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  2.  
  3. Stellenbosch University (SUN)
  4.  
  5. Financial Management 244

Summary

Summary Chapter 2: Financial Statements
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A complete summary of Chapter 2: Financial Statements from the Corporate Finance textbook assigned to the module. This includes outlines from the slides as well.

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  • October 3, 2018
  • 5
  • 2018/2019
  • Summary

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Financial Management 244


Chapter 2: Financial Statements

When attempting to analyze the financial position of a company, external capital
providers often struggle to find the relevant financial information about the company.
Companies are required to publish annual financial reports, which include the
following financial statements:
 Statement of financial position
 Statement of comprehensive income
 Statement of cash flows

Objective of Financial Reporting

Listed firms have to prepare their financial reports according to International
Financial Reporting Standards (IFRS). This framework defines the type and nature of
the information that should be provided.

The objective of financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and creditors
in making decisions about providing resources to the entity.

Bearing the objective of financial reporting in mind, there are three aspects that are
important:
 Financial reporting is specifically directed towards potential external-capital
providers.
 Financial reporting provides financial information about the company’s
economic resources, claims on these resources, and changes in resources
and claims.
 Financial reporting attempts to provide other useful information to external-
capital providers to inform their decision making.

Users of Financial Reporting

External-capital providers are the most important users of financial reporting. The
primary users of financial reporting include existing and potential equity investors,
lenders and other creditors.

Financial reporting is also useful to all of the company’s stakeholders, which include:
shareholders, management, customers, employees, competitors and government.

Information Provided by Financial Reporting

Financial reporting provides information about a company’s economic resources
(assets) and the claims on these resources (equity and liabilities). The three main
aspects of information provided by financial reporting are:
 Summary of the firm’s financial position
 Financial performance
 Changes in financial position

Qualitative Characteristics of Useful Financial Reporting

, Financial Management 244



To ensure the financial information provided by financial reporting is useful, the IFRS
framework identifies six fundamental qualitative characteristics:
 Relevant and faithfully presented
 Verifiable
 Comparable
 Understandable
 Timely
 Accurate and objective

Standardization of Financial Statements

Financial statements of different companies do not always contain comparable
financial information, as a result of different accounting standards or reporting dates.

This is usually solved by analysts by standardizing financial statements in order to
facilitate comparison between different companies and across time. Most companies
in South Africa have switched to the IFRS framework to help facilitate this solution.

Statement of Financial Position

The statement of financial position (SFP) provides a summary of a company’s
financial position at a specific date, usually the end of its financial year. The SFP is
organized into two sections, distinguishing between its assets and its equity and
liabilities.

Assets

Assets represent a capital investment, usually with the idea of economically applying
the assets in order to generate revenue. Assets can be distinguished between non-
current and current assets.

The difference between current and non-current assets is usually based on:
 Turnover rate of capital
 Ease of conversion
 Physical characteristics

Non-Current Assets

Non-current assets are assets that are applied for a relatively long period of time,
normally more than one year. There are three types of non-current assets: tangible,
intangible and financial assets. Under these different types of assets are the
following:
 Tangible assets
 Property, plant and equipment (PPE) @ Cost price
 Accumulated depreciation
 PPE @ Carrying value
 Assets under construction
 Intangible assets

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