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Definition Assets may be classified into Current and Non-Current.

The distinction is made on


the basis of time period in which the economic benefits from the asset will flow to
Financial Statements represent a formal record of the financial activities of an the entity.
entity. These are written reports that quantify the financial strength, performance
and liquidity of a company. Financial Statements reflect the financial effects of
Current Assets are ones that an entity expects to use within one-year time from the
business transactions and events on the entity.
reporting date.
Four Types of Financial Statements
Non Current Assets are those whose benefits are expected to last more than one
The four main types of financial statements are: year from the reporting date.
1. Statement of Financial Position
Types and Examples
Statement of Financial Position, also known as the Balance Sheet, presents the
financial position of an entity at a given date. It is comprised of the following three Following are the most common types of Assets and their Classification along with
elements: the economic benefits derived from those assets.
Assets: Something a business owns or controls (e.g. cash, inventory, plant
and machinery, etc) Asset Classification Economic Benefit

Used for the production of goods


Elements of the financial statements Machine Non-current
for sale to customer.
include Assets, Liabilities, Equity, Income & Expenses. The first three elements
relate to the statement of financial position whereas the latter two relate to the Provides space to employees for
income statement. Office Building Non-current
administering company affairs.

The first three elements relate to the statement of financial position while the latter Used in the transportation of
two relate to income statements. Vehicle Non-current company products and also for
commuting.
Assets
Cash is generated from the sale of
Inventory Current
inventory.
Definition
Cash Current Cash!
Asset is a resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity (IASB Framework). Will eventually result in inflow of
Receivables Current
cash.
Explanation

In simple words, asset is something which a business owns or controls to benefit Liabilities: Something a business owes to someone (e.g. creditors, bank
from its use in some way. It may be something which directly generates revenue for loans, etc)
the entity (e.g. a machine, inventory) or it may be something which supports the
According to IASB Frmework liability is defined as follows:
primary operations of the organization (e.g. office building).
A liability is a present obligation of the enterprise arising from past events, the
Classification settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits (IASB Framework).
Explanation outstanding liabilities. Equity therefore represents the difference between
the assets and liabilities.
In simple words, liability is an obligation of the entity to transfer cash or other
resources to another party. Definition

Liability could for instance be a bank loan, which obligates the entity to pay loan Equity is the residual interest in the assets of the entity after deducting all the
installments over the duration of the loan to the bank along with the associated liabilities (IASB Framework).
interest cost. Alternatively, an entity's liability could be a trade payable arising from
the purchase of goods from a supplier on credit. Explanation

Classification Equity is what the owners of an entity have invested in an enterprise. It represents
what the business owes to its owners. It is also a reflection of the capital left in the
Liabilities may be classified into Current and Non-Current. The distinction is made business after assets of the entity are used to pay off any outstanding liabilities.
on the basis of time period within which the liability is expected to be settled by the
entity. Equity therefore includes share capital contributed by the shareholders along with
any profits or surpluses retained in the entity. This is what the owners take home in
Current Liability is one which the entity expects to pay off within one year from the the event of liquidation of the entity.
reporting date.
The Accounting Equation may further explain the meaning of equity:
Non-Current Liability is one which the entity expects to settle after one year from
the reporting date. Assets - Liabilities = Equity

Types and examples This illustrates that equity is the owner's interest in the Net Assets of an entity.

