Good Example Of Essay On Financial Statements
Generally Accepted Accounting Principles (US GAAP)
These refer the framework of accounting standards, rules, and procedures used in the United States to record and report financial statements of entities (Fasb.org, 2015). They are applied by both privately held and publicly traded companies, non-profit organizations and the government. The rules must be adhered to so to ensure the accuracy and reliability of financial statements. The GAAPs act as a common means of communication among accounting and finance professionals hence enables interested parties to compare financial statements with those of other corporations (Aicpa.org, 2015).
International Accounting Standards/International Financial Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS) are set of accounting standards developed by the International Accounting Standards Board (IASB) for the purpose of preparation of financial statements (Ifrs.org, 2015). The International Accounting Standards Board works towards improvement and harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements. Moreover, it publishes the public accounting standards to be adhered to in the preparation of financial statements. The use of IFRS adds credibility to the financial statements as they can be compared with others worldwide. In addition, the financial statements become more relevant and reliable for decision-making purpose by interested parties such as the shareholders and management.
Securities and Exchange Commission (SEC)
This is a government agency that oversees securities transactions, activities of financial professionals and mutual fund trading so as to deter fraud and international deception (Sec.gov, 2015).
It consists of five commissioners who serve staggered five-year terms (Sec.gov, 2015). The composition of the commission is such utmost three members can be from a single political party. SEC has four divisions namely;
Division of Corporation Finance: It ensures that corporate disclose relevant information to those who wants to invest in the company.
Division of Trading Market: It ensures that there are fairness, order and efficiency in market activities
Division of investment management: This division helps in ensuring that the investors are protected and also encourages capital formation through monitoring and regulating the investment management industry.
Division of Enforcement: It is charged with investigating securities law violations and to press civil and criminal actions against the offenders.
The Securities and Exchange Commission, therefore, ensures that there is confidence in the financial markets by providing investors with reliable information and that the individuals and corporation get to deal with each other honestly and faithfully.
This is a report given to company’s shareholders, creditors and regulatory authorities when a fiscal year ends. The report contains the income statement, balance sheet/statement of affairs, and the statement of cash flows, accompanying footnotes. It may also include management comments and audit report and other schedules that may be required by regulatory bodies.
The income statements show a report of income expense and the ultimate profit or loss earned during a given accounting period. The statement of affairs shows the assets and liabilities of an entity so as to ascertain its’ financial position on a particular date. With this kind of report, the financial statements become so easy to compare with those of other firms.
Forms 10-K, 10-Q and 8-K
Form 10-K is the annual report that is presented yearly by a company to give more detailed summary of its financial performance (Sec.gov, 2015). The report contains information such as a business history, organizational structure, equity holding and earnings per share
Form 10-Q is a detailed report of company’s performance submitted quarterly by all public companies to the Securities and Exchange Commission (SEC). The firms are required to disclose relevant information as far as their financial position is concerned (Sec.gov, 2015).
Form 8-K details unscheduled material events or corporate changes in a company that might be of use to the shareholders or the Securities and Exchange Commission (Sec.gov, 2015).
The forms provide reliability and relevance to the financial statements since the financial statements can be easily accessed, and relevant information taken from financial the statements items.
1. Income Statement
It is a financial statement that reports about income expenses and the ultimate profit or loss earned in a given accounting period. The format followed during its preparation is as follows:
For Year Ending dec.31, 2014
Revenue: Gross sales xxxxxx
Less: sales returns/Allowance xxxxxx
Net sales xxxxxx
Cost of goods sold:
Delivery charges xxxxxx
Cost of goods sold (xxxx)
Gross sales profit (loss) xxxxxx
Expense 1 xxxxxx
Expense 2 xxxxxx
Expense 3 xxxxxx
Total expenses: (xxxx)
Net operating income: xxxxxx
Income 1 xxxxxx
Income 2 xxxxxx
Income 3 xxxxxx
Total other income: xxxxxx
Net income (loss): xxxxxx
2. Statement of cash flows
It shows the amount of money and money equivalents that a business gets and uses during a period, usually a month, quarter or after a year. It takes the following format:
CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DEC 2xx
Cash from operating activities:
Net profit before taxation xx
Foreign exchange loss x
Investment income (x)
Interest expense x
Interest income (x)
Gain on disposal of property, plant and equipment (x)
Loss on disposal of investment x
Operating profit before working capital changes xx
Decrease in receivables xx
Increase in inventories (xx)
Increase in trade payables xx
Cash generated from operations xx
Cash flow investing activities:
Purchase of property, plant and equipment (x)
Proceeds from disposal of land (x)
Purchase of equity investment (x)
Interest received x
Net cash flow from investing activities xx
Cash flow from financing activities
Proceeds from issue of share capital xx
Proceeds from long term loans xx
Dividend paid (x)
Net cash flow from financing activities xx
Net increase in cash and cash equivalent xx
Cash and cash equivalent at the beginning of the period xx
Cash and cash equivalent at the end of period xx
3. Statement of retained earnings
A financial report that is showing the amount of income that is remaining after withdrawals or paying of dividends by the owner. Retained earnings are calculated using the formula.
Retained earnings =Beginning retained earnings + Net income – distributions to shareholders
Statement of retained earnings
For the year ended December 31,20xx
Beginning retained earnings xx
Add: net income xx
Less: dividends (xx)
Ending retained earnings xx
A balance sheet is a financial statement that shows the financial position of the firm at a particular date. It takes the following format.
Balance sheet as at Dec 20xx
Non-Current Assets $ $
Land & Buildings xx
Plant & Machinery xx
Fixtures, furniture & fittings xx
Motors vehicles xx
Total non-current assets xx
Debtors/ trade receivables xx
Cash at bank xx
Cash in hand xx
Total current assets xx
Bank Overdraft xx
Creditors/trade payables xx
Total current liabilities (xx)
Net Current Assets xx
Net assets xx
Loan (from bank or other sources) xx
Total equity and long-term liabilities xx
The non-current assets are listed in order of permanency, for example from land to building and building to motor vehicles. On the other hand, the current assets are listed in order of liquidity. The current liabilities are recorded in their order of permanency; that that is due for payment is recorded first.
1. The accounting equation: Assets=Liabilities +Owner’s equity
2. Components of the accounting equation
Capital = Assets - liabilities
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Aicpa.org,. (2015). AICPA - Frequently Asked Questions About the AICPA. Retrieved 2 March 2015, from http://www.aicpa.org/About/FAQs/Pages/FAQs.aspx#aicpa_answer13
Fasb.org,. (2015). Standards. Retrieved 2 March 2015, from http://www.fasb.org/jsp/FASB/Page/LandingPage&cid=1175805317350
Ifrs.org,. (2015). IFRS - How we develop IFRSs. Retrieved 2 March 2015, from http://www.ifrs.org/How-we-develop-standards/Pages/How-we-develop-standards.aspx
Sec.gov,. (2015). SEC.gov |Current SEC Commissioners. Retrieved 2 March 2015, from http://www.sec.gov/about/commissioner.shtml#.VPS93nzF-cU
Sec.gov,. (2015). SEC.gov | Form 10-K. Retrieved 2 March 2015, from http://www.sec.gov/answers/form10k.htm