Financial Statements

3.5.3 A. Fill in the gaps with the suitable expressions from the box:

A) accruals principle	B) balance sheet	C) reserves
D) bottom line	E) sales revenue	F) bank loans
G) gross profit	H) share prices	I) pre-tax profit

Each year a company produces an annual report with three key sets of figures: profit and loss account, ___ (1)____ and cashflow statement. These are three key financial statements in financial reporting. They give the basic information about a company’s financial results. The results a company publishes can affect____(2)___: good results cause prices to rise, if the market believes the company is undervalued. However, poor results often cause a drop in share price, as investors feel the company is overvalued.

The profit and loss (P&L) account (the income statement in the USA) records the money a company makes or loses during a particular reporting period, using the accruals principle. The ____(3)______ means that events in a particular reporting period, for example sales of goods or purchases of supplies, are recorded in that period, rather that when money is actually received or paid out: this may happen in a later period. Accounts record money received from sales (____(4)_____, referred to as turnover on BrE), minus the labour and cost of materials used to produce them, which is called the cost of goods sold (COGS). The difference between the sales revenue and the cost of sales is ___(5)______ .

Then selling and general expenses – the cost related to making these sales – employees’ salaries, rent for buildings, etc. - are taken away. These other costs and expenses are often grouped together as selling, general and administrative expenses (SG&A). There is also cost of depreciation – this is not an actual sum of money paid out, but is shown in the account to allow for the way that machinery wears out and declines in value over time and will have to be replaced. This leaves a company with its operating profit.

Then we subtract the interest payable on money borrowed in the form of bonds and ___(6)_____. This gives the profit before tax or ____(7)_____. Sometimes there are exceptional items to report, for example the cost of closing a particular operation. A company pays tax on its profit, which in the UK is called corporation tax (corporate income tax in the USA). So, the statement also shows EBITDA (earnings before interest, tax, depreciation and amortization) and EBIT (earnings before interest and tax). After all the expenses and deductions there is the net profit, often called the ___(8)______.

Dividends to shareholders (dividends per share) are usually paid to shareholders from profit after tax, also referred to as earnings. However dividends may be omitted, passed or skipped when business is bad. Not all profit is paid out in dividends. Some is kept to invest in future activities - these are retained earnings, or __(9)_______.

Non-profit organizations such as charities, public universities and museums produce an income and expenditure account. If they have more income than expenditure this is called a surplus rather than a profit.