Following are examples the common types of liabilities along with their usual Rearranging the above equation, we have
classifications. Assets = Equity + Liabilities
Liability Classification Assets of an entity have to be financed in some way. Either by debt (Liability) or by
Long Term Bank Loan Non-current share capital and retained profits (Equity). Hence, equity may be viewed as a type of
liability an entity has towards its owners in respect of the assets they financed.
Bank Overdraft current
Examples
Short Term Bank Loan current
Examples of Equity recognized in the financial statements include the following:
Trade Payables current
Ordinary Share Capital
Debenture Non-current
Preference Share Capital (irredeemable)
Tax Payble Current
Retained Earnings
It may be appropriate to break up a single liability into their current and non current
portions. For instance, a bank loan spanning two years and carrying 2 equal Revaluation Surpluses
installments payable at the end of each year would be classified half as current and
half as non-current liability at the inception of loan.
View detailed explanation and Example of Statement of Financial Position

Equity: What the business owes to its owners. This represents the amount
of capital that remains in the business after its assets are used to pay off its Statement of Financial Position [Balance Sheet]
Definition TOTAL ASSETS 265,000 250,000
Statement of Financial Position, also known as the Balance Sheet, presents the
financial position of an entity at a given date. It is comprised of three main
components: Assets, liabilities and equity. EQUITY AND LIABILITIES

Statement of Financial Position helps users of financial statements to assess the


financial soundness of an entity in terms of liquidity risk, financial risk, credit risk
and business risk. Equity

Example Share capital 4 100,000 100,000

Following is an illustrative example of a Statement of Financial Position prepared Retained earnings 50,000 40,000
under the format prescribed by IAS 1 Presentation of Financial Statements.
Revaluation reserve 5 15,000 10,000

Total equity 165,000 150,000


Statement of Financial Position as at 31st December 2013

2013 2012
Notes Non-current liabilities
USD USD
Long term borrowings 6 35,000 50,000
ASSETS

Current liabilities
Non-current assets
Trade and other payables 7 35,000 25,000
Property, plant & equipment 9 130,000 120,000
Short-term borrowings 8 10,000 8,000
Goodwill 10 30,000 30,000
Current portion of long-term borrowings 6 15,000 15,000
Intangible assets 11 60,000 50,000
Current tax payable 9 5,000 2,000
220,000 200,000

Total current liabilities 65,000 50,000


Current assets
Total liabilities 100,000 100,000
Inventories 12 12,000 10,000
TATAL EQUITY AND LIABILITIES 265,000 250,000
Trade receivables 13 25,000 30,000

Cash and cash equivalents 14 8,000 10,000


Classification of Components
45,000 50,000
Statement of financial position consists of the following key elements:

Assets
An asset is something that an entity owns or controls in order to derive economic Short term borrowings typically include bank overdrafts and short term
benefits from its use. Assets must be classified in the balance sheet as current or bank loans with a repayment schedule of less than 12 months.
non-current depending on the duration over which the reporting entity expects to
derive economic benefit from its use. An asset which will deliver economic benefits Long-term borrowings comprise of loans which are to be repaid over a
to the entity over the long term is classified as non-current whereas those assets period that exceeds one year. Current portion of long-term borrowings
that are expected to be realized within one year from the reporting date are include the installments of long term borrowings that are due within one
classified as current assets. year of the reporting date.

Assets are also classified in the statement of financial position on the basis of their Current Tax Payable is usually presented as a separate line item in the
nature: statement of financial position due to the materiality of the amount.

Tangible & intangible: Non-current assets with physical substance are Equity
classified as property, plant and equipment whereas assets without any Equity is what the business owes to its owners. Equity is derived by deducting total
physical substance are classified as intangible assets. Goodwill is a type of liabilities from the total assets. It therefore represents the residual interest in the
an intangible asset. business that belongs to the owners.
Inventories balance includes goods that are held for sale in the ordinary Equity is usually presented in the statement of financial position under the
course of the business. Inventories may include raw materials, finished following categories:
goods and works in progress.
Share capital represents the amount invested by the owners in the entity
Trade receivables include the amounts that are recoverable from
customers upon credit sales. Trade receivables are presented in the Retained Earnings comprises the total net profit or loss retained in the
statement of financial position after the deduction of allowance for bad business after distribution to the owners in the form of dividends.
debts.
Revaluation Reserve contains the net surplus of any upward revaluation of
Cash and cash equivalents include cash in hand along with any short term property, plant and equipment recognized directly in equity.
investments that are readily convertible into known amounts of cash.

