Financial statements

The profit and loss account

The profit and loss account is a statement of the amount of profit or loss a business has made in a period of time. For convenience and ease of interpretation the information is contained in three sections.

1. The trading account This includes the revenue from sales and the costs associated with producing those sales.

• Revenue - Cost of sales = Gross profit

2. The profit and loss account Payments such as interest and directors' fees are deducted from the gross profit to give net profit before tax. Tax is then deducted to give net profit after tax.

Table 7 A profit and loss account Profit and loss account for year ending 30 June 2005 £000 £000 £000
SALES			10795
Cost of sales			8650
GROSS PROFIT			2145
Less OVERHEADS
Administration
Wages and salaries	235
Stationery	95
Heat and light	50
Rates, rent, insurance	75
Depreciation	10	375
Finance:
Interest	100
Bad debts	95	195
Selling:
Salaries	100
Distribution	50
Advertising	150	300	870
Net profit			1275
Corporation tax			383
Net profit after tax			892
Ordinary share dividend			400
Reserves			492

3. The appropriation account To appropriate means to set aside for a purpose or to make something the private property of an individual or an organization. The appropriation account tells interested parties how the business has used the net profit after tax. A company's appropriation account would include the amount distributed to shareholders, the amount transferred to general reserve and the retained profit. The presentation of a profit and loss account is shown in Table 7.

Funds flow statement

A funds flow statement shows the sources and uses of funds employed by a business over a period of time.

If you look at the information given in a funds flow statement and compare it with the information given in the balance sheet you will see many apparent similarities in the information. The difference lies in the period of time summarized by each statement. The balance sheet gives the sources and use of funds from the beginning of the life of a business. The funds flow statement usually relates to a shorter period of time.

Funds flows are useful to analyze the effects of changes in working capital. Transactions that result in an increase in working capital are sources of funds. Those which lead to a decrease in working capital are funds flowing out of the firm, that is the use of funds. The funds flow analysis shows changes in working capital for a given period.