FB214 Component 1 - Financial Statements
Notes
Introduction to Financial Statements
Objective of Financial Statements
Financial statements provide a structured summary of a company’s financial position,
performance, and cash flows over a given period (typically a financial year). They are
essential for decision-making by investors, management, creditors, and other stakeholders.
Three Main Financial Statements
1. Statement of Financial Position (SFP) (Balance Sheet)
o Provides a snapshot of the company’s financial health at a particular date.
o Shows what a company owns (assets), what it owes (liabilities), and the
owners’ claim on assets (equity).
o Key Formula: Assets=Equity+Liabilities\text{Assets} = \text{Equity} +
\text{Liabilities}Assets=Equity+Liabilities
o Example:
If a company has R500,000 in assets and R200,000 in liabilities, then its
equity is: Equity=R500,000−R200,000=R300,000\text{Equity} = R500,000 R200,000 = R300,000Equity=R500,000−R200,000=R300,000
2. Statement of Profit or Loss (SPL) (Income Statement)
o Shows revenues and expenses over a period to determine net profit or loss.
o Key Formula: Net Profit=Total Revenue−Total Expenses\text{Net Profit} =
\text{Total Revenue} - \text{Total
Expenses}Net Profit=Total Revenue−Total Expenses
o Example Calculation:
If revenue is R800,000 and expenses are R600,000, then:
Net Profit=R800,000−R600,000=R200,000\text{Net Profit} = R800,000 R600,000 = R200,000Net Profit=R800,000−R600,000=R200,000
3. Statement of Cash Flows (SCF)
o Highlights cash inflows and outflows from three activities:
 Operating Activities: Cash from daily business operations.
 Investing Activities: Cash spent or earned from investments.
 Financing Activities: Cash from borrowing or repaying debts.
o Purpose: Ensures the company has enough liquidity to operate and grow.
Users of Financial Statements
Different stakeholders rely on financial statements for decision-making:

Shareholders (Existing & Potential Investors):
o Analyze profitability, dividends, and return on investment (ROI).



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Management:
o Assess financial health, performance, and future strategy.
Debt Providers (Banks, Lenders, Creditors):
o Evaluate creditworthiness and risk before lending money.
Government Organizations (e.g., SARS in South Africa):
o Use financial data for tax assessment and regulatory compliance.
Other Stakeholders (Customers, Suppliers, Trade Unions, Analysts):
o Determine company stability and reliability.
Requirements for Financial Statements
For financial statements to be useful, they must meet these criteria:
1. Understandable
o Should be logically structured with clear labels, notes, and explanations.
o Complex financial jargon should be explained.
2. Relevant
o Must contain information useful for assessing past, current, and future
performance.
3. Significant (Materiality Concept)
o Only relevant financial data should be included. Excluding important items
could lead to incorrect decisions.
4. Timely
o Must be prepared in time to influence decisions.
5. Reliable
o Information should be accurate and free from bias or manipulation.
6. Comparable
o Financial statements should allow comparisons:
 Between different companies.
 Across different financial periods (year-to-year comparison).
Example:
If a company changes its depreciation method, it must disclose this change and apply it
consistently in future reports for comparability.
Statement of Financial Position (SFP)
The Statement of Financial Position (also called the Balance Sheet) provides a financial
snapshot at a specific date. It consists of:
1. Assets
Assets are resources controlled by the company that provide future economic benefits.
Non-Current Assets (Fixed Assets)



Used for long-term purposes.
Not easily converted into cash within one year.
Includes:
o Property, Plant & Equipment (PPE)
 Formula:
Carrying Value=Cost Price−Accumulated Depreciation\text{Carrying
Value} = \text{Cost Price} - \text{Accumulated
Depreciation}Carrying Value=Cost Price−Accumulated Depreciation
 Example:
A company buys machinery for R500,000. If annual depreciation is
R50,000 and it has been used for 3 years:
Carrying Value=R500,000−(R50,000×3)=R350,000\text{Carrying
Value} = R500,000 - (R50,000 \times 3) =
R350,000Carrying Value=R500,000−(R50,000×3)=R350,000
o Intangible Assets (non-physical but valuable assets)
 Examples: Patents, trademarks, goodwill, software.
 Goodwill arises when one company acquires another for more than its
book value.
Financial Assets (Investments)