Liabilities
Rationale - Why the balance sheet always balances?
A liability is an obligation that a business owes to someone and its settlement
involves the transfer of cash or other resources. Liabilities must be classified in the The balance sheet is structured in a manner that the total assets of an entity equal
statement of financial position as current or non-current depending on the duration to the sum of liabilities and equity. This may lead you to wonder as to why the
over which the entity intends to settle the liability. A liability which will be settled balance sheet must always be in equilibrium.
over the long term is classified as non-current whereas those liabilities that are Assets of an entity may be financed from internal sources (i.e. share capital and
expected to be settled within one year from the reporting date are classified as profits) or from external credit (e.g. bank loan, trade creditors, etc.). Since the total
current liabilities. assets of a business must be equal to the amount of capital invested by the owners
Liabilities are also classified in the statement of financial position on the basis of (i.e. in the form of share capital and profits not withdrawn) and any borrowings, the
their nature: total assets of a business must equal to the sum of equity and liabilities.

Trade and other payables primarily include liabilities due to suppliers and This leads us to the
contractors for credit purchases. Sundry payables which are too Accounting Equation: Assets = Liabilities + Equity
insignificant to be presented separately on the face of the balance sheet
are also classified in this category. Purpose & Importance
Statement of financial position helps users of financial statements to assess the For instance, sale revenue of a business whose main aim is to sell biscuits is income
financial health of an entity. When analyzed over several accounting periods, generated from selling biscuits. If the business sells one of its factory machines,
balance sheets may assist in identifying underlying trends in the financial position of income from the transaction would be classified as a gain rather than sale revenue.
the entity. It is particularly helpful in determining the state of the entity's liquidity
risk, financial risk, credit risk and business risk. When used in conjunction with other Examples
financial statements of the entity and the financial statements of its competitors, Following are common sources of incomes recognized in the financial statements:
balance sheet may help to identify relationships and trends which are indicative of
potential problems or areas for further improvement. Analysis of the statement of Sale revenue generated from the sale of a commodity.
financial position could therefore assist the users of financial statements to predict
the amount, timing and volatility of entity's future earnings. Interest received on a bank deposit.

Dividend earned on entity's investments.

2. Income Statement Rentals received on property leased by the entity.

Income Statement, also known as the Profit and Loss Statement, reports the Gain on re-valuation of company assets.
company's financial performance in terms of net profit or loss over a specified
period. Income Statement is composed of the following two elements:
Expense: The cost incurred by the business over a period (e.g. salaries and
Income: What the business has earned over a period (e.g. sales revenue, wages, depreciation, rental charges, etc
dividend income, etc)

Definition Expenses are the decreases in economic benefits during the accounting period in
the form of outflows or depletions of assets or incurrences of liabilities that result in
Income is increases in economic benefits during the accounting period in the form decreases in equity, other than those relating to distributions to equity participants
of inflows or enhancements of assets or decreases of liabilities that result in (IASB Framework).
increases in equity, other than those relating to contributions from equity
participants (IASB Framework). Explanation
Explanation
Expense is simply a decrease in the net assets of the entity over an accounting
Income is therefore an increase in the net assets of the entity during an accounting period except for such decreases caused by the distributions to the owners. The
period except for such increases caused by the contributions from owners. The first first aspect of the definition is quite easy to grasp as the incurring of an expense
part of the definition is quite easy to understand as income must logically result in must reduce the net assets of the company. For instance, payment of a company's
an increase in the net assets (equity) of the entity such as by the inflow of cash or utility bills reduces cash. However, net assets of an entity may also decrease as a
other assets. However, net assets of an entity may increase simply by further capital result of payment of dividends to shareholders or drawings by owners of a business,
investment by its owners even though such increase in net assets cannot be both of which are distributions of profits rather than expense. This is the
regarded as income. This is the significance of the latter part of the definition of significance of the latter part of the definition of expense.
income.

