Tips from our webinar: Interpretation of business accounts
In September 2022 we delivered the second of our webinars and looked in detail at the interpretation of financial statements. In this article we cover three of the areas which were considered in the webinar.
Components of financial statements
Director’s report, auditors report, strategic report, corporate governance report
Reports
Profit/loss account
Records the revenue generated and costs incurred by the company during the accounting period
Balance sheet
Provides a snapshot of the assets and liabilities of the company as at the accounting date
Statement of changes in equity
Shows the changes in the owner’s or shareholder’s equity during the accounting period
Cashflow statement
Summarises the amount of cash and cash equivalents entering and leaving the company in the accounting period
Red flags in analysing financial statements:
Key considerations in reviewing the cash flow statement:
Provide additional information pertaining to a company’s financial performance and position
Notes
Non recurring or exceptional income or expenses eg restructuring costs, settlement of a legal claim, profit on sale of a fixed asset, FX gains Reported profits significantly exceeding operating cashflows Increasing work in progress or accrued revenue Contingent liabilities Related party transactions Post balance sheet events Prior year adjustments Qualified audit opinion and changes to accounting policies
How does the cash generated from operations compare to profits? Has the company purchased substantial fixed assets or sold fixed assets? Has the financing structure changed eg new loans, repayment of loans, share issues?
What are the trends year on year? Is turnover increasing or decreasing? If turnover is increasing is this reflected in gross profits? Have overheads increased and how do these compare to gross profit? Key considerations when reviewing the profit and loss account and thus financial performance:
What is in other operating income (if anything)? Is it the consolidated profit and loss including all group entities? Are results exceptional or consistent with earlier years?
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