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16. Types of financial satatements

Lead-in:

What information is, in your opinion, included in companies’ annual reports?

Key words and phrases

1. annual report – щорічний звіт

2. profit and loss account – рахунок прибутку та витрат

3. income statement – звіт про прибутки та витрати

4. income and expenditure – прибуток та витрати

5. turnover – оборот

6. costs – витрати

7. overheads – накладні витрати

8. government taxation – державне оподаткування

9. balance sheet – балансовий звіт

8. assets and liabilities – активи і пасиви

10. accounts receivable – рахунки дебіторів, дебіторська заборгованість

11. accounts payable – рахунки кредиторів, кредиторська заборгованість

12. double-entry bookkeeping – система подвійного запису

13. share premium (paid-in-surplus) – премія на акцію (активний платіжний баланс)

14. retained profit – нерозподілений прибуток

15. cash flow – приплив готiвки

16. depreciation – зниження вартості, амортизація

In their annual reports companies usually include three financial statements.

The profit and loss account or income statement shows the revenue or earnings or income and expenditure. It usually gives figures for total sales or turnover, and costs and overheads. The first figure should obviously be higher than the second, i.e. there should be a profit. Part of the profit goes to the Government in taxation, part is usually distributed to shareholders (stockholders) as a dividend, and part is retained by the company.

The balance sheet shows a company’s financial situation on a particular date, generally the last days of the financial year. It lists the company’s assets, its liabilities, and shareholders’ funds. Assets include debtors or accounts receivable, liabilities include creditors or accounts payable. Negative items on financial statements, such as taxation, creditors, and dividends paid, are usually enclosed in brackets.

In accordance with the principle of double-entry bookkeeping, the basic accounting equation is Assets = Liabilities + Owners’ (or Shareholders) Equity. This can be rewritten as Assets – Liabilities = Owners’ Equity or Net Assets. This includes share capital, share premium (GB) or paid-in-surplus (US) (selling shares at above their nominal value), and the company’s reserves, including the year’s retained profits.

The third financial statement, source and application of funds statement, or the statement of changes in financial position, shows the flow of cash in and out of the business between balance sheet dates. Sources of funds include trading profits, depreciation provisions, and sales of assets, borrowing and the issuing of shares. Applications of these funds include purchases of fixed or financial assets, payment of dividends, repayment of loans, and – in a bad year – trading losses.

Comprehension:

1. What does a profit and loss account show?

2. Where does part of the profit go?

3. What is listed in the company’s balance sheet?

4. How do you read the basic accounting equation?

5. What items are included in the statement of changes in financial position?

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