Types Types

There are two types of income: Following is a list of common types of expenses recognized in the financial
statements:
Sale Revenue: Income earned in the ordinary course of business activities
of the entity;
Salaries and wages
Gains: Income that does not arise from the core operations of the entity.
Utility expenses

Cost of goods sold Income Statement for the Year Ended 31st December 2013

2013 2012
Administration expenses Notes
USD USD
Finance costs

Depreciation
Revenue 16 120,000 100,000
Impairment losses
Cost of Sales 17 (65,000) (55,000)
Accruals Principle

Expense is accounted for under the accruals principal whereby it is recognized for Gross Profit 55,000 45,000
the whole accounting period in full, irrespective of whether payments have been
made or not.
Other Income 18 17,000 12,000
As expense is an element of the income statement, it is calculated over the entire
accounting period (usually one year) unlike balance sheet items which are Distribution Cost 19 (10,000) (8,000)
calculated specifically for the year end date.
Administrative Expenses 20 (18,000) (16,000)

Depreciation is systematic allocation the cost of a fixed asset over its useful life. It is Other Expenses 21 (3,000) (2,000)
a way of matching the cost of a fixed asset with the revenue (or other economic
benefits) it generates over its useful life. Without depreciation accounting, the Finance Charges 22 (1,000) (1,000)
entire cost of a fixed asset will be recognized in the year of purchase. This will give a
misleading view of the profitability of the entity. The observation may be explained
by way of an example. (15,000) (15,000)

Profit before tax 40,000 30,000


Net profit or loss is arrived by deducting expenses from income.

View detailed explanation and Example of Income Statement


Income tax 23 (12,000) (9,000)

Definition
Net Profit 28,000 21,000
Income Statement, also known as Profit & Loss Account, is a report of income,
expenses and the resulting profit or loss earned during an accounting period. Basis of preparation

Example Income statement is prepared on the accruals basis of accounting.

Following is an illustrative example of an Income Statement prepared in accordance


with the format prescribed by IAS 1 Presentation of Financial Statements.
This means that income (including revenue) is recognized when it is earned rather Interest income on bank deposits
than when receipts are realized (although in many instances income may be earned
and received in the same accounting period). Exchange gain on translation of a foreign currency bank account

Conversely, expenses are recognized in the income statement when they Distribution Cost
are incurred even if they are paid for in the previous or subsequent accounting Distribution cost includes expenses incurred in delivering goods from the business
periods. premises to customers.
Income statement does not report transactions with the owners of an entity. Administrative Expenses
Hence, dividends paid to ordinary shareholders are not presented as an expense in Administrative expenses generally comprise of costs relating to the management
the income statement and proceeds from the issuance of shares is not recognized and support functions within an organization that are not directly involved in the
as an income. Transactions between the entity and its owners are accounted for production and supply of goods and services offered by the entity.
separately in the statement of changes in equity.
Examples of administrative expenses include:
Components
Salary cost of executive management
Income statement comprises of the following main elements:
Legal and professional charges
Revenue
Depreciation of head office building
Revenue includes income earned from the principal activities of an entity. So for
example, in case of a manufacturer of electronic appliances, revenue will comprise Rent expense of offices used for administration and management purposes
of the sales from electronic appliance business. Conversely, if the same
manufacturer earns interest on its bank account, it shall not be classified as revenue Cost of functions / departments not directly involved in production such as
but as other income. finance department, HR department and administration department

Cost of Sales Other Expenses

Cost of sales represents the cost of goods sold or services rendered during an This is essentially a residual category in which any expenses that are not suitably
accounting period. classifiable elsewhere are included.

