Financial statements Businesses produce statements of their financial

Financial statements Businesses produce statements of their financial results for a number of reasons. • In the case of companies, to comply with the law (Companies Act 1985). • To inform the people who are interested in the company about its situation (the shareholders, employees, bank, Inland Revenue, trade contacts, financial markets etc). • To help management in managing the company. The objective of financial statements is to provide information about the financial position, performance and change in financial position of an enterprise that is useful to a wide range of users in making economic decisions. (International Accounting Standards Board)

Annual report and accounts • The annual report and accounts of a company are • presented to shareholders at the annual general meeting and are also submitted to the registrar of companies at Companies House The report and accounts consists of – – – – the directors report profit and loss account balance sheet cash flow statement notes to the accounts statement of recognised gains and losses auditor report confirming that the accounts provide a true and fair view of the performance of the business

A true and fair view • Company law requires that financial statements • • provide a true and fair view This is generally taken to mean that the accounts are prepared to inform and not to mislead the user The accounts should provide a fair impression of the company and the results of its activities To provide a true and fair view accounts must conform to various accounting concepts, conventions, policies and standards The accounts must also be prepared in accordance with company law

STATEMENTS REQUIRED BY THE COMPANIES ACT • The financial statements required by the Companies Act are: • profit and loss account • balance sheet • directors' report • When producing financial statements, companies also have to bear in mind the requirements of the various Statements of Standard Accounting Practice (SSAPs) and Financial Reporting Standards (FRSs), these are issued by the Accounting Standards Board and lay down acceptable accounting methods for various topics. Of particular note is FRS 1, which requires larger limited companies to include a cash flow statement as part of the published accounts. • The reporting procedures of smaller companies call for simpler and less detailed disclosure requirements.

• • • Financial statements comprise: Balance sheet Profit and loss account Cash flow statement An annual report and accounts will also contain notes to the financial statements, directors' and auditors' reports and usually a chairman's report. • The balance sheet shows the business's financial position as at the balance sheet date whereas the profit and loss account shows its trading results, overheads, interest, tax and dividends for the year. The cash flow statement reconciles the trading profit to operational cash flows and shows other movements in cash for capital transactions etc. • Larger companies generally produce group accounts. • The principal limitations of financial statements are that: They are usually out of date by the time you receive them. They can only tell you about the past of the company and its financial affairs. There is sometimes confusion because of a company's chosen accounting policy.