Investments in shares of other companies.
Loans granted to other entities.
Derivatives used for hedging.
Current Assets (Short-Term Assets)


Expected to be converted into cash within a year.
Includes:
o Inventories (Stock): Raw materials, finished goods.
o Trade Receivables (Debtors): Money owed by customers.
o Cash & Cash Equivalents: Bank balances, cash in hand.
2. Equity
Represents the owners' share in the company after liabilities are settled.


Ordinary Shareholders’ Equity:
o Formula: Ordinary Share Capital+Reserves\text{Ordinary Share Capital} +
\text{Reserves}Ordinary Share Capital+Reserves
o Example:
If a company has 100,000 shares issued at an average price of R5, the share
capital is: 100,000×R5=R500,000100,000 \times R5 =
R500,000100,000×R5=R500,000
Reserves:
o Non-distributable reserves (e.g., revaluation reserves).
o Distributable reserves (e.g., retained earnings).
3. Liabilities
Obligations the company must pay in the future.
Non-Current Liabilities (Long-Term)


Payable after more than one year.
Includes:
o Long-Term Loans (e.g., bank loans, debentures).
o Deferred Tax (difference in tax calculations between accounting & tax laws).
Current Liabilities (Short-Term)


Payable within one year.
Includes:
o Trade Payables (Creditors): Amounts owed to suppliers.
o Short-Term Borrowings: Overdrafts, short-term loans.
o Dividends Payable: Unpaid declared dividends.
Example: Statement of Financial Position
Assets
Amount (R)
Equity & Liabilities
Amount (R)
700,000
Non-Current Assets 1,200,000 Equity
PPE
900,000
Share Capital
500,000
Intangibles
200,000
Retained Earnings
200,000
Investments
100,000
Non-Current Liabilities 400,000
800,000
Long-Term Loan
400,000
Current Assets
Inventory
300,000
900,000
Current Liabilities
Trade Receivables 250,000
Trade Payables
350,000
Cash & Equivalents 250,000
Short-Term Loans
350,000
Other Payables
200,000
Total Assets
2,000,000 Total Equity & Liabilities 2,000,000
This is an in-depth breakdown of Financial Statements so far. Next, I'll cover the Statement
of Profit or Loss, including revenue, expenses, calculations, and examples. Let me know if
you need adjustments!
Statement of Financial Position (SFP) - In-Depth
Breakdown
The Statement of Financial Position (SFP), also known as the Balance Sheet, provides a
snapshot of a company's financial position at a specific point in time. It outlines what a
company owns (assets), what it owes (liabilities), and what remains for the owners (equity).
Purpose of the SFP



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Shows financial health: Investors and creditors use it to assess financial stability.
Demonstrates liquidity: Helps determine if a company can meet its short-term
obligations.
Assists in decision-making: Used by management for planning and strategy.
Forms the basis for financial analysis: Key financial ratios (e.g., liquidity ratios,
solvency ratios) are derived from the SFP.
Key Formula for the SFP
Assets=Equity+Liabilities\text{Assets} = \text{Equity} +
\text{Liabilities}Assets=Equity+Liabilities
This equation ensures that every resource owned by the company (assets) is funded either by
its owners (equity) or by borrowing from others (liabilities).
Breakdown of the SFP Components
1. Assets (What the Company Owns)
Assets are divided into Non-Current Assets (long-term) and Current Assets (short-term).
1.1 Non-Current Assets (Long-Term Assets)
Used for long-term business operations and not easily converted to cash within a year.
(A) Property, Plant, and Equipment (PPE)