Hence, for a retailer, cost of sales will be the sum of inventory at the start of the Finance Charges
period and purchases during the period minus any closing inventory. Finance charges usually comprise of interest expense on loans and debentures.
In case of a manufacturer however, cost of sales will also include production costs The effect of present value adjustments of discounted provisions are also included
incurred in the manufacture of goods during a period such as the cost of direct in finance charges (e.g. unwinding of discount on provision for decommissioning
labor, direct material consumption, depreciation of plant and machinery and cost).
factory overheads, etc.
Income tax
You may refer to the article on cost of sales for an explanation of its calculation.
Income tax expense recognized during a period is generally comprised of the
Other Income following three elements:
Other income consists of income earned from activities that are not related to the Current period's estimated tax charge
entity's main business. For example, other income of an entity that manufactures
electronic appliances may include: Prior period tax adjustments

Gain on disposal of fixed assets Deferred tax expense


Prior Period Comparatives Operating Activities: Represents the cash flow from primary activities of a
business.
Prior period financial information is presented along side current period's financial
results to facilitate comparison of performance over a period. Investing Activities: Represents cash flow from the purchase and sale of
assets other than inventories (e.g. purchase of a factory plant)
It is therefore important that prior period comparative figures presented in the
income statement relate to a similar period. Financing Activities: Represents cash flow generated or spent on raising
and repaying share capital and debt together with the payments of interest
For example, if an organization is preparing income statement for the six months and dividends.
ending 31 December 2013, comparative figures of prior period should relate to the
six months ending 31 December 2012. View detailed explanation and Example of Cash Flow Statement

Purpose & Use Definition

Income Statement provides the basis for measuring performance of an entity over Statement of Cash Flows, also known as Cash Flow Statement, presents the
the course of an accounting period. movement in cash flows over the period as classified under operating, investing and
financing activities.
Performance can be assessed from the income statement in terms of the following:
Example
Change in sales revenue over the period and in comparison to industry
growth Following is an illustrative cash flow statement presented according to the indirect
method suggested in IAS 7 Statement of Cash Flows:
Change in gross profit margin, operating profit margin and net profit
margin over the period

Increase or decrease in net profit, operating profit and gross profit over the
period
ABC PLC
Comparison of the entity's profitability with other organizations operating Statement of Cash Flows for the year ended 31 December 2013
in similar industries or sectors
2013 2012
Income statement also forms the basis of important financial evaluation of an entity Notes
when it is analyzed in conjunction with information contained in other financial USD USD
statements such as:

Change in earnings per share over the period

Analysis of working capital in comparison to similar income statement Cash flows from operating activities
elements (e.g. the ratio of receivables reported in the balance sheet to the
credit sales reported in the income statement, i.e. debtor turnover ratio)
Profit before tax 40,000 35,000
Analysis of interest cover and dividend cover ratios

3. Cash Flow Statement Adjustments for:

Cash Flow Statement, presents the movement in cash and bank balances over a Depreciation 4 10,000 8,000
period. The movement in cash flows is classified into the following segments:
Amortization 4 8,000 7,500

Impairment losses 5 12,000 3,000 Net cash from operating activities (A) 19,600 25,300

Bad debts written off 14 500 -

Interest expense 16 800 1,000 Cash flows from investing activities

Gain on revaluation of investments (21,000) -

Interest income 15 (11,000) (9,500) Capital expenditure 4 (100,000) (85,000)

Dividend income (3,000) (2,500) Purchase of investments 11 (25,000) -

Gain on disposal of fixed assets (1,200) (1,850) Dividend received 5,000 3,000

Interest received 3,500 1,000

35,100 40,650 Proceeds from disposal of fixed assets 18,000 5,500

Proceeds from disposal of investments 2,500 2,200

Working Capital Changes:

Net cash used in investing activities (B) (96,000) (73,300)

Movement in current assets:

(Increase) / Decrease in inventory (1,000) 550 Cash flows from financing activities

Decrease in trade receivables 3,000 1,400

Issuance of share capital 6 1000,000 -

Movement in current liabilities: Bank loan received - 100,000

Increase / (Decrease) in trade payables 2,500 (1,300) Repayment of bank loan (100,000) -

