The income statement for a British company, Avon Rubber plc, is presented as follows. Avon prepares its financial statements in accordance with IFRS. Avon Rubber plcConsolidated Income Statement(pounds in thousands) Current Year Prior Year Continuing operations Revenue 107,600 117,574 Cost of sales (77,892) (89,256) Gross profit 29,708 28,318 Distribution costs (4,832) (4,527) Administrative expenses (13,740) (14,536) Other operating income — — Operating profit/(loss) from continuing operations 11,136 9,255 Operating profit/(loss) is analysed as: Before depreciation, amortization and exceptional items 15,723 13,577 Depreciation and amortization (4,587) (4,322) Operating profit/(loss) before exceptional items 11,136 9,255 Exceptional operating items Finance income 5 16 Finance costs (486) (985) Other finance income (443) (1,152) Profit/(loss) before taxation 10,212 7,134 Taxation (3,094) (2,808) Profit/(loss) for the year from continuing operations 7,118 4,326 Earnings/(loss) per share Basic 25.2p 15.2p Diluted 23.3p 14.4p Earnings/(loss) per share from continuing operations Basic 25.2p 15.2p Diluted 23.3p 14.4p Instructions a. Review the Avon Rubber income statement and identify at least three differences between the IFRS income statement and an income statement of a U.S. company as presented in the chapter. b. Identify any irregular items reported by Avon Rubber. Is the reporting of these irregular items in Avon’s income statement similar to reporting of these items in U.S. companies’ income statements? Explain.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
The income statement for a British company, Avon Rubber plc, is presented as follows. Avon prepares its financial statements in accordance with IFRS.
Avon Rubber plc Consolidated Income Statement (pounds in thousands) |
||
| Current Year | Prior Year | |
| Continuing operations | ||
| Revenue | 107,600 | 117,574 |
| Cost of sales | (77,892) | (89,256) |
| Gross profit | 29,708 | 28,318 |
| Distribution costs | (4,832) | (4,527) |
| Administrative expenses | (13,740) | (14,536) |
| Other operating income | — | — |
| Operating |
11,136 | 9,255 |
| Operating profit/(loss) is analysed as: | ||
| Before depreciation, amortization and exceptional items | 15,723 | 13,577 |
| Depreciation and amortization | (4,587) | (4,322) |
| Operating profit/(loss) before exceptional items | 11,136 | 9,255 |
| Exceptional operating items | ||
| Finance income | 5 | 16 |
| Finance costs | (486) | (985) |
| Other finance income | (443) | (1,152) |
| Profit/(loss) before |
10,212 | 7,134 |
| Taxation | (3,094) | (2,808) |
| Profit/(loss) for the year from continuing operations | 7,118 | 4,326 |
| Earnings/(loss) per share | ||
| Basic | 25.2p | 15.2p |
| Diluted | 23.3p | 14.4p |
| Earnings/(loss) per share from continuing operations | ||
| Basic | 25.2p | 15.2p |
| Diluted | 23.3p | 14.4p |
Instructions
a. Review the Avon Rubber income statement and identify at least three differences between the IFRS income statement and an income statement of a U.S. company as presented in the chapter.
b. Identify any irregular items reported by Avon Rubber. Is the reporting of these irregular items in Avon’s income statement similar to reporting of these items in U.S. companies’ income statements? Explain.
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