Author Archives: Karl

Updating the info on the statement of cash flows

During the preparation of the annual report, you are bound to amend some figures or their place on the balance sheet or on the income statement. Being the two main statements, the third one these changes are bound to affect – statement of cash flows – stays neglected. The key thing to remember is the fact that all four statements – balance sheet, income statement, statement of cash flows and statement of changes in equity – are connected. They don’t live their own separate life.

Yes, the statement of cash flows is cash related and if the financial year has already ended there’s nothing you can do anymore about the cash movement, obviously. But, if certain expenses increase due to adjustments made or receivable against group bank account for an example is considered to be as a loan given, you really need to make some rearrangements on the statement of cash flows as well.
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Write-down of inventory

A company that is in production or selling of goods, almost definitely has some inventory. It’s an asset that the company is able to use for making sales and thus earning money. This inventory is held for certain product lines, certain markets or for certain companies and people. If something in the course of business of the company or on the market changes, this inventory is ‘under attack’. No, not literally, but the value of it through falling or non-existing sales, negative effect on selling prices or decrease in populations ability to buy those goods. All those conditions indicate that company’s inventory may be overvalued.

Essentially inventory is an asset and as such is recognized at fair value, which almost always is preferably its market value less cost needed to make the sale. If the selling prices are falling through demand-offer ratios, it may be that the company is earning losses through sales and as such the value of the inventory needs to be written down. In such case it’s written down to ‘net realizable value’ meaning market value less costs needed to make the sale. So watch out for those reducing selling prices. If your product is making losses, the first thing to do, is write-down the value, but for future purposes, think for alternatives – cease the production or sales in full, change the materials for cheaper ones or hope it’s just one-time thing and won’t happen again.
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Doubtful receivables

Accounts receivable balances are the ones the company has against its clients. These balances are receivable from sales of goods or services. On the balance sheet they are recognized under assets and as such are subject to valuation assessment as frequently as needed.

All the assets need to be recognized essentially at their fair value meaning most often the market value. In the case of receivables, one needs to assess if the amount recorded in the books is indeed collectable. I know it sounds simple, but estimating it is not something that is easily grasped. In normal situation the clients pay the invoices in their due time meaning at the ‘payment date’. On the contrary, depending on the situation, there also may be clients that are unable or unwilling to pay their debt in due time thus creating doubt whether the receivables are in fact collectable or should be written down.
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Continuing operations

What is usually stated, is the fact that a company ‘operates’ in specific field of industry. On the IFRS Income Statement the results of such activities are reflected under ‘continuing operations’. This is to simplify things however.

The phrase ‘continuing operations’ means a bit more. As you may guess, the stress is on the word ‘continuing’. Continuing is something that is expected to and will do so in the future as well. Continuing operations are those that generate revenue through sale of goods or providing services in coming periods, meaning for a longer period than 12 months. The management expects to have those activities up and running and hence their results are disclosed under ‘continuing operations’. From this the readers of the financial statements and annual report and investors can see how much money is made through ongoing business activities.
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What is ‘gross profit’?

On the IFRS Income Statement there’s a line labeled as ‘gross profit’. It’s just below ‘revenue’ and ‘cost of sales’ and as it happens, reflects earnings left from deducting costs necessary to make a sale happen from revenue earned. Yes, it’s the first total displayed on the income statement, but it’s there for a reason.

Gross profit or gross income is the residual profit after selling a product or a service to someone and subtracting any expense associated with its purchase, production and the sale itself. What it essentially shows, is whether you are making profit or loss with the sales. You may think that c’mon, every sale is a profit, but is it so?
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What is recognized as ‘cost of sales’?

Making revenue and recognizing it is one thing, but against all revenue earned you most certainly incur some expenses. It’s the same with everything in the world. To earn something, you first need to give up a thing or two. So as a consequence you have just after revenue on the income statement a line labeled as ‘cost of sales’ or ‘cost of goods sold’. The naming really depends on the type of business and means used to earn revenue. Either its goods you are selling in which case the name is obviously ‘cost of goods sold’, or if its services, than you should replace the word ‘goods’ with ‘services’ and so on. But understandably not all expenses are put under ‘cost of sales’ although it may feel like appropriate. There are different types of expenses one incurs over course of business, but not all are ‘cost of sales’ obviously.
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