Interest expense (3,600) (7,400)

Cash generated from operations 39,600 41,300

Net cash from financing activities (C) 896,400 92,600

Dividend paid (8,000) (6,000)

Income tax paid (12,000) (10,000) Net increase in cash & cash equivalents (A+B+C) 820,000 44,600
Cash and cash equivalents at start of the Example
77,600 33,000
year
Following is an illustrative example of a Statement of Changes in Equity prepared
Cash and cash equivalents at end of the according to the format prescribed by IAS 1 Presentation of Financial Statements.
24 897,600 77,600
year

ABC Plc
Statement of changes in equity
for the year ended
4. Statement of Changes in Equity 31st December 2012
Statement of Changes in Equity, also known as the Statement of Retained Earnings,
details the movement in owners' equity over a period. The movement in owners'
equity is derived from the following components:
Share Retained Revaluation Total
Net Profit or loss during the period as reported in the income statement Capital Earnings Surplus Equity

Share capital issued or repaid during the period

Dividend payments USD USD USD USD

Gains or losses recognized directly in equity (e.g. revaluation surpluses)

Effects of a change in accounting policy or correction of accounting error Balance at 1 January 2011 100,000 30,000 - 130,000
View detailed explanation and Example of Statement of Changes in Equity

Changes in accounting policy - - - -


Definition Correction of prior period error - - - -
Statement of Changes in Equity, often referred to as Statement of Retained
Earnings in U.S. GAAP, details the change in owners' equity over an accounting
period by presenting the movement in reserves comprising the shareholders' Restated balance 100,000 30,000 - 130,000
equity.

Movement in shareholders' equity over an accounting period comprises the


following elements: Changes in equity for the year
2011
Net profit or loss during the accounting period attributable to shareholders

Increase or decrease in share capital reserves


Issue of share capital - - - -
Dividend payments to shareholders
Income for the year - 25,000 - 25,000
Gains and losses recognized directly in equity
Revaluation gain - - 10,000 10,000
Effect of changes in accounting policies
Dividends - (15,000) - (15,000)
Effect of correction of prior period error
reserves so that the amounts presented in current period statement might be easily
reconciled and traced from prior period financial statements.
Balance at 31 December 2011 100,000 40,000 10,000 150,000
Restated Balance

This represents the equity attributable to stockholders at the start of the


Changes in equity for the year comparative period after the adjustments in respect of changes in accounting
2012 policies and correction of prior period errors as explained above.

Changes in Share Capital


Issue of share capital - - - - Issue of further share capital during the period must be added in the statement of
changes in equity whereas redemption of shares must be deducted therefrom. The
Income for the year - 30,000 - 30,000
effects of issue and redemption of shares must be presented separately for share
Revaluation gain - - 5,000 5,000 capital reserve and share premium reserve.

Dividends - (20,000) - (20,000) Dividends

Dividend payments issued or announced during the period must be deducted from
shareholder equity as they represent distribution of wealth attributable to
Balance at 31 December 2012 100,000 50,000 15,000 165,000 stockholders.

