Company Accounts

The purpose of company accounts is to present information about a company’s affairs in financial terms and should enable the reader to answer two very basic questions about it — first, how has it managed its affairs over a period of time? and second, what is its current financial situation? To be able to answer these questions information is needed about such things as the company’s level of sales, the costs it has incurred, the profit it has made, how much money it has and from where it has obtained its finance.

In the last chapter you will recall that a key question to ask about any business is ‘What is it worth?’ A good starting point in an attempt to answer this question is to make a list of all the things of value in a firm, place a value on the items and then get a total value. The things of value in a business are called ‘assets’ and they are always included in the balance sheet if they are owned by the business.

In this chapter you will be able to find out about the ‘other side’ of the balance sheet. The last chapter was all about assets — things of value in the business — this chapter will focus on where the money has come from to pay for the assets. You will then be able to name the major sources of finance and classify them.

We can now complete our look at the balance sheet by bringing together the two sides that we have been examining in the last two chapters. You will soon be able to pick up any balance sheet and identify the main components of it, no matter how the information is presented.

The profit and loss account is as important a document as the balance sheet. Indeed looking at one without the other is a bit like visiting a famous city for the first time without a guide book: you will see a lot of interesting things but you are most likely to miss the real treasures and places of interest. Very early in Chapter 1 we defined profit as the difference between the value of what has been sold and the costs associated with sales. We will now look more closely at the definition and also at the way this account is set out in published accounts. You should then be able to take most profit and loss accounts and describe their main components.

The source and use of funds statement is the third very important document which is produced by companies to help to explain what has been going on in the business. This statement is not required by law, only recommended as good practice, indeed until recently very few firms bothered with it at all. The aim of this chapter is to help you understand why the statement is important and what it consists of, and to explain the significance of most of the items in these statements.

The ‘current cost accounts statement’ is another recent innovation in the published accounts of companies. It is sometimes called ‘accounting for inflation’ which gives a clue as to what it is all about. Accounts prepared on the traditional basis of ‘historic cost’ (see p. 21) suffer from the fact that in some respects they do not adequately reflect the effect of inflation on the value of the business. This document is an attempt to remedy this deficiency. By the end of the chapter you should be able to explain the main items in this statement, and give reasons for their inclusion.

The aim of this chapter and the next is to show you what questions you can reasonably ask about a company’s accounts, and how you can go about finding the answers, so that you will be able to pick up any set of accounts and comment on them. We will first focus on growth and profitability.

The analysis of profitability and growth we considered in the last chapter helps us to gain an appreciation of where the company stands in terms of its overall performance, since the measures we discussed are all common indicators of commercial success. It is, however, important to probe beneath the surface to see if there is any sign of weakness which may affect the future success of the firm and also to be able to identify the factors which have influenced the company in the past.

In this chapter, the full accounts of a real company (United Biscuits (Holdings) plc) have been reproduced for you to study and evaluate.

We are now going to take a look at the accounting statements common in the USA and list some of the common accounting terms used in French and German accounts.