Understanding the financial statement

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Understanding the Financial Statements
Gaining an Overview of Organisations Performance

The first part of this module is intended to give you an understanding of financial reports. You may find that this is difficult at first but by examining financial statements from a variety of companies you will soon gain an understanding of these and how to use them to assess an organisationsperformance. Before we progress with the interpretation let us spend some time exploring the information contained in an organisations Annual report and Accounts using Bright and Glossy’s Annual report and Accounts given at the end of the student guide.

You must never lose sight of the fact that accounts are kept in order that they may assist the proprietor or manager of the business. If the accounts, orany part of them, have no meaning to such individuals then they can have little meaning to others. You need to regard the records made as telling a story of what has happened, and telling it in a clear and intelligible manner.

What are the key characteristics of good information?

In answering this question you should have noted some or all of the following:

Good information should be:Relevant Timely

Accurate Objective

Sufficient Unbiased

Reliable Consistent

Complete Understandable

The type and level of information required to be produced in the accounts of a business depends to a large extent on the format taken by the business. The limited company is required to produce by far the mostdetailed accounting information. For that reason we will consider the accounts of a company throughout the rest of this handout.

Consider the accounts of Bright and Glossy plc for the year ended 31 August 2010.

At this stage you may not feel able to answer this question. What you are faced with is a mass of information of a financial nature presented in a form prescribed by the Companies Act,taking into account generally accepted accounting practice.

What exactly is presented to you in these accounts?

Company Information

Details include the directors’ names, the secretary, registered office, registrars, principal bankers and who the auditors are.

Chairman's Statement

A short report outlining the position of the company as seen by the chairman. Thisstatement will, to a certain extent, be subjective and will usually paint a rosy picture of the business.

Directors' Report and Review of the Year

The content of the directors’ report is essentially prescribed by law under the Companies Act 1985. Information is usually kept to the minimum required by law.

Director's Responsibility Statement

This example is particularly brief,but this is where the directors admit responsibility for producing the information presented in the accounts. It is not the auditor’s responsibility to do this, but to audit the information presented to them by the directors.

Report of the Auditors

The auditors are independent experts who are required by law to give an opinion on the truth and fairness of the accounting informationpresented. Note the fact that the auditors are very specific about what information has been audited (refer to the page numbers i.e. 10 to 20) and their opinion is very general. Having said this, this statement is possibly the most important piece of information presented as it essentially tells the reader whether they can believe the accounting information or not.

Accounting PoliciesGenerally accepted accounting practice allow for a wide variety of choice with regard to the calculation and presentation of information. The scope allowed could lead to a lack of comparability between the accounts of various companies who had chosen different methods of calculation or presentation. Under “accounting policies” the company explains what methods have been used in preparing the...