Income / Loss for the period


Components This represents the profit or loss attributable to shareholders during the period as
reported in the income statement.
Following are the main elements of statement of changes in equity:
Changes in Revaluation Reserve
Opening Balance
Revaluation gains and losses recognized during the period must be presented in the
This represents the balance of shareholders' equity reserves at the start of the
statement of changes in equity to the extent that they are recognized outside the
comparative reporting period as reflected in the prior period's statement of
income statement. Revaluation gains recognized in income statement due to
financial position. The opening balance is unadjusted in respect of the correction of
reversal of previous impairment losses however shall not be presented separately in
prior period errors rectified in the current period and also the effect of changes in
the statement of changes in equity as they would already be incorporated in the
accounting policy implemented during the year as these are presented separately in
profit or loss for the period.
the statement of changes in equity (see below).
Other Gains & Losses
Effect of Changes in Accounting Policies
Any other gains and losses not recognized in the income statement may be
Since changes in accounting policies are applied retrospectively, an adjustment is
presented in the statement of changes in equity such as actuarial gains and losses
required in stockholders' reserves at the start of the comparative reporting period
arising from the application of IAS 19 Employee Benefit.
to restate the opening equity to the amount that would be arrived if the new
accounting policy had always been applied. Closing Balance
Effect of Correction of Prior Period Error This represents the balance of shareholders' equity reserves at the end of the
reporting period as reflected in the statement of financial position.
The effect of correction of prior period errors must be presented separately in the
statement of changes in equity as an adjustment to opening reserves. The effect of Purpose & Importance
the corrections may not be netted off against the opening balance of the equity
Statement of changes in equity helps users of financial statement to identify the Assets, liabilities and equity balances reported in the Balance Sheet at the period
factors that cause a change in the owners' equity over the accounting periods. end consist of:
Whereas movement in shareholder reserves can be observed from the balance
sheet, statement of changes in equity discloses significant information about equity Balances at the start of the period;
reserves that is not presented separately elsewhere in the financial statements The increase (or decrease) in net assets as a result of the net profit (or loss)
which may be useful in understanding the nature of change in equity reserves. reported in the income statement;
Examples of such information include share capital issue and redemption during the
period, the effects of changes in accounting policies and correction of prior period The increase (or decrease) in net assets as a result of the net gains (or
errors, gains and losses recognized outside income statement, dividends declared losses) recognized outside the income statement and directly in the
and bonus shares issued during the period. statement of changes in equity (e.g. revaluation surplus);

The increase in net assets and equity arising from the issue of share capital
as reported in the statement of changes in equity;
Link between Financial Statements
The decrease in net assets and equity arising from the payment of
The following diagram summarizes the link between financial statements. dividends as presented in the statement of changes in equity;

The change in composition of balances arising from inter balance sheet


transactions not included above (e.g. purchase of fixed assets, receipt of
bank loan, etc).

Accruals and Prepayments

Receivables and Payables

Income Statement

Income Statement, or Profit and Loss Statement, is directly linked to balance sheet,
cash flow statement and statement of changes in equity.

The increase or decrease in net assets of an entity arising from the profit or loss
reported in the income statement is incorporated in the balances reported in the
balance sheet at the period end.

The profit and loss recognized in income statement is included in the cash flow
statement under the segment of cash flows from operation after adjustment of
non-cash transactions. Net profit or loss during the year is also presented in the
statement of changes in equity.

Statement of Changes in Equity

Statement of Changes in Equity is directly related to balance sheet and income


statement.

Statement of changes in equity shows the movement in equity reserves as reported


Balance Sheet in the entity's balance sheet at the start of the period and the end of the period.
Balance Sheet, or Statement of Financial Position, is directly related to the income The statement therefore includes the change in equity reserves arising from share
statement, cash flow statement and statement of changes in equity. capital issues and redemptions, the payments of dividends, net profit or loss
reported in the income statement along with any gains or losses recognized directly
in equity (e.g. revaluation surplus).

Cash Flow Statement

Statement of Cash Flows is primarily linked to balance sheet as it explains the


effects of change in cash and cash equivalents balance at the beginning and end of
the reporting period in terms of the cash flow impact of changes in the components
of balance sheet including assets, liabilities and equity reserves.

Cash flow statement therefore reflects the increase or decrease in cash flow arising
from:

Change in share capital reserves arising from share capital issues and
redemption;

Change in retained earnings as a result of net profit or loss recognized in


the income statement (after adjusting non-cash items) and dividend
payments;

Change in long term loans due to receipt or repayment of loans;

Working capital changes as reflected in the increase or decrease in net


current assets recognized in the balance sheet;

Change in non current assets due to receipts and payments upon the
acquisitions and disposals of assets (i.e. investing activities)

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