Includes land, buildings, machinery, vehicles, and equipment used in operations.
Accounting Treatment:
o Initially recorded at cost price.
o Depreciation is deducted annually to account for wear and tear.
o Some assets may be revalued to reflect their fair value.
Formula for Carrying Value of PPE:
Carrying Value=Cost Price−Accumulated Depreciation\text{Carrying Value} = \text{Cost
Price} - \text{Accumulated
Depreciation}Carrying Value=Cost Price−Accumulated Depreciation

Example Calculation:
o
o
o
A machine is bought for R500,000.
Depreciation is R50,000 per year.
After 3 years, the carrying value is:
R500,000−(R50,000×3)=R350,000R500,000 - (R50,000 \times 3) =
R350,000R500,000−(R50,000×3)=R350,000
(B) Intangible Assets
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Non-physical assets that provide long-term value.
Includes goodwill, patents, trademarks, copyrights, licenses, and software.
Goodwill: Arises when a company acquires another for more than its net asset value.
Amortization: Intangible assets are expensed over their useful life.
Formula for Net Intangible Assets Value:
Net Intangible Assets=Cost Price−Accumulated Amortization−Impairment Losses\text{Net
Intangible Assets} = \text{Cost Price} - \text{Accumulated Amortization} - \text{Impairment
Losses}Net Intangible Assets=Cost Price−Accumulated Amortization−Impairment Losses
Example Calculation:



A company buys a patent for R100,000.
Amortization is R10,000 per year.
After 5 years, the value is: R100,000−(R10,000×5)=R50,000R100,000 - (R10,000
\times 5) = R50,000R100,000−(R10,000×5)=R50,000
(C) Financial Assets
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
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Investments that a company holds in other entities.
Includes investments in shares, bonds, and long-term loans given.
If a company owns more than 50% of another company, it is considered a
subsidiary, and their financials are consolidated.
1.2 Current Assets (Short-Term Assets)
Assets expected to be converted to cash within a year.
(A) Inventories (Stock)
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
Includes raw materials, work-in-progress, and finished goods.
Important for companies that manufacture or sell goods.
Formula for Cost of Inventories:
Cost of Sales=Opening Inventory+Purchases−Closing Inventory\text{Cost of Sales} =
\text{Opening Inventory} + \text{Purchases} - \text{Closing
Inventory}Cost of Sales=Opening Inventory+Purchases−Closing Inventory
Example Calculation:
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Opening Inventory: R50,000
Purchases during the year: R300,000
Closing Inventory: R70,000
Cost of Sales: R50,000+R300,000−R70,000=R280,000R50,000 + R300,000 R70,000 = R280,000R50,000+R300,000−R70,000=R280,000
(B) Trade Receivables (Debtors)
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
Amounts owed by customers who bought goods on credit.
Bad debts provision is created to account for uncollectible amounts.
Formula for Net Receivables:
Net Receivables=Trade Receivables−Provision for Bad Debts\text{Net Receivables} =
\text{Trade Receivables} - \text{Provision for Bad
Debts}Net Receivables=Trade Receivables−Provision for Bad Debts
(C) Cash & Cash Equivalents


Cash in hand, bank balances, and short-term investments that can be quickly
converted into cash.
Ensures the company has liquidity to pay short-term obligations.
2. Equity (Owners' Share)
Equity represents the shareholders’ ownership in the company.
(A) Ordinary Share Capital

Formula:
Ordinary Share Capital=Number of Shares Issued×Issue Price\text{Ordinary Share
Capital} = \text{Number of Shares Issued} \times \text{Issue
Price}Ordinary Share Capital=Number of Shares Issued×Issue Price
Example Calculation:

If 100,000 shares are issued at R5 per share: 100,000×R5=R500,000100,000 \times
R5 = R500,000100,000×R5=R500,000
(B) Reserves


