Question

TASK 1:

Annual report is a comprehensive report providing useful financial and non-financial information to shareholders and interested parties. It contains company’s activities and financial performance for the financial year. Annual reports are prepared at the end of a fiscal year for external users to gain financial information about the inner workings of the company and what management plans to do in the future.

a)    Financial statements are the main component in an annual report that indicate financial information of a company. What are the main elements of a financial statement? Discuss the functions of each of the element of a financial statement.

(8)

b)    Auditor’s report is one of the elements in an annual report. Discuss the functions of the auditor’s report in an annual report.

(6)

c)    What other qualitative information that you will find in an annual report? Discuss the objectives of the qualitative information that you have identified.

(6)

(Total: 20 marks)

Answer 1

a)

The financial statements include three statements: Income Statement or Statement of Profit & Loss, Balance Sheet or Statement of Financial Position, Cash Flow Statement.

The income statement shows the revenue, the split up of the expenses and the net profit. The balance sheets tells the total assets and liabilities of the firm. It also tells details about the cash position, inventory, receivable and payable positions and the debt if any taken by the firm. The cash flow statement discusses about the net cash that is present with the company. It also tells the sources of cash and the use of the cash and the cash balance with the company.

b)

An auditor's report is used to provide an external evaluation of the company and its accounts by the auditor. The auditing report is based taking into account the company laws and the accounting standards followed by the company. Based on the verdict provided by the auditor, the investors come to know if the company is being truthful about its dealings or not. The functions of the auditor's report is to identify if the company is in a going concern situation or not, to detect if there is any fraud in the company, to confirm if all the legal processes are being followed, to ensure the accuracy of the company's accounts and financial statements and to ensure if the company follows the environment and social regulations as stipulated.

c)

Other important qualitative information in the annual reports would be the board's view on the industry performance, the board's performance evaluation, the management discussion and analysis of the company. These identify the performance of the management of the firm and what i future direction and scope of the company. The shareholding pattern is also an important qualitative parameter as it helps to understand who is the key decision maker in the company. The corporate governance is also important as it helps to identify the board structure and if the committees are functioning adequately. It also helps to disclose the salary of key management employees and related party transactions if any within the company and its subsidiaries.