided you with a basic idea as to what factors a company should
take in to consideration when deciding how to arrange financial information in
statements. If you do have any queries, please feel free to contact me.

Best regards,

Sajidh Marikkar
Accounting and financial consultant

Bibliography

• Pendlebury, M. 2004 .Company Accounts. 6th edition, Thomson

publications
• Davidson, S. 1985. Financial Accounting: An Introduction to Concepts,
Methods, and Uses, Dryden Press
• Britton, A 2006. Financial Accounting, Pearson Education
• Holmes, A.G. 2005 Interpreting company reports and accounts,
Pearson education
• Miller P.W.B. 2002 Quality financial reporting, McGraw-hill professional
COULD A CASHFLOW STATEMENT BE PRESENTED AS THE ONLY FINANCIAL
STATEMENT OF A COMPANY?

Cash flow statement is a financial statement prepared by business entities to

present the cash flow of a business to its stake holders. A cashflow statement
reports all cash transactions both paid in and paid out. It has other
advantages as well.

A cashflow statement helps predict the future cashflow of a company. By

studying the present and past cashflows a forecast can be made about the
future cashflows. The CFS also assists to assess the way the management
made and used cash. It also assesses a company’s capability to carry on day-
to-day business, pay interest and dividends and also the ability to payback
loans.

The main financial reports a company prepares are the income statement,
balance sheet, the CFS and the statement of total recognised gains and
losses. These are aimed at indicating a company’s financial performance and
financial position with respect to each financial year.

The annual accounts of a company summarises main trading activity, changes

in assets and other investment and also changes in equity and other financing
methods. A main feature and advantage of cashflow statements is that it
covers all areas of financial activities that takes place over the financial year.
It signifies the changes to assets, liabilities and capital in a financial year.
The way the cashflow statement is formulated and presented it gives an
overall picture as to how a company faired in a fiscal year.
All the areas covered by cashflow statement are divided into three main
categories
• Operational activities
All cash generated and spent with regards to operational activities are
recorded under this heading. It includes cash receipts and payments from
customers and suppliers. Interest and dividends received and cash spent
on wages and tax paying.
• Investment activities
All transactions relating to sale and purchase of property, plant and assets
are reported here. Sales and purchases of securities, non cash equivalents
and receipt and loan makings are categorised under this heading.
• Financial activities
Issuing of equities and securities, borrowing and repayment of loans and
payments of dividends are listed here.

The cashflow statement covers all aspects of business activities that take
place in a business entity. There for a debate can be put forward as to
whether the cash flow statement can be presented as the ONLY financial
statement of a company.

Although it covers all areas of financial activities it presents them only in

cash terms. It does not show the activities that did not take place in cash
terms e.g. purchases and sales made on credit, changes in stock levels,
sales and purchases returns etc.. So it is not possible to get a clear picture
about a company’s success in its core business activity. A company exists
largely to make a profit. The profit made during a period cannot be
calculated with information presented on the cashflow statement as a lot of
transactions take place on credit and companies record profits on accrual
basis.

The cashflow statement presents the amount spent or generated by the

purchase or sale of assets. But it does not show how much was depreciated
on assets and also if any gains are made on assets. They will not appear
until the asset is sold or disposed. The cashflow statement does not show a
break down in assets either. Any rise in the value of investments do not
appear in the cashflow until they are realised. There for you cannot use the
cashflow statement to get an overall impression of how the assets and its
values have transformed over the year..

Every year, a company’s directors propose dividends. As they are not cash
transactions they do not appear in the CFS. The cashflow statement will not
entirely report how the owner’s equity changed over the year. Any capital
gains, fund transfers between capital reserves or capital losses do not
appear in CFS. The only information you can obtain is the amount spent or
earned by issuing or repaying stocks, securities and loans.

A cashflow statement will not show how much a company is owed and how
much it owes. It also does not show the breakdown of stocks. If there is a
possibility of the company being sued over some legal issue the amount
payable will not appear on the cashflow statement. This might show a
 positive balance of cash and give a wrong impression about a company’s
future.

Although a company runs on a very tight cash flow, it could be making

good profits and having other liquid assets which can be readily converted
into cash. In the long term a company may benefit from unrealised profits,
but this is not the impression you get, when you refer only the cashflow
statement which shows a low cash balance.

Also a company’s prosperity and success can be measured by the use of

financial ratios. Financial ratios tend to compare various financial data or
inputs and outputs to measure a company’s success. You cannot do this by
having a cashflow statement in hand. You need to have the income
statement and the balance sheet for this as well.

There for its clear that a cashflow statement cannot single handedly be
used to summarize and analyze a company’s performance over a financial
year. It provides great information regarding financial transactions but it is
limited by the fact that it cannot to provide any non cash transactions
which are highly critical and big in numbers. For a complete understanding
of a businesses financial position and performance an income statement
and a balance sheet should be accompanied by a cashflow statement.

BIBILOGRAPHY
• Pendlebury, M. 2004 .Company Accounts. 6th edition, Thomson
publications
• Miller, P.B.W 2002. Quality Financial Reporting. Mcgrew-Hill Professional
• Russmusen, 2003. Process improvement for effective budgeting and
financial reporting. John Wiley & Sons
• Nobes, N. 1992. International Classification of Financial Reporting.
Routeledge