Non-Distributable Reserves (Cannot be given as dividends)
o Revaluation Reserve: Adjusts assets to fair value.
o Capital Redemption Reserve: For share buybacks.
Distributable Reserves (Can be paid as dividends)
o Retained Earnings: Profits not distributed to shareholders.
3. Liabilities (What the Company Owes)
Obligations that the company must repay.
3.1 Non-Current Liabilities (Long-Term Debt)
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
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Payable after more than one year.
Includes long-term loans, debentures, and mortgage loans.
Formula for Loan Repayment: Total Loan=Long-Term Portion+ShortTerm Portion\text{Total Loan} = \text{Long-Term Portion} + \text{Short-Term
Portion}Total Loan=Long-Term Portion+Short-Term Portion
Example Calculation:


A company takes a R100,000 loan payable over 5 years.
The annual installment is R20,000.
o Long-term liability: R80,000
o Short-term liability: R20,000
3.2 Current Liabilities (Short-Term Debt)


Payable within one year.
Includes:
o Trade Payables (Creditors): Amounts owed to suppliers.
o Short-term Borrowings: Bank overdrafts, short-term loans.
o Dividends Payable: Declared but unpaid dividends.
Example: Statement of Financial Position
Assets
Amount (R)
Equity & Liabilities
Amount (R)
700,000
Non-Current Assets 1,200,000 Equity
PPE
900,000
Share Capital
500,000
Intangibles
200,000
Retained Earnings
200,000
Investments
100,000
Non-Current Liabilities 400,000
800,000
Long-Term Loan
400,000
Current Assets
Inventory
300,000
900,000
Current Liabilities
Trade Receivables 250,000
Trade Payables
350,000
Cash & Equivalents 250,000
Short-Term Loans
350,000
Other Payables
200,000
Total Assets
2,000,000 Total Equity & Liabilities 2,000,000
Extra
FB214 Component 1 - Financial Statements Notes
Introduction to Financial Statements
Objective of Financial Statements
Companies must publish annual financial statements as required by the South
African Companies Act (No. 71 of 2008). These statements follow the
International Financial Reporting Standards (IFRS), ensuring useful financial
information for various stakeholders.
Purpose of Financial Statements:
1. Summarize financial performance – Shows how profitable a company was
during the financial year.
2. Summarize financial position – Shows what a company owns (assets) and
owes (liabilities) at a point in time.
3. Show financial changes over time – Highlights changes due to investment,
financing, and operating activities.
Key Financial Statements
The three main financial statements are:
1. Statement of Financial Position (SFP) (Balance Sheet)
o
Shows assets, liabilities, and equity at a specific point in time.
o
Formula: Assets=Equity+Liabilities\text{Assets} = \text{Equity} +
\text{Liabilities}Assets=Equity+Liabilities
o
Helps determine the company’s financial health.
2. Statement of Profit or Loss (SPL) (Income Statement)
o
Summarizes revenue, expenses, and profit over a period.
o
Formula: Net Profit=Revenue−Expenses\text{Net Profit} =
\text{Revenue} - \text{Expenses}Net Profit=Revenue−Expenses
o
Helps measure profitability.
3. Statement of Cash Flows (SCF)
o
Tracks cash inflows and outflows from operating, investing, and
financing activities.
o
Helps assess liquidity and cash management.
Users of Financial Statements
Different stakeholders use financial statements for various purposes:
1. Shareholders (Investors)

Why? To evaluate profitability and potential dividends.

Focus Areas: Net profit, dividends, and retained earnings.
2. Providers of Debt Capital (Banks, Lenders)

Why? To determine creditworthiness and ability to repay debt.

Focus Areas: Debt-to-equity ratio, interest coverage ratio, and cash flows.
3. Management

Why? To assess business performance and plan future strategies.

Focus Areas: Profitability, cash flow, and cost control.
4. Employees

Why? To check company stability, wages, and retirement benefits.

Focus Areas: Profitability, salaries, and pension fund contributions.
5. Government Organizations (SARS)

Why? To assess tax liabilities and regulatory compliance.

Focus Areas: Revenue, expenses, and taxable income.
6. Other Stakeholders (Suppliers, Competitors, Stockbrokers)

Why? To evaluate company stability and growth.

