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AFS Exercise

The document discusses group financial statements and their key components including the income statement and balance sheet. It provides explanations of key financial terms like assets, liabilities, equity, revenue, expenses, profit, and loss. It also asks a series of questions about interpreting and applying various financial statement concepts.

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12 views

AFS Exercise

The document discusses group financial statements and their key components including the income statement and balance sheet. It provides explanations of key financial terms like assets, liabilities, equity, revenue, expenses, profit, and loss. It also asks a series of questions about interpreting and applying various financial statement concepts.

Uploaded by

francis.n0891
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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EXERCISE - Group Financial Statements

The financial statements of an organisation can provide you with critical insight into the
objectives, strategy and financial performance of the entity. The two primary financial
statements found in any annual report are the:
• Income statement
• Balance sheet

The income statement presents the performance of the company for the period under
review. It is typically disclosed by showing all revenue or income sources subtracted by
all costs or expenses to arrive at net profit or earnings. The income statement can be
shown as a triangle as revenue is decreased by different categories of expenses until
net profit (earnings or the bottom line) is derived.

Turnover
Less: Cost of Sales
Gross profit

Plus: Other Income


Less: Operating Expenses
Operating Income
Less: Tax
Net Profit

The balance sheet is a summary of the organisation’s condition at a particular point in


time. A balance sheet consists of three components:
• Assets – what the entity owns
• Liabilities – what the entity owes
• Equity – the net worth of the entity (net asset value)

Assets are always equal to liabilities plus equity. Another way to consider the accounting
equation is to say that equity (net value of the business) is equal to the assets (what is
owned) less the liabilities (what is owed).

The balance sheet:


Assets Liabilities

= +
Equity

Assets are items that the company owns, from which it expects to create value in the
future. Assets represent an institution’s deployment of available resources. Different
assets provide different levels of earnings, as well as varying levels of risk.

1
Liabilities are present obligations on amounts owed to others. Liabilities represent an
institution’s source of funding. Liabilities have different maturities (short term or long
term) and different cost structures (interest rates).

Equity is the shareholder’s interest in an institution. It is also called net asset value, as it
can be derived by subtracting what the entity owes from what it owns to determine the
net worth of the business. Equity is represented by share capital and retained earnings.

Answer the following questions relating to the income statement and balance sheet for
your company.

1 What is IFRS all about? Why do you think the Notes to


the Financial Statements and Accounting Policies are
so important?

2 What constitutes revenue? How is it recognised?

3 What is operating profit?

4 The cost to income ratio measures the overall


efficiency of a bank. Gross profit is considered key in
many companies. How useful are these measures?

5 What is EPS? What does this indicate? How does it


impact the P:E ratio?

6 What is Headline Earnings and how meaningful is it to


investors?

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7 Why does taxable income differ from profit?

8 What is a contingent liability? A capital commitment?

9 What is “off balance sheet finance”?

10 What distinguishes a Subsidiary from an Associate


from an Investment?

11 How does Goodwill arise? Where is it shown? How is


it dealt with?

12 What are “Minority Interests”?

13 What causes the share price to be what it is?

14 What is “market capitalisation”? Does it mean


anything?

15 What is “impairment”? What does it apply to?

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