Demystifying the Annual Report (3)
July 7th, 2008 Tunde Brown || tunde.brown@stockmarketnigeria.com
Still on the Balance sheet, it is important to note that a company’s ability to give bonuses depends on what it has made as profit and preserved in its revenue reserves over its years of existence. It then follows that in examining a company’s Balance Sheet, a relatively fat revenue reserve balance is indicative of a company’s ability to issue bonuses, provided there are no accumulated losses alongside. Though some other considerations go into the decision to give bonuses, without adequate reserve to capitalize to the extent of the proportionate outstanding shares, there cannot be bonuses.
The Profit and Loss Account or Income Statement presents a summary of how income was generated and utilized in the period of reference. The contrast with the Balance Sheet is that, while the Balance Sheet presents a position ‘as at a date’ – meaning a point in time, the Profit and Loss Account or Income Statement summarizes financial activities ‘for a period ended’ – from the beginning to the end of a period. In essence, it is a flow statement that systematically classifies income, expenses, and the appropriation of the resultant ‘surpluses’.
We could broadly classify the Profit and Loss Account/ Income Statement into two (2) functional areas namely: the Account and the Appropriation sections. Usually, the Account shows the various channels of income and matched expenses, presenting the Operating Profit/Profit before tax while the Appropriation side, which shows how the operating income generated is distributed, follows. To investors, it is important to read the trend in the Appropriation side, which really points to how well the company is faring, particularly in terms of profitability, giving due consideration to the effects of exceptional (Usual Profit and Loss Account items with unusually large size/figures e.g., an aberration in loan loss figure for a bank, not likely to recur in subsequent years) and extra-ordinary (profit or loss from unusual transactions) items.
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