Focus Areas: Financial health and market position.
Requirements for Financial Statements
To be useful, financial statements must meet the following criteria:
1. Understandable

Information should be clearly presented and logically structured.
2. Relevant

Data must help stakeholders make informed decisions.

Should show historical, current, and future trends.
3. Reliable

Must be accurate, free from bias, and objective.
4. Comparable

Should allow comparison across companies and time periods.

Must follow IFRS for standardization.
Statement of Financial Position (SFP) (Balance Sheet)
The SFP summarizes a company’s financial status at a specific date.
Key Equation:
Assets=Equity+Liabilities\text{Assets} = \text{Equity} +
\text{Liabilities}Assets=Equity+Liabilities
The SFP consists of two parts:
1. Assets (What the company owns)
2. Equity & Liabilities (How assets are financed)
1. Assets (Resources Owned by the Company)
Assets are classified into non-current (long-term) and current (short-term) assets.
(A) Non-Current Assets (Fixed Assets)
These assets are used long-term and are not easily converted to cash.
1. Property, Plant & Equipment (PPE)

Includes land, buildings, machinery, and vehicles.

Depreciation is deducted annually to reflect asset usage.

Carrying Value Formula:
Carrying Value=Cost Price−Accumulated Depreciation\text{Carrying Value} =
\text{Cost Price} - \text{Accumulated
Depreciation}Carrying Value=Cost Price−Accumulated Depreciation

Example:
o
A machine costs R500,000.
o
Depreciation is R50,000 per year.
o
After 3 years, carrying value =
R500,000−(R50,000×3)=R350,000R500,000 - (R50,000 \times 3) =
R350,000R500,000−(R50,000×3)=R350,000
2. Intangible Assets

Includes patents, trademarks, software, and goodwill.

Amortization is applied to reduce value over time.

Formula:
Net Intangible Assets=Cost Price−Accumulated Amortization\text{Net
Intangible Assets} = \text{Cost Price} - \text{Accumulated
Amortization}Net Intangible Assets=Cost Price−Accumulated Amortization
3. Financial Assets

Investments in other companies, shares, or long-term loans.
(B) Current Assets (Short-Term Assets)
Assets that will be converted to cash within a year.
1. Inventories (Stock)

Raw materials, work-in-progress, finished goods.

Formula:
Cost of Sales=Opening Inventory+Purchases−Closing Inventory\text{Cost of
Sales} = \text{Opening Inventory} + \text{Purchases} - \text{Closing
Inventory}Cost of Sales=Opening Inventory+Purchases−Closing Inventory
2. Trade Receivables (Debtors)

Money owed by customers.

Formula:
Net Receivables=Trade Receivables−Provision for Bad Debts\text{Net
Receivables} = \text{Trade Receivables} - \text{Provision for Bad
Debts}Net Receivables=Trade Receivables−Provision for Bad Debts
3. Cash & Cash Equivalents

Includes cash on hand, bank balances, and marketable securities.
2. Equity (Shareholders’ Investment)
Represents the owners’ stake in the business.
1. Ordinary Shareholders’ Equity

Formula: Share Capital+Retained Earnings\text{Share Capital} +
\text{Retained Earnings}Share Capital+Retained Earnings
2. Preference Share Capital

Hybrid between equity and debt.

Pays fixed dividends before ordinary shares.
3. Non-Controlling Interest

If a company owns >50% of another company, it consolidates financials.

Minority shareholders’ stake is recorded separately.
3. Liabilities (Company’s Obligations)
Liabilities are classified as non-current (long-term) and current (short-term).
(A) Non-Current Liabilities

Long-term loans, debentures, and mortgages.

Deferred tax liabilities (arising from tax differences).
(B) Current Liabilities

Trade payables (creditors)

Short-term borrowings (overdrafts, short-term loans)

Dividends payable
Example: Statement of Financial Position
Assets
Amount (R) Equity & Liabilities Amount (R)
Non-Current Assets 1,200,000
Equity
700,000
PPE
Share Capital
500,000
900,000