The Two Other Financial Statements (S2)

 

The Two Other Financial Statements

1). The Profit and Loss and Account

Companies' annual reports typically include a profit and loss account, which is a financial statement that outlines the difference between revenues and expenses over a specific period. For non-profit or not-for-profit organizations, such as charities, public universities, and museums, this is often referred to as an income and expenditure account. When these organizations have more income than expenditure, it is termed a surplus rather than a profit.

At the top of these financial statements is the total sales revenue or turnover, representing the total amount of money received during the period. This is followed by the cost of sales, also known as the cost of goods sold (COGS), which includes expenses related to producing the sold products, such as raw materials, labor, and factory costs. The difference between sales revenue and the cost of sales is the gross profit.

From the gross profit, various other expenses are deducted, including rent, electricity, and office salaries. These are often grouped under selling, general, and administrative expenses (SG&A). The statement also typically includes EBITDA (earnings before interest, tax, depreciation, and amortization) and EBIT (earnings before interest and tax). EBITDA is considered more objective because depreciation and amortization expenses can vary based on the accounting system used.

After accounting for all expenses and deductions, the net profit, often referred to as the bottom line, is calculated. This profit can be distributed as dividends, unless the company needs to cover past losses, or it can be transferred to reserves.

 Searby PLC  Annual Profit and Loss Account, 1/20

	(£'000)
Sales Revenue	48,782
Cost of Sales	33,496
Gross Profit	15,286
Selling, General and Administrative Expenses	10,029
Earnings before Interest, Tax, Depreciation and Amortization (EBITDA)	5,257
Depreciation and Amortization	1,368
Earnings before Interest and Tax (EBIT)	3,889
Interest expenses	257
Income Tax	1,064
Net Profit	2,568

2). The Cash Flow Statement

British and American companies also produce a cash flow statement. This provides details of cash flows—money coming into and leaving the business—relating to:

Operations: Day-to-day activities.

Investing: Buying or selling property, plant, and equipment.

Financing: Issuing or repaying debt, or issuing shares.

The cash flow statement shows how effectively a company generates and manages cash. Other names are sometimes used for it, including funds flow statement and source and application of funds statement.

British companies also have to produce a statement of total recognized gains and losses (STRGL), showing any gains and losses that are not included in the profit and loss account, such as the revaluation of fixed assets.

(The following three exercises are pieces of homework to be handed in before 27.02.2025 via e.mail: fz.dekhir@gmail.com  ) 

I.    Comprehension Questions

What is the purpose of a profit and loss account in a company’s annual report?

What is the difference between a profit and a surplus in financial statements?

What does EBITDA stand for, and why is it considered more objective than EBIT?

What is the "bottom line" in a profit and loss account?

What are the two main components deducted from sales revenue to calculate gross profit?

II.    Vocabulary Questions

1.      What does "turnover" mean in the context of financial statements?

2.      What is the meaning of "cost of goods sold" (COGS)?

3.      What does "amortization" mean in accounting?

4.      What is the difference between "gross profit" and "net profit"?

5.      What does "reserves" mean in the context of net profit?

 

III.     Grammar Questions

     Identify the passive voice in this sentence: "The net profit can be distributed as dividends or transferred to reserves."

 What tense is used in the sentence: "Companies’ annual reports contain a profit and loss account"?

 Rewrite this sentence in the active voice: "The costs associated with making the products are deducted from sales revenue."

 What is the function of the word "such as" in this sentence: "These include costs such as rent, electricity, and office salaries"?

 Correct the following sentence: "If they have more income than expenditure, this are called a surplus."