The Statement of Profit or Loss
It explains the financial performance of a business over a specific period. As the name depicts, it tells of how profitable a business is over a period. Can be prepared Weekly, Monthly, Quarterly or Yearly. The report displays the business Revenues, Cost of sales, Operating Expenses and Other Incomes/Losses
Revenue
Income earned from sales of goods or services in the core activities of the business.
Cost of Goods Sold (COGS)
Direct costs associated with producing or acquiring the goods or services sold or offered to customers.
Operating Expenses
Indirect costs related to running the business. Examples: Salaries, Rent, Advertising, Distribution etc.
Other Income/Losses
Additional income earned from other activities outside of the core activity of the business.
Notes to the account
These are supporting information that provides details and comments about the other financial statements such as statement of financial position, income statement and cashflow statements. It provides facts about items that have significant impact in the financial statement.
Other key terms to note while interpreting financial statements includes:
Financial Year End: This depicts the date at which a business reports its operations within a 12month accounting period. It is the date at which an entity prepares its financial statements. Most organizations use the 31st December, however, it can vary from business to business. Guinness Nigeria financial year-end is 30th June.
Entity: Entity in Accounting represents the name of the organization to whom a financial statement is being prepared. The entity’s name must be boldly written on every financial statement to show ownership of the information being represented. Examples of Entities are Guinness Nigeria, Flour Mill of Nigeria Plc
Accounting Equation: This is also known as the balance sheet equation. It depicts the correlation between the assets of a business and its sources of financing which are the owner’s equity and liabilities- obligations to third party.
Assets = Owner’s Equity + Liabilities
Net Income: This is the profit earned from operations in an organization. It represents the total revenue minus expenses, available for distribution to the owners of the business. When not distributed as dividend, they are retained as a component of equity.
Net Cashflow from Operating Activities: These are the sum of inflows and outflows derived from activities related to the regular day to day running of the business. Customarily, it should be a positive figure representing inflows into the business. Examples include Cash Receipts from credit sales offered, Payment to suppliers, Salaries and wages paid etc.
Net Cashflow from Financing Activities: These are the sum of inflows and outflows generated from the different sources of financing, to run the business. These could be from Equity financing i.e. Sales of stocks, or Debt financing which involves sourcing long term loans from banks and other institutions. These are customarily positive net cashflows as well.
Net Cashflows from Investing Activities: These are sums of inflows and outflows generated from long term investments such as purchasing new machineries, land and buildings etc. They are expected to yield economic benefits over the course of the investment periods. They are mostly negative net cashflows because of the huge initial capital outlay.
Non-Controlling Interest: This is an element of equity which represents the minority interest i.e. the shareholders who owns less than 